GDP is a measure of a nation’s economic output. It is calculated as the total value of all final goods and services produced within a country in a given period, usually a quarter. GDP can be adjusted for inflation to give a more accurate picture of a country’s economic growth or decline. GDP can also be divided by the population to give per-capita GDP, which is an indicator of a country’s standard of living.
Economists use GDP to analyse the health of an economy, understand economic cycles and predict future growth. Governments and central banks monitor GDP to determine how much they can spend on public services and taxation, and to make decisions about interest rates. Companies and investors watch GDP to see if a country’s economy is growing or slowing, which influences their decision-making.
The three main components of GDP are consumption, investment and net exports. Consumption includes household spending on goods and services such as food, clothing and petrol. Investment includes money that businesses spend on things like machinery and computers, as well as expenditure by charities and sports/youth organisations. Net exports are made up of the sum of a country’s gross exports minus its gross imports.
There are several methods to calculate GDP, but they all should give the same result. The most common method is to add up all production in the economy using market prices, then subtract taxes and subsidies on goods and services. This is known as the Purchasing Power Parity (PPP) approach. A second method is to use the “production” approach, which tries to capture the value of all inputs into production by adding up intermediate consumption and deducting costs of materials and supplies used up in production.