Gross Domestic Product

Gross domestic product (GDP) is an economic measure that assesses the market value of all finished goods and services produced within a country's borders over a set period, usually one year or one quarter. The term 'domestic' indicates that production within the country is counted regardless of whether the producer is a citizen or a foreign company.

It is used to compare the economic size of different countries and to track whether an economy is growing or contracting. National accountants in finance ministries and statistical offices calculate it, following an international standard called the System of National Accounts.

Methods of Calculation

There are three main methods, which should produce similar results. The production method adds up the value added at each stage of economic production, excluding intermediate goods to avoid double-counting. The expenditure method adds up household consumption, investment, government spending, and exports, minus imports. The income method sums wages earned by workers, profits earned by companies, rent, and taxes on production.

Nominal and Real GDP

Nominal GDP is measured at the market prices of the year being measured. Real GDP uses prices from a base year, allowing actual growth to be distinguished from price increases. Economic growth reported in the media usually refers to the percentage change in real GDP. There is also per capita GDP, which divides the total by population, making it better for comparing countries of different sizes.

Difference from GNI

Gross national income (GNI) counts income earned by a country's citizens and companies from anywhere in the world, whereas GDP counts production within the country's borders. In countries with large numbers of remittances from overseas workers or significant foreign investment, the two figures can differ substantially.

Limitations of the Measure

GDP does not measure inequality of wealth and says nothing about health, education, or environmental conditions. It also does not count unpaid household work or informal economic activity, meaning that countries with large informal sectors have GDP figures below reality. For these reasons, other measures such as the Human Development Index are also used.