What is GDP, and how is it calculated?

GDP, or Gross Domestic Product, is a measure of the economy. It's the total value of all the goods and services produced in a country in a given period of time (usually a year). GDP growth is used as an indicator of how an economy is doing. When GDP growth is strong, it usually means that businesses are doing well and that there are more jobs. GDP per capita is a measure of GDP divided by the population. It's a way to compare GDP between countries with different populations.

To calculate GDP, you add up the total value of all final goods and services produced in a country in a given period of time. This includes everything from haircuts to houses, from computers to cars. GDP only includes finished products - it doesn't include intermediate goods, like raw materials or components. GDP also doesn't include illegal activity, like drug dealing.

GDP can be calculated in three ways: by production, by expenditure, or by income. The most common way to calculate GDP is by expenditure. This approach subtracts imports from GDP because they're not considered " domestically produced." Finally, GDP can be measured in real terms or nominal terms. Real GDP takes inflation into account, while nominal GDP doesn't.

For example, if Country A has a GDP of $100 million and Country B has a GDP of $200 million, but prices in Country B are twice as high as in Country A, then Country A has a higher real GDP even though it has a lower nominal GDP. That's because $100 million can buy more goods and services in Country A than $200 million can buy in Country B. In general, nominal GDP is more commonly used than real GDP because it's easier to calculate.