Overview

Description

Gross domestic product (GDP) is the value of all final goods and services produced within a country's borders in a given year. GDP is a vital way to assess the overall economic "health" of a country. There are multiple ways to calculate GDP; the common ones are the expenditure approach, the income approach, and the value-added approach. In theory, each of these approaches should produce the same GDP value because the underlying economic factors should be the same. However, when using GDP to determine the total value of goods and services, fluctuations in price can distort the results when that total value is determined using only current dollar values. To work around this problem, economists use real GDP. Real GDP is nominal GDP adjusted for inflation. One way to convert nominal GDP to real GDP is to use the GDP deflator. The GDP deflator compares the current prices of various goods and services against their past prices. A GDP calculation describes the "health" of the economy at a given time. So, to analyze patterns in economic activity, a measurement of the change in GDP over a given period of time is needed. Analysis of the changing GDP allows economists to track changes in the rate of growth. While GDP is the value of all final goods and services produced within a country's borders in a given year, the gross national product (GNP) is the value of goods and services produced by a country's citizens and corporations anywhere in the world. The difference between GDP and GNP indicates the ratio of domestic producers to foreign producers within a country.

At A Glance

  • Gross domestic product (GDP) is an important measure of the economic activity in a country.
  • Various measurements exist for GDP, including GDP per capita, nominal GDP, and real GDP.
  • There are three ways to calculate GDP: the expenditure approach, the income approach, and the value-added approach.
  • The expenditure approach to calculating GDP uses spending as the basis for the calculation.
  • The income approach to calculating GDP uses income as the basis for the calculation.
  • The value-added approach to calculating GDP uses supply of goods as the basis for the calculation.
  • The GDP deflator is a measure of the level of price inflation or deflation and is used to adjust nominal GDP.
  • To determine trends and patterns in economic activity, economists analyze the GDP growth rate.
  • GDP is the value of all final goods and services produced in a country in a year, while gross national product (GNP) is the value of goods and services produced by a country’s citizens and corporations around the globe.