- It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy.
- Usually, GDP is expressed as a comparison to the previous quarter or year.
- For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year.
- either by adding up what everyone earned in a year (income approach), or
- by adding up what everyone spent (expenditure method).
The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.
- For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy.
- A significant change in GDP, whether up or down, usually has a significant effect on the stock market.
- It's not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices.
- Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.
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