Glossary

GDP

Gross domestic product (GDP) is a measure of the total amount of goods and services produced by a country in a specific period of time, usually a year or a quarter.

Gross domestic product (GDP) is a measure of the size of an economy over a period of time (normally a year). GDP is most often used for discussing individual countries, but may also be calculated for regions (eg, southeast Asia), trading blocs (eg, the European Union), or areas within a country.

GDP is calculated in three ways. The production or output approach is the sum of all the value added through producing goods and providing services (ie, the market value of what’s produced minus the costs of producing it). The income approach is the sum of all the income earned by companies and individuals from offering the same goods and services. The expenditure approach is the sum of everything spent on finished goods and services. In theory, all three should produce exactly the same result, but the difficulties of collecting data means that they may not.

Expenditure is normally the most useful way to analyse what makes up GDP. The equation is GDP (represented by a Y) = consumption (C) + investment (I) + government spending (G) + exports (X) – imports (M). As the last two terms make clear, GDP is based only on what’s produced within the borders of a country. If you’re looking at how much is produced by businesses owned by residents of the country – whether production takes place at home or elsewhere in the world – the equivalent statistic is gross national product (GNP) or gross national income (GNI).

Larger countries can have a bigger GDP than smaller ones and still be poorer in terms of living standards, so we often look at GDP per capita (GDP divided by population). In addition, comparing GDP calculated at market exchange rates – known as nominal GDP – may not reflect differences in the cost of goods and services between countries. So we also look at GDP per capita at purchasing power parity (PPP), which adjusts the exchange rate to account for differences in living costs.

See Tim Bennett's video tutorial: What is GDP?

Recommended

Margin call
Glossary

Margin call

When an investor borrows to bet on markets, they put down a deposit known as “margin”.
2 Apr 2021
Resource curse
Glossary

Resource curse

The term “resource curse” refers to the observation that countries with abundant natural resources also tend to be less economically developed than th…
14 Jan 2021
Balance of payments
Glossary

Balance of payments

The balance of payments refers to the accounts that sum up a country's financial position relative to other countries.
8 Jan 2021
Yield-curve control
Glossary

Yield-curve control

Yield-curve control is when a central bank aims to control long-term interest rates by pledging to buy (or sell) as many long-term bonds as needed to …
25 Dec 2020

Most Popular

Inflation is taking off in the US and markets really don’t like it
Inflation

Inflation is taking off in the US and markets really don’t like it

US inflation is at its highest for 25 years. Stockmarkets – and tech stocks in particular – have taken the news badly. John Stepek explains why, and w…
13 May 2021
Inheritance tax planning: the rules around gifting
Inheritance tax

Inheritance tax planning: the rules around gifting

There are plenty of legal ways to minimise an inheritance tax bill. Perhaps the simplest is to give away assets to reduce the size of your estate. Dav…
11 May 2021
Is it time to top up on gold? Or should you wait for a better opportunity?
Gold

Is it time to top up on gold? Or should you wait for a better opportunity?

Fears of inflation, money-printing and a global pandemic are all conditions that should drive the gold price higher. But it has been struggling. Domin…
12 May 2021