A country's GDP is a measure of its aggregate performance in domestic terms. It can be measured by combining various aspects of consumption, that is, private expenditure, investment, government expenditure and net exports. Actual GDP is a term that distinguishes measured GDP from its potential output when an economy is operating at its maximum capacity.
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GDP stand for gross domestic product, and measures the value of all goods and services produced within a given country in a given period of time. This period of time is often expressed in either years or quarters of years. There are several ways of measuring GDP, but the most common approach is the income method. The income method adds up the various components of total production. These components are consumption, investment, government expenditure and net exports.
Consumption and Investment
Consumption, often the largest component of GDP in western economies, is essentially the private expenditure in a given economy. Such expenditure may be on food, fuel, cars or any product that does not include real estate (which falls under a different category). Investment is essentially the purchasing of goods and services for the purpose of expanding future production. Companies and individuals often use banks for sources of investment capital, and this capital is usually derived from savings. Savings is composed of the amount of deposits, plus interest. There is a general consensus that the amount of a country's savings is roughly equal to the amount spent on investment.
Government Expenditure and Net Exports
Government expenditure is essentially the money the government spends on public goods and services, including government employees' salaries. Net exports are the total number of a country's exports subtracted by a country's imports. If imports are more than exports, this value can be negative. Thus, the more products a country exports, the higher the GDP. The opposite is true for imports, as the money derived from their sales goes to other countries.
Actual and Potential GDP
The actual GDP of an economy is the amount spent on consumption, investment, government expenditure and net exports in measured terms. It differs from potential GDP, which is the amount an economy can potentially make, not what it actually makes. This value of GDP would be achieved if an economy was at its full rate of employment and by keeping all other inputs the same. Thus, potential GDP is essentially the maximum capacity of an economy. The difference between actual GDP and potential GDP is called the GDP gap, which in turn measures the shortfall in maximum performance of a given economy.
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