Gross Domestic Product

Gross domestic product

One of the primary indicators used to estimate the health of a country's economy is the gross domestic product (GDP). GDP is total market value of all final goods and services produced within the country in a given period of time (usually a calendar year). GDP includes all private and public consumption, government outlays, investments, private inventories, paid-in construction costs and the foreign balance of trade (exports are added, imports are subtracted).

Measuring GDP is complicated, but at its most basic, the calculation can be done in one of three ways, all of which should give the same result. They are the production (or output or value added) approach, the income approach, or the expenditure approach.

The production approach sums the “value-added” at each stage of production, where value-added is defined as total sales less the value of intermediate inputs into the production process. This method of compiling GDP leads to counting the production by sector of activity. Most countries using this approach calculate value added with tools such as the Index of Industrial Production (IIP), physical quantity indicators or sales type statistics for estimates of value added in manufacturing.

The income approach sums the incomes generated by production. This method of calculating GDP refers to compiling data from employment and earnings surveys to estimate salaries and wages by industrial activity. However, there are sectors of activity for which it is not easy to measure compensation. Therefore, many countries such as Canada, the United States, Japan or Australia use the income approach through trend extrapolation to estimate GDP.

Although the two approaches presented above are still popular, the most widely used approach to measure GDP is the expenditure approach. The expenditure approach adds up the value of purchases made by final users. This method suggests simply looking at how much do households, government, non-profit institutions and financial institutions consume within a country to which one must add the net exports of that country.

GDP gives an overall picture of the state of the economy. It enables policymakers and central banks to judge whether the economy is contracting or expanding, whether it needs a boost or restraint, and if a threat such as a recession or inflation looms on the horizon.