GDP – or Gross Domestic Product – is a measure of the overall economic output within a country’s borders over a particular time, typically a year.
GDP is calculated by adding together the total value of annual output of all that country’s goods and services.
GDP can also be measured by income by considering the factors producing the output – the capital and labour – or by expenditure by government, individuals, and business on that output.
- Real GDP is the gross domestic product adjusted for inflation
- Nominal GDP is the gross domestic product without taking into account inflation.
What is the GDP growth rate?
The change in GDP from one year to the next (or from quarter to quarter) can be given as a percentage. This is called the GDP growth rate.
The real GDP growth rate is a much more useful measure of economic growth than the nominal rate.
If a country’s GDP is growing at a nominal rate of 5% but inflation is running at 4%, only 1% of the growth is down to improved economic output. The rest is just because prices of goods and services went up.
What is GDP really worth?
The GDP shows how well a particular country is doing economically.
A recession, for instance, is defined as two quarters of negative GDP growth.
One drawback of GDP however is that it can only measure what the government has measured. Anything traded without the government knowing won’t be included in the GDP, which can be significant in some countries.
Also, it’s worth stressing GDP is a purely economic measure. A brutal dictatorship might whip a decent GDP growth rate out of its workforce, for instance, but it wouldn’t say much about the standard of living in that country!
Similarly, some environmentalists have argued that our obsession with growth has led to an over-exploitation of the Earth’s resources.
GDP as a formula
The GDP can be represented by the following formula:
- GDP = C + G + I + NX
Where:
- C = All private consumption
- G = All government spending
- I = Investment by businesses
- NX = The country’s net exports (total exports – total imports)
To discover what is the GDP of particular countries, try the CIA World Factbook [1].