What's GDP in economic terms?

Question

also whats the difference between Actual growth and Potential growth?
Thank You

Answer 1

I am a young student to economics, further more, self taught. GDP is broken into three Major components; consumption by consumers ( what you and I buy), Investments by businesses (what a business may purchase to enable them to produce), and government spending (buying from the civilian sector to fulfill their needs. (exports minus imports round it off). important to note GDP only tracks a nations economy. In other words, we do not factor American money invested out of country.

The formula is C+I+G+(Ex-Im)
C= consumer spending
I= Investment spending
G= government spending
(Ex-Im)= net exports (exports-imports)

as for potential growth. I do not believe there is a ceiling on potential growth. America's GDP has increased 1800% in the last 100 years.

I hope this helps.

Answer 2

What Joe says (answer #1) is great. Well done on your self-teaching, mate.

I've just one add-on. Economists talk about potential growth to mean the rate of growth of an economy that can be sustained over a longer period like a decade without causing a rise in inflation. Sometimes actual growth is higher than this for a while and, you've guessed it, inflation is rising. Sometimes it's lower, or indeed in recession, and there's a waste of potential. The latter is usually when the government or the central bank has had to put a brake on the economy in order to control inflation. It can also happen when a country's international balance of payments is unsustainable (a.k.a. a debt crisis).