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- GDP or Gross Domestic Product

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is a measure of the total market value
of all end goods and services


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produced within an economy's
borders within a year.

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This is the most basic metric

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by which economists determine
the size of an economy.

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Finished goods simply means goods

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that are not going to be
used to make more goods.

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For example, an engine
would not be counted

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towards GDP figures if
it was put into a car,

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only the value of the car would be.

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This stops modern products
with thousands of components

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having their value
measured multiple times.

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It is worth mentioning, however,

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that if an engine is produced

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and then it is sold to a customer

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who uses it to replace an
old engine in their car,

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then that replacement
engine would be counted

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towards GDP figures
because it was an end good.

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The most common equation
that economists use

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to calculate GDP is
consumer spending

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plus government spending
plus investments

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plus exports minus imports.

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If you add up all of these figures,

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you get an economy's
total output or GDP.

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But hang on,

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why are we looking at
consumption and investment

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when trying to figure out how
much stuff an economy makes?

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Wouldn't it make more sense
to look at all of the stuff

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that the factories and service providers
around the country are doing?

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Well, yes, that is certainly
possible, but the problem is,

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it's very difficult to employ
millions of economists

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to stand at the end of every
factory's production line

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and oversee the work of every
service provider in the economy.

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Fortunately, consumption figures
are much easier to collect

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and they should, theoretically,
produce the same result.

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This happens because
anything that is produced

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or any service that is provided

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will fall into one of these categories.

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Let's say a factory produces
a water bottle.

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They can sell that water bottle
to a consumer,

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they could sell it to the government,

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they could export it overseas,
or they could hold onto it,

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which would count as a business
investment into inventory.

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Now, the reason it's
important for economists

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to subtract imports is that
if a TV imported from Japan

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is sold in Australia,
then it would add value

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to the consumer spending
portion of Australian GDP,

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which would give the economist
an unfair impression

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of how much Australia
produced in that year.

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So by subtracting the
value of all imports,

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that issue just fixes itself.

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Calculating GDP is still a big task

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and requires lots of data
to be collected

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on everything from sales,
taxes, export records,

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and government budget reports.

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Sometimes these figures can be open

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to a certain amount of interpretation,

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which is why GDP figures
from different organizations

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can be slightly different.

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That is why it's important

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to use figures from the same source

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when comparing the size of
different national economies.

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The World Bank and the
International Monetary Fund

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are what most economists will use.

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You might have also heard
of Gross National Product,

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and while GNP and GDP are
very similar measures,

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they are not the same.

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GNP measures the total
output of an economy,

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including the net total of
output from offshore operations.

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For example, if an American
company owned a car factory

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in Germany, the cars
produced in that factory

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would not count towards
American GDP figures,

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but they would count towards
GNP figures.

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This is not a measure that
is used nearly as much,

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but if you do ever need to work it out,

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you just take GDP and add
Foreign Monetary Inflows

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and subtract Foreign Monetary Outflows.

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Now, economists will be quick to point out
that size isn't everything,

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and just because an economy has
a big GDP,

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doesn't mean that it's
a good place to live

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or a good place to do business

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or even that it runs an
economy particularly well.

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Economies with more people in them

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are naturally going to have
higher GDPs,

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all other things being equal,

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so this is why another common
measure is GDP per Capita,

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which is simply an economy's
GDP divided by its population.

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Another term you should be
familiar with is Real GDP.

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Real GDP is simply GDP that has
been adjusted for inflation.

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If GDP grows by 3% one year,
but inflation is also 3%,

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then the economy is not
really any better off.

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It's producing the same amount of stuff,

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it's just that that stuff costs 3% more.

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Real GDP is very important to use

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if you are comparing economies
over long time periods.

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A different amount of money

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also buys a very different amount of
things in different economies.

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$10,000 in the Philippines

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goes a lot further than
$10,000 in Switzerland.

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That is why economists will
sometimes use an adjustment

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called Purchasing Power Parity,

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which adjusts the GDP figure up or down,

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depending on how much a similar
basket of goods costs in a different country.

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Economists normally use
the United States

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as a baseline for this measurement,

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so all other countries baskets of goods

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are compared to the same
basket of goods in the USA.

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If their basket of goods

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is more expensive than the American one,

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then their GDP is adjusted
downwards a relative amount.

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If their basket is cheaper
than the American basket,

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it's adjusted upwards.

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Goods in China are a lot
cheaper than goods in America,

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and that's why when adjusted
for Purchasing Power Parity,

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China is already the larger economy.

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You may have heard of The Big Mac Index,

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which is a very basic version of a
Purchasing Power Parity Index.

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Although when international organizations
create their figures,

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they do use more than just one product.

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Purchasing Power Parity
is a really good tool to use,

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but you need to be careful
about when you use it.

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When looking at domestic
economic policies, it's great,

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but if you are looking at
Purchasing Power Parity figures

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for things like trade or
international financial influence,

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you're just gonna make yourself
confused unnecessarily,

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because a dollar is a dollar,

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and you aren't gonna
have to pay more or less

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for your imports or international loans

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just because consumer goods
are cheaper in your country.

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The last thing to know about
GDP and all of its add-ons

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is that they can be combined
to tell you different things.

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If you wanna know how much
GDP per Capita

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has increased in a country
over the past 10 years,

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when adjusted for inflation,

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you can use Real GDP per Capita.

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If you wanna know how much
GDP per capita has increased

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in a country over the past 10 years

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when adjusted for inflation
and Purchasing Power Parity,

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you can use GDP per Capita PPP.