Let's understand with some real-life examples -
Suppose your father is retired and you are the person earning for the family. Here your family is the country, you are the residents and your father is the government.
You = Residents
Family = Country
Father = Government
Mother = Central bank (RBI in India)
You pay your father some part of your salary to manage household expenses and support other family members in need. This part of your salary is TAX you are paying and this is the revenue for the government.
The remaining part of your salary you keep for savings and to manage your personal expenditure, like the citizens of India do.
The total expenses you and your family make within a year is called GDP (Gross Domestic Product). And by which percentage your expenses increase year by year is call GDP growth rate.
For example, suppose your family spend total 5 lakhs in 2018 (including all kinds of expenses), that is the GDP for 2018 and your family spend 5.25 lakhs in 2019 that is the GDP for 2019 and the growth rate will be 5% for the year 2019.
GDP consist of Consumptions + Investments + Governement Spendings + Import - Export.
The amount you spend on food expenses, electricity bill, buying product for your personal use and other utility services is termed as 'consumption'.
Suppose you purchased gold, land, securities or anything for investment purpose, this termed as investments.
Government Spendings -
Suppose your father spend money on house repair, buying goods for the house and supporting you and other family members financially etc. are termed as government spending.
Suppose you purchased a new laptop for your work purpose then it would be termed as the import.
(Generally, import also includes consumer goods being imported from other countries but it is a very well known concept and we are here understanding GDP so let's continue with the given example for better understanding).
The money you earned offering your services or by sales in your business.
Suppose you earned less than the expenditure of your family (country), then what would your father (government) do to fulfil the need, either he will borrow from your mother (RBI) or from his friends (other countries) or bank credit card (loan from World Bank).
Here is your GDP calculation for the year based on the sending your family made in the following categories:
Consumption = ₹2,00,000
Investments = ₹1,00,000
Government Spending = ₹2,00,000
Import = ₹1,00,000
Export = ₹1,00,000
As per the formula, your GDP will be of (2,00,000 + 1,00,000 + 2,00,000 + 1,00,000 - 1,00,000) that is ₹5 lakhs economy.
Why it is important?
The more country spends will show how much more country is earning year by year (as more you earn leads to more you spend). The more you spend arouse the foreign companies to invest more in your country to earn more from you with a better rate of returns. The more GDP shows more progress in your country, hence this makes the World Bank and other countries to provide you (country) with loans with more ease and to have a friendly relation with the country.
GDP is a kind of measurement for measuring and comparing the countries' economy.