If there is one figure worth knowing in economics then it is surely that of gross domestic product (GDP). It is literally the biggest economic statistic of them all, dwarfing everything else, from inflation and unemployment to exchange rates and house prices.
A country's GDP is quite simply the measure of its entire income (gross = entire; domestic = in a particular economy; product = economic output, or activity). It is the most widely recognized measure of a country's economic strength and performance.
Most people are well aware that China has had a remarkable rise towards economic pre-eminence in recent decades. The GDP statistics show that it has quickly leapfrogged France, Britain and Germany in recent years, and if it maintains its current rate of growth by 2010 it will have overtaken Japan as the world's second-largest economy. However, its economic output still remains a fraction of the size of that of the United States.
What Does GDP Include?
Gross domestic product measures two things: the total income of the country and its total spending. Across an economy, income and expenditure equal each other. If you pay a dollar for a newspaper, that money -- your expenditure -- instantly becomes someone else's earnings. GDP measures both goods (such as food) and services (such as haircuts), including invisible items (such as housing services -- the amount people pay to live in their homes, whether they rent or buy).
What is Not Included?
The main exclusion is anything produced by the so-called informal economy. This includes trade in illegal goods (such as drugs and anything on the black market) which is thought to account for almost one-tenth of the economy in most rich countries. GDP also does not include the constituents of products as well as the products themselves. For instance, a car engine would not be counted separately from the finished vehicle of which it is a part. If the engine is sold off separately that is another matter.
What About Foreign-Owned Companies?
GDP measures the value of anything produced within a certain country, whoever owns it. Thus, if a US company owns a factory in Mexico, that factory's output contributes to Mexico's GDP. However, there is another related statistic that measures the economic output of a country's citizens, whether they are based at home or abroad. The US's gross national product (GNP), for example, includes income earned by US citizens at home and abroad, but excludes what citizens and companies from other countries earn in the US. The figures for GDP and GNP are usually very similar.
How is GDP Measured?
When governments publish their GDP figures, they usually do so at quarterly intervals (i.e. every three months) and the figure that is of most interest is not the total amount but the growth rate. It is worth bearing in mind that the GDP growth rates most frequently quoted in newspapers or by politicians are for real GDP growth -- in other words, they have had the effects of inflation stripped out. When the changes in market prices due to inflation are left in, the resulting figure is called nominal GDP.
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