When evaluating how productive a country or state is on the macro scale, few numbers are as influential and widely recognized as GDP (gross domestic product), which is the market value of all final goods and services produced within a nation in a given period. It’s a crucial number for investors, business leaders and policymakers to understand—both domestically and internationally.
GDP is typically calculated using one of two methods. The production method adds up the value of all industries’ output (at market prices) while the expenditure approach sums up all consumption, investment, government spending and net exports. The latter figure is obtained by subtracting a country’s imports from its exports. Economists use these figures to compare the size of economies and to track trends over time. GDP is also adjusted for inflation to provide a “real” GDP figure, which accounts for price changes over time.
A key limitation of GDP is that it emphasizes material output rather than overall well-being. For example, traffic jams that lead to increased gasoline consumption may have a positive impact on GDP, but they can be detrimental to citizens’ quality of life. In addition, GDP doesn’t account for certain activities that aren’t provided through the marketplace, such as household production and unremunerated volunteer work.
Another issue is that GDP figures are reported in the currency of each country, so comparing them requires conversion. For example, the United States uses the dollar; Canada, the Canadian dollar; most countries in Western Europe, the euro; Japan, the yen; and Mexico, the peso.