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The basic formula for calculating the GDP is:
CALCULATING GDP
Many of the goods and services produced are purchased by consumers. So, what consumers spend on them (C) is a measure of that component.
The next component is the quantity "I", or investment made by industry.
When calculating the GDP, investment does NOT mean what we normally think of in the case of individuals. It does not mean buying stocks and bonds, or putting money in a savings account (S in the diagram).
GDP is a measure of all the goods and services produced domestically. Therefore, to calculate the GDP, one only needs to add together the various components of the economy that are a measure of all the goods and services produced.
When calculating the GDP, investment means the purchases of new capital by firms. This capital is used to improve productivity of goods and/or services. This includes, for example, buying a new truck, building a new factory, or purchasing new software.
The basic formula for calculating the GDP is:
Y = C + I + E + G
where
Y = GDP
C = Consumer Spending
I = Investment made by industry
E = Exports minus Imports
G = Government Spending
The next component is E, or the difference between the value of all exports and the value of all imports. If Exports exceeds imports, it adds to the GDP. If not, it subtracts from the GDP.
The final component is G. The government buys (with your tax money) goods and services (G).
Thus, even if a nation's people work very hard to produce products for exports, but still import more than they export, the nation's GDP will be negatively impacted. This is one of the reasons trade deficits are frequently a political target. Because the balance of trade can be either positive or negative, the number for "E" can be either positive or negative.