GDP (Y)= C+Ig+G+(x-n)

     I know that this may seem like a bunch of gibberish, but in fact, this is a quite simple and straightforward formula for understanding the size and performance of our economy. Most of us hear the GDP (Gross Domestic Product) reports on the news and have some vague idea of what these reports actually mean, while others have no idea what GDP is. Let’s break it down:

     First off, GDP is just an accounting measure of all “final goods and services” sold in America (or whichever country you may reside in). “Final goods”. What does that even mean? Well, the easiest example of a final good is a new car. When a new car is sold it is counted toward GDP, but individual parts: tires, engine, airbags, etc… that make up the car are not counted in order to avoid double-counting.  Some countries, most notably China, calculate GDP by counting all goods produced, rather than sold. This method can lead to a distorted picture of how the economy is actually performing.

     Y=C+Ig+G+(x-n). The meaning of the letters in the formula is quite simple. ‘Y’ is National Income, or GDP. To get ‘Y’ we need to add up all of the other categories first. The four categories that comprise GDP are as follows:

      ‘C’ stands for consumer spending. Every dollar spent in the last year on goods and services. This is by far the largest portion of GDP, comprising more than 70% of the total.

     ‘Ig’ stands for capital investment* by businesses. * ‘Capital’ in economics means “things that make other things”, or tools that make money, such as a printing press, a new truck, or harvester, etc…

     ‘G’ stands for government spending.

     ‘(x-n)’ stands for exports minus imports.

Once you have all of these figures, all you have to do is simply add them up, and eureka! You have calculated gross domestic product.