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How are the world's top economies measured?

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Quick Answer

Nations' economies are measured by their gross domestic product, or GDP, which can also be adjusted to reflect purchasing power parity. The International Monetary Fund, or IMF, calculates nations' GDP by market-exchange rates and by each nation's individual domestic purchasing power. The latter method takes into account that goods have varying prices depending upon the country in which they are purchased.

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The most common use of a GDP measurement is to determine the relative yearly or quarterly economic growth of nations. The measurement determines whether a country's economy is growing, stabilizing or in a state of recession. The GDP calculations can also be used to compare various regions across the world, such as Asia or South America. Another useful statistic derived from the calculations is the degree of a particular industry's contribution to a nation's GDP.

The two methods of calculating GDP can sometimes place a country in two significantly different ranking positions. For example, by adjusting for purchasing power, China has higher ranking than the United States, as of 2014, by more than $0.2 trillion. This reflects that fact that someone living in China can purchase a good domestically at a lesser cost than someone in the U.S. would pay for an identical item. This gives a consumer in China a greater degree of purchasing power. The unadjusted, or raw, GDP data, however, places China at a point about $6.5 trillion lower than the U.S., according to the 2014 figures.

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