Few numbers tell us more about a nation’s economy than gross domestic product (or GDP). A country’s total output of goods and services, measured in terms of its current prices, is the broadest measure of national economic activity. GDP is important for everyone, from individual investors to global leaders. It is often the key metric that explains how well a country’s economy is doing, and changes in this number over time are one of the main indicators for macroeconomic health.
GDP can be reported in either nominal or real terms, with the latter taking into account inflation. When comparing GDP over time, it is best to use the real version, as this accounts for differences in price levels.
To compute GDP, economists add up the value of all final goods and services produced in a country during a certain period. The sum is then divided by the country’s population to get the per capita GDP.
In practice, not all production is counted: unpaid work (such as housework), donations to charity or sports/youth organisations and activities considered to be black/grey market are excluded. This is because they are difficult to measure and value accurately.
The other major component of GDP is G, which represents government spending on goods and services. This includes the salaries of public servants and weapons for the military, but excludes transfer payments such as social security benefits. GDP can also be calculated using the “production” method, which adds up the value of all goods and services produced within a nation at basic prices and subtracts the taxes and subsidies on those goods and services.