Gross Domestic Product (GDP) is the total value of all goods and services produced in an economy. It can also be looked at as the total value added of every business in an economy.
The usual textbook definition) is:
GDP = C + I + G + X - Z
where C is consumer expenditure,
I is investment,
G is government expenditure,
X is exports, and,
Z is imports.
An advantage of this definition is that the data needed to calculate GDP this way is comparatively readily available.
GDP growth generally considered to be very important. It is the key measure of economic growth and is often used in financial modelling. It is the most widely used measure of the size of the economy and:
- Many financial models assume a relationship between demand for particular goods and services and GDP — strong correlation indicating cyclical goods/services.
- The last period of many DCF models assumes long term growth in line with long term GDP growth.
GDP is usually stated in real terms (i.e. corrected for inflation) by adjusting it with a special inflation measure, the GDP deflater.