GDP measures a country’s total economic output. It is the most important of the economic indicators used by economists around the world to determine how a country is doing economically. It is also a key indicator that is commonly used to compare the size of economies between different countries.
GDP is a measure of the value of all the goods and services produced by a country in a year. It is calculated in terms of a country’s currency so that it can be easily compared between countries using the same measurement.
The Purchasing Power Parity (PPP) method of calculating GDP eliminates differences in purchasing power between countries by converting prices and quantities to a common currency. This allows for direct comparisons of the level of economic activity between nations, with adjustments for any distortions caused by price inflation.
It excludes the production of intermediate goods and services, as well as any capital expenditures that are not used directly in producing final products. For example, a company’s investment in machinery and equipment is not included in GDP because it is not immediately used to produce products; instead, it increases the productive capacity of the firm and thus contributes indirectly to product production. Similarly, investing in shares of stock or bonds is not counted because it is not an investment in products; rather, it is a swapping of claims on future production, which is not included in GDP.
Lastly, GDP does not include any unpaid labour or black-market activity. It is important to remember that GDP only measures economic activity that has been paid for, and it does not account for the satisfaction of consumer demand or the depletion of nonrenewable natural resources.