What Is GDP (Gross Domestic Product)?
GDP is the total market value of all final goods and services newly produced within a country's borders over a given period (usually a year or a quarter) β the single most widely used measure of the size of an economy.
GDP vs. GNP: Location vs. Nationality
GDP counts everything produced within a country's territory, regardless of who produced it β citizens or foreigners. GNP (Gross National Product) instead counts by the nationality of the producer, including income citizens and companies earn abroad, and excluding what foreigners earn domestically. As global activity has grown, GDP has become the more widely used measure.
GDP vs. GNI (Gross National Income)
GNI adds a country's net income earned abroad and terms-of-trade effects to GDP, measuring what a country's people actually earn (purchasing power) rather than what was produced. Per-capita national income figures typically use GNI rather than GDP.
Nominal GDP vs. Real GDP
Nominal GDP is calculated using that year's current prices, so it can rise from inflation alone even if actual output hasn't changed. Real GDP fixes prices at a base year, removing the effect of inflation to show the true change in output β which is why economic growth rates are calculated using real, not nominal, GDP.
What Is GDP Per Capita?
GDP per capita is a country's total GDP divided by its population β a rough measure of average output per person. A populous country can have a huge total GDP but relatively low GDP per capita, so total GDP is better for comparing economic size, while per-capita GDP is better for comparing average living standards.
Three Ways to Calculate GDP
GDP can theoretically be calculated three different ways: the production approach (summing value added across industries), the expenditure approach (summing household consumption, business investment, government spending, and net exports), and the income approach (summing wages, interest, and profit). Since production ultimately becomes someone's spending and someone's income, all three should theoretically arrive at the same number.
What GDP Doesn't Show
Because GDP only counts market transactions, it excludes unpaid activity like housework, childcare, and volunteering. It also doesn't subtract negative effects like pollution or resource depletion, and it says nothing about how evenly income is distributed β which is why GDP alone can't fully capture quality of life or well-being.
How Does "Economic Growth Rate" Relate to GDP?
The "economic growth rate" reported in the news is generally the percentage increase in real GDP compared to the previous period (year or quarter). A 2% rise in real GDP is reported as 2% growth β though because of GDP's limitations, a high growth rate doesn't automatically mean every citizen's living standard improved.