Gross domestic product is arguably the best-known measure of economic output and performance. It represents the monetary value of all finished goods and services produced within a country in a given period, adjusted for price changes.
GDP is calculated by adding up private consumption, government investment and exports minus imports. It includes all income earned by workers (salaries, profit, interest and other investments) as well as tax, depreciation and gross operating surplus. Private consumption is a measure of all spending by households, businesses and organizations on final goods and services. This includes items such as food, clothing and fuel. Government investment refers to spending on construction, research and development and other public expenditures. Finally, exports minus imports is an important piece of the puzzle since it tells us how much a country is actually producing in terms of goods and services.
This is the basis for measuring a country’s international trade balance. If a country’s exports are greater than its imports, then it has a trade surplus. If a country’s imports are greater than its exports, then it has a trade deficit.
GDP can be expressed either on a nominal or real basis. Nominal GDP uses market exchange rates to compare the value of output in different countries, while real GDP adjusts for inflation and provides a better way of comparing long-term economic performance.
Despite its broad popularity, there are some limitations to GDP as a measure of a country’s economy. For one, it doesn’t capture all types of productive activity. For example, if Kamila bakes a cake for herself at home, it doesn’t contribute to GDP (although the ingredients she buys do). Another limitation is that it doesn’t tell us how evenly income is distributed among the population.
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