{"id":120479,"date":"2023-11-10T09:18:43","date_gmt":"2023-11-10T09:18:43","guid":{"rendered":"https:\/\/www.techopedia.com\/?post_type=definition&p=120479"},"modified":"2023-11-10T10:22:21","modified_gmt":"2023-11-10T10:22:21","slug":"gross-domestic-product-gdp","status":"publish","type":"definition","link":"https:\/\/www.techopedia.com\/definition\/gross-domestic-product-gdp","title":{"rendered":"Gross Domestic Product (GDP)"},"content":{"rendered":"

What is Gross Domestic Product (GDP)?<\/span><\/h2>\n

Gross domestic product (GDP) is the total value of all the consumer goods and services that a country produces domestically within a given time period. This includes both native and foreign companies operating within a country\u2019s borders.<\/p>\n

GDP is measured monthly, quarterly, and annually. It is one of the most important statistics of economic growth and health. It signals which stage of the economic cycle a country is in, for example, expansion, peak, recession, or trough. Thus, GDP figures are crucial for most key economic policy decisions.<\/p>\n

Types of Gross Domestic Product<\/span><\/h2>\n

\"Types<\/p>\n

There can be several types of GDP, which all convey different information, as highlighted below:<\/p>\n

Real GDP<\/h3>\n

Real GDP excludes the effect of inflation<\/a> or deflation from the goods and services produced in an economy in a year. For the purposes of real GDP, it is as if prices have stayed constant throughout the year considered.<\/p>\n

This is because inflation or deflation highly influences GDP, as the monetary value of goods is being considered. In several cases of inflation, GDP figures may rise because prices are rising. However, that does not translate into any real increase in production or quality and can be quite misleading.<\/p>\n

Real GDP takes a base year\u2019s prices into account while calculating the GDP output for the current year. Using a GDP deflator eliminates the impact of inflation in the current year to keep prices level with the base year.<\/p>\n

This makes real GDP the most valuable measure of how an economy is actually doing. It also points out whether there are any factors affecting production.<\/p>\n

Nominal GDP<\/h3>\n

Nominal GDP, in a way, does the opposite of what real GDP does. It does not cancel out the impact of rising prices from its calculation. It takes the current year\u2019s prices, as they are, into account without adjusting them with a base year\u2019s.<\/p>\n

This means that nominal GDP is often quite a bit higher than real GDP. Hence, policymakers can’t always take it at face value to assess economic activity or production. Countries value nominal GDP in either US dollars for better international comparability or in the domestic country\u2019s own currency.<\/p>\n

Nominal GDP looks at quarters rather than years. This can help mitigate the impact of inflation somewhat, even if no active measures are taken to eliminate it. It is usually useful in comparisons with any other macroeconomic statistic that is also not inflation-adjusted, such as national debt.<\/p>\n

GDP Per Capita<\/h3>\n

GDP per capita measures the amount of gross domestic product per person in a country in order to glean insight into the average standard of living and production. It can easily be taken as a measure of prosperity, and the higher it is, the wealthier a country usually is. GDP per capita can use both real and nominal gross domestic product.<\/p>\n

Since GDP per capita takes both GDP and population into account, it can better analyze how each affects output and the economy.<\/p>\n

Sometimes, smaller and wealthier countries such as Luxembourg or Switzerland may also have a very high GDP per capita. This is despite them having a relatively small population. This can be due to them being quite self-sufficient or having very advanced technology and other resources.<\/p>\n

Similarly, if a country\u2019s population remains more or less the same, but GDP per capita rises, it can be due to technological improvements increasing production levels.<\/p>\n

GDP Growth Rate<\/h3>\n

The GDP growth rate is the rate at which a country’s economy is growing quarter-on-quarter or year-on-year.\u00a0The real GDP growth rate adjusts for inflation or deflation, giving a more accurate measure of actual economic growth by considering both changes in the quantity of goods and services produced and their prices.<\/p>\n

The GDP growth rate is one of the most important types of GDPs considered for economic reports, monetary policy, and more. This is because of its simplicity yet impact in economic terms.<\/p>\n

The real GDP growth rate can be calculated as below:<\/p>\n

GDP Growth Rate = {(Current year’s real GDP-Previous year’s real GDP)\/Previous year’s real GDP} x 100.<\/p>\n

It can also be calculated like this:<\/p>\n

(Nominal GDP\/GDP Deflator) x 100.<\/p>\n

When GDP is accelerating at a substantially fast pace, the economy may be headed towards a boom period. This usually happens when demand grows at an unprecedented pace and supply becomes unable to fulfill it.<\/p>\n

This leads to higher inflation, amongst other factors, and can cause an economy to “overheat”. As a result, central banks may decide to further tighten monetary policy to curb inflation.<\/p>\n

On the other hand, if GDP is reducing, it may spur governments and central banks to think about stimulus measures and laxer monetary policies.<\/p>\n

GDP Purchasing Power Parity (PPP)<\/h3>\n

Gross domestic product purchasing power parity serves primarily as a comparative instrument rather than a distinct GDP category. It is mostly used to compare one country’s GDP with another’s.<\/p>\n

Essentially, this approach seeks to assess the value of a country’s GDP in relation to the US dollar on the global stage. The choice of the US dollar as the benchmark is rooted in its widespread use as the predominant currency in international trade.<\/p>\n

It also takes into account the economic and labor resources of each country, as well as the local prices, regulations, and more. This is in order to evaluate the economic and production efficiency between countries.<\/p>\n

Thus, it’s possible to gain insights into their living standards and the strength of their own currencies.<\/p>\n

GDP Calculation<\/span><\/h2>\n

Essentially, there are three different methods to calculate GDP:<\/p>\n