WHAT IS GDP? Definition and Example

Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country in a given period of time.

GDP measures two things at once; the total income of everyone in the economy and the total expenditure on the economy’s output of goods and services. The reason that GDP can measure both total income and total expenditure is that these two things are really the same. For an economy, as a whole the income must equal to its expenditure.

The income must be equal to its expenditure because every transaction has two parties; a buyer and a seller. Every dollar of spending by some buyer is a dollar of income for some seller.

For example, if person A buys some goods on the cost of $20, then that $20 is his spending (expenditure). On the other hand, the $20, which the buyer has given to seller in exchange of some goods, is the income of the seller.

Thus, the transaction contributes equally to the economy’s income and to its expenditure. GDP whether measured as total income or total expenditure, rises by $20.

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