GDP Definition

First Published: ADawnJournal.com March 20, 2010

Something that is vitally important for a country, and for the citizens of that country, is the gross domestic product, or GDP. The GDP is a basic measure of the health of a country’s economy because it is a measure of the overall economic output of that country. Similar to the profits of a company, the GDP shows whether or not a country is making money.

The GDP is essentially the market value of all the goods and services that are made within a country during one year and the higher the GDP, the higher the standard of living of that country.

In order to determine the GDP of a country, there are three different ways in which this can be done.

1. The income approach

2. The product/output approach

3. The expenditure approach

The income approach works on the principle of having all the income of the producers in the country being equal the value of their products and the GDP is found by adding together all of the producers’ incomes.

The product approach is the most widely used of the approaches and it takes the sum of all enterprises to arrive at the GDP total for a country.

The expenditure approach uses the principle that products must be bought, so the value of a product must be equal to the expenditures of people when they buy items. This is not often used as an approach for GDP.

Standard of Living

As was mentioned earlier, the GDP of a country is tied closely with the standard of living of that country. While GDP per capita is not a measure of standard of living, it is an indicator of how the citizens of a country are doing financially. The better they are doing financially, the better the standard of living because they can buy more things to live on.

It is also important to note that the GDP per capita is not a measure of the personal income of a country’s citizens. It is possible for a GDP to increase while the income of the majority of the citizens in a country does not change by much, or may even go down. This has happened in the United States where during the 1990s, the income of the citizens went up by less than a percent, but the GDP went up by over three percent.

The biggest advantage of having a GDP per capita as an indicator of the standard of living of the citizens of a country is that it can be measured on a regular basis, often every year, or even every four months.

Of course, there is a disadvantage to using this method to determine standard of living and that is the fact that GDP per capita is not a measure of the standard of living, it is the measure of the economic health and activity of a country. An example of this is a country that can export 100 percent of its production, import nothing because it does not need to and that country will have a high GDP, but it will have a poor standard of living.

Real GDP and Nominal GDP

Real GDP is GDP in dollars that has not changed. This is usually done by taking the prices of a specific or base year. Read GDP is also referred as “constant dollar GDP”, “inflation protected GDP”, “constant price GDP” etc.

Nominal GDP is which has not been adjusted for price changes or inflation. Nominal GDP shows GDP in today’s or current prices. Nominal GDP may increase without increased economic output due to price increases.

The Highest GDPs on Earth

The world’s GDP is $60,971,477,000,000, which is $60.9 trillion, and of that, the European Union accounts for $18.3 trillion and the United States accounts for $14.4 trillion. Added together, the EU and the USA account for almost half of the world’s GDP. In terms of countries, not political groups like the EU, the United States has the highest GDP on Earth. The next highest is $10 trillion less, with Japan bringing in $4.9 trillion.

The top ten for GDP is as follows:

1. United States $14.4 trillion

2. Japan $4.9 trillion

3. China $4.3 trillion

4. Germany $3.6 trillion

5. France $2.8 trillion

6. UK $2.6 trillion

7. Italy $2.3 trillion

8. Russia $1.6 trillion

9. Spain $1.6 trillion

10. Brazil $1.5 trillion

The Lowest GDPs on Earth

Of course, there are plenty of countries that do not make much money in terms of GDP, and many of these countries make less in a year than some companies, and some of the richest people on Earth.

The bottom ten for GDP is as follows:

1. Kiribati $137 million

2. Sao Tome $176 million

3. Tonga $258 million

4. Dominica $364 million

5. Guinea-Bissau $461 million

6. Solomon Islands $473 million

7. East Timor $499 million

8. Comoros $532 million

9. Samoa $537 million

10. Vanuatu $573 million

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