What is Gross Domestic Product – GDP Meaning?
Gross Domestic Product (GDP) Meaning
GDP meaning: The monetary value of the final goods and services produced within an economy in a specific period.
How to calculate GDP?
GDP includes the total value of an economy in dollars for private consumption, private investments, government expenditure, and net exports.
So, according to the aggregate expenditure approach, GDP is the combination of four factors. They are private consumption, investment, government spending, and net expenditure. We can calculate the GDP using the GDP formula.
GDP formula
Gross Domestic Product = Consumption (C) + Private Investment (I) + Government expenditure (G) + Net Exports (Nx)
GDP = C + I + G + Nx
GDP Examples
Assume that following data is regarding to the an economy for the year 2022.
| Private consumption | USD 10bn |
| Private investment | USD 3bn |
| Government expenditure | USD 2.5bn |
| Net exports | USD 2.5 bn |
Calculate GDP of that economy
Calculate GDP
GDP = C + I + G + Nx
| Private consumption | USD 10bn |
| Private investment | USD 3bn |
| Government expenditure | USD 2.5bn |
| Net exports | USD 2.5bn |
| GDP | USD 18bn |
Which country has highest GDP?
According to the World Bank statistics in 2022, the USA has recorded the highest GDP in the world.
The following list shows the 15 countries that have recorded the highest GDP in the world.
1. United States: $20.89 trillion
2. China: $14.72 trillion
3. Japan: $5.06 trillion
4. Germany: $3.85 trillion
5. United Kingdom: $2.67 trillion
6. India: $2.66 trillion
7. France: $2.63 trillion
8. Italy: $1.89 trillion
9. Canada: $1.64 trillion
10. South Korea: $1.63 trillion
11. Russia: $1.48 trillion
12. Brazil: $1.44 trillion
13. Australia: $1.32 trillion
14. Spain: $1.28 trillion
15. Indonesia: $1.05 trillion
What are the 3 types of GDP?
There are three main types of GDP. They are nominal GDP, real GDP, and potential GDP.
1. Nominal GDP meaning
Nominal Gross Domestic Product (NGDP) means the monetary value of the currently produced (produced within the current period, not in the previous periods), final goods and services (not including the intermediate goods and services) in a specific geographical area (usually within a country or a region). NGDP is calculated based on the current monetary values.
Nominal GDP is also known as a “current dollar GDP” or “chained dollar GDP”.
Usually, GDP is defined as the nominal GDP. So, using the above GDP formula, we can calculate the nominal GDP.
2. Real GDP meaning
When nominal GDP is adjusted for the changes of the general price level (inflation or deflation), we call it “real GDP”. Since the real GDP is free from price level changes, it is highly acceptable to measure the economic health of a country. Real GDP is calculated based on a fixed unit of currency.
How to calculate real GDP?
To calculate the real GDP, we should calculate the GDP deflator first. The GDP deflator is a measurement of determining price levels of new goods that are available in a country’s domestic market. GDP deflator removes the changes of the price level. That means GDP deflator removes the impact of inflation and deflation.
Real GDP formula
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3. Potential GDP meaning
Potential GDP is the level of gross domestic product (GDP) that the economy able to achieve by operating at a full employment output level. So, potential GDP presents the output level that maximum using the resources within the productive capacity, especially at a constant inflation rate.
Potential GDP provides an important benchmark for regulators and policymakers. It is the healthy level of the GDP of an economy. But, in the real world, actual (real) GDP can vary from the potential GDP.
Gross domestic product estimation (potential GDP) for a particular period may differ from the actual output (real GDP). The difference between the real gross domestic product and the potential gross domestic product is called the “output gap”.
There are two major types of output gaps. They are the inflationary gap and the recessionary gap.
If real output level > potential GDP, there is an inflationary gap.
If the real output level < potential GDP, there is a recessionary gap.
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Potential GDP Definition, Formula, Determinants, and Vs Real GDP
Recessionary Gap – Definition Examples Graph How To Remove
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Inflationary gap – Definition, Examples, Graph & how to remove
