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The Gross Domestic Product, GDP, is a measure of the market value of all final goods and services produced by a country for a given period of time, typically measured over quarters or years. Usually, it is expressed in comparative terms to the previous period. For example, if GDP is up 3 percent over last year, it means the economy has grown in size by 3 percent. In America, GDP is reported each quarter by the Bureau of Economic Analysis, a segment of the US Department of Commerce. [1]The GDP numbers are given in two forms, current dollar and constant dollar. Current dollar GDP is calculated using today's dollars and makes comparisons between different time periods is hard due to the effects of inflation. Constant dollar GDP is the solution to this problem. This occurs by converting the current information into some standard era dollar, such as 1999 dollars. This sequence negates the effects of inflation so we can make successful comparisons between different time periods. [2]

Share-of-world-gdp-by-country.jpg [3]

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GDP Growth

Economic growth is the increase in the value of the goods and services produced by an economy. It is conventionally measured as the percent rate of increase in GDP. Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced. In economics, "economic growth" or "economic growth theory" typically refers to growth of potential output, i.e., production at "full employment," which is caused by growth in aggregate demand or observed output. Since economic growth is measured as the annual percent change of national income, it has all the advantages and drawbacks of that level variable.

The real GDP per capita of an economy is often used as an indicator of the average standard of living of individuals in that country, and economic growth is therefore often seen as indicating an increase in the average standard of living. However, there are some problems in using growth in GDP per capita to measure general well being. GDP per capita does not provide any information relevant to the distribution of income in a country. GDP per capita does not take into account negative externalities from consequent to some forms of economic growth. GDP per capita does not take into account positive externalities that may result from services such as education and health. GDP per capita excludes the value of all the activities that take place outside of the market place (such as cost-free leisure activities like hiking). Another factor that GDP does not include is production that is made within the household, for instance the value added to products bought at the store when combined together at home to create goods such as dinner or a deck in your backyard.

Economists are well aware of these deficiencies in GDP, thus, it should always be viewed merely as an indicator and not an absolute scale. Economists have developed mathematical tools to measure inequality, such as the Gini coefficient. There are also alternate ways of measurement that consider the negative externalities that may result from pollution and resource depletion (see Green Gross Domestic Product). The flaws of GDP may be important when studying public policy, however, for the purposes of economic growth in the long run it tends to be a very good indicator. There is no other indicator in economics which is as universal or as widely accepted as GDP. Economic growth is exponential, where the exponent is determined by the purchasing power parity annual GDP growth rate. Thus, the differences in the annual growth from country A to country B will multiply up over the years. For example, a growth rate of 5% seems similar to 3%, but over two decades, the first economy would have grown by 165%, the second only by 80%

Top projected nominal GDP growth through 2015

GDP per capita

GDP per capita is a measure to compare differing countries level of national wealth by Purchasing Power Parity (PPP). GDP per capita is measured in US$ and is used to gauge the standard of living within countries, which has its issues, as GDP per capita is not a measure of personal income.


There are two ways to calculate a country's GDP: the income approach or the expenditure approach. The income approach, GDP(I), adds up the earnings of everyone in the country for the year, specifically compensation to employees, profits of corporations, and taxes. The income approach measures national income (NI). National Income is the sum of labor income (W), rental income (R), interest income (I) and profits (PR). Labor income is composed of salaries, wages, and benefits (i.e. health or retirement). Unemployment and government taxes for social security are also included as labor income. Rental income is income gained from property, royalties from patents, copy rights, and assets. Profit is measure by the difference between their rent, interest and employee compensation. [4]
The expenditure approach is calculated by adding total compensation, investment, government spending, and net exports (imports subtracted from exports). The function most commonly looks like this: GDP = C + I + G + (X-M) [5] The expenditure approach is the more common way of measuring GDP of the two methods.


  5. Investopedia 19 Sept 2007
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