Gross domestic product

In economics, gross domestic product (GDP) is how much a place produces in an amount of time. GDP can be calculated by adding up its output (total production) inside a country.

To find the GDP of a country, one adds up all consumer spending (C), all investment (I), all government spending minus taxes (G), and the value of exports minus imports (X – M). This is shown by the equation:

$GDP=C+I+G+(X-M)$

This measure is often used to find out how healthy a country is; a country with a high value of GDP can be called a large economy. The United States has the largest GDP in the world. Germany has the largest in Europe, Nigeria in Africa and China in Asia.

When a country's GDP is negative for two consecutive quarters it is considered to be in a recession. This is an unhealthy state for the country.

There are different ways to calculate GDP. Nominal GDP is the total amount of money spent on all the goods (new and final) in an economy; however, real GDP (adjusting for changes in prices) tries to correct this number for inflation. For example, if the prices rise by 2% (meaning, everything costs 2% more) and the nominal GDP grows by 5%, the real GDP growth is only increased by 3%.

GDP per capita

GDP per capita is the total income of a country divided by the number of people living in that country. It shows how rich people are, on average.

There are also different ways of calculating GDP per capita: nominal and purchasing power parity (PPP). Nominal does not take into account the inflation rate and the cost of living of a country, but it's more useful when comparing national economies on the international market. PPP may be more useful when comparing peoples' living standards between countries.

Gross national product

The GDP measure is different from gross national product (GNP) in that GNP = GDP + net income from assets in other countries (net income receipts).

Nominal GDP

When the gross domestic product is evaluated at the current market prices, it is called the nominal GDP. It includes changes in prices which makes it different from the real GDP due to inflation or price fluctuations. It can be measured in one of three different ways: income approach uses the total of all income from businesses and individuals in a single year; the expenditure approach uses the market value of all goods purchased in a single year; and the production approach is based on the total production in a single year.