GDP is a measurement of the market value of all the goods and services produced by a nation in a given period. It is an important indicator of economic health and is used by economists, investors, analysts and policymakers to make decisions. GDP is also a key measure of price inflation and is used by central banks to determine interest rates and money supply.
GDP includes all private and public expenditure on final consumption, investment and government spending. It does not include any transfers payments, such as welfare benefits or social security payments. It is measured at current prices, which means that comparing one period to another requires adjusting for inflation using a price index.
A nation’s GDP is calculated by its statistical agency, and the data is collected internationally by the Organization for Economic Co-operation and Development, the International Monetary Fund and the World Bank. There are three approaches to calculating GDP, all of which should theoretically give the same result: the expenditure approach, the production (or output) approach and the income approach.
The expenditure approach to GDP adds up all household and government consumption, investment and government spending, minus the value of exports and imports. The GDP calculated by the production method adds up all industry outputs using basic prices and subtracts intermediate consumption, which are the materials, supplies and services that are used to produce other products within the economy.
The Purchasing Power Parity, or PPP, approach to GDP compares GDP in terms of the prices of its citizens’ currencies rather than its nominal exchange rates. This avoids double-counting, such as when a person buys shares in a company that he or she then uses to build a factory or purchase equipment, thus counting those investments twice.
About the Author
