What Does GDP Measure?

GDP, or gross domestic product, is a way to measure a country's economy by adding up the total amount of all services and goods produced within that country in a given year. GDP is used to help determine the health of an economy or to compare the economies of different countries.

There are four components used to calculate GDP: government spending, personal spending, business investment and total net exports. Total net exports is determined by examining the difference between the values of a country's total exports compared to its total imports.

There are a number of different ways GDP is calculated, such as nominal GDP, which is the base calculation before inflation is taken into account. Real GDP is considered a more accurate measurement, as it is calculated using a price deflator based on inflation.

GDP growth rates can also be calculated to show if a country's economy is growing or shrinking and at what rate. In order to compare the economies of different countries, it is necessary to calculate the GDP per capita. This is calculated by dividing the GDP by the number of people in the country, which shows how much each person in that country earns on average.