What Is GDP?

In an increasingly global world, understanding the interaction of countries from an economic perspective becomes key.  Obviously, globalization has been a touchy subject in recent years, often at the front and center of emotionally charged political debates.  Our mission at ComposeMD is to help make the world a little bit smarter, and quite frankly, engaging with modern politics does not currently align with that mission.  We aim to provide foundational knowledge that allows for proper processing of the world such that our reliance on the opinions and interpretations of others diminishes over time.  With that off our chest, what is GDP? Here is an excellent summary, and what follows is a brief overview.

 

The Concept

GDP, or gross domestic product, is the total value of finished goods and services produced by an entity (usually a country) within its borders over a specified period of time (generally a year).  GDP thus serves as a measure of economic health.  One way of calculating this measure, called the expenditure approach, takes into account consumer spending, government spending, private business domestic investment, and net exports.  (Other methods of calculating this figure do exist.)

A related value called GNP, or gross national product, includes international activity in its calculations.  In other words, an American company’s product sales abroad get credited to the American economy and not the economy of the country in which the sale occurred.  As such, American GNP is typically larger than its GDP.  This concept can work in reverse for countries that serve as the headquarters for many international companies.  Under such a circumstance, GNP can be smaller than GDP.

 

Adjustments

The concept described above is referred to as the nominal GDP.  This number is often adjusted for the following three variables in order to serve as a more reasonable assessment of a country’s economic health.

Inflation

A country’s nominal GDP may rise solely due to inflation and not true economic growth.  Real GDP adjusts for inflation.

Differing costs of goods and services in different countries

Even though a country’s nominal GDP might appear low, if goods and services in that country are cheap, economic health might be better than indicated.  GDP adjusted for purchasing power parity (PPP) captures this phenomenon.

Differing population sizes

Comparing China’s nominal GDP to most other countries (aside from India) is an unfair comparison based on the population discrepancy.  GDP per capita accounts for this factor.

All three of the above variables are addressed by reporting the real per capita GDP, adjusted for PPP.

Another figure that can be reported is the GDP growth rate, which simply compares changes in any specific value over time.

 

Some Numbers

In terms of nominal GDP—based on 2020 numbers—the United States ranked number one in the world with an annual figure of around $21 trillion, followed by China in the $14 trillion range.

When adjusted for PPP, China took the number one spot at approximately $24 trillion, with the U.S. falling to number two at $21 trillion.

Whenever PPP data is expressed per capita, countries like Liechtenstein and Luxembourg come to the top, hanging out around $120,000 per capita.  The U.S. is 10th or so with $63,000 per capita, and China drops to around 83rd with $17,000 per capita.

Here is a more complete and updated list of nominal GDP figures, with links to other types of figures being found at the bottom.

 

Limitations

First, GDP cannot account for unrecorded economic activity.  Furthermore, as the measure includes only finished goods, it overlooks the business-to-business activity that occurs along the path to producing the finished goods.  Finally, no variation of GDP captures quality of life factors such as health, education, income distribution, gender equality, etc.  The United Nations Human Development Index does its best to include such factors (along with GDP) in its rankings.  But even such an index cannot incorporate happiness, whatever that is.

 

If you would like to learn more about the global economy at a fundamental level, we highly recommend reading The New World Economy: A Beginner’s Guide.