Gross Domestic Product

- Overview

Gross Domestic Product (GDP) is the monetary value of all manufactured goods and services produced by a country during a given period. GDP provides an overview of a country's economy and is used to estimate the size and growth rate of the economy. It can be calculated in three ways, using expenditure, production or income. GDP can be adjusted for inflation and population to provide deeper insights. Despite its limitations, GDP is a key tool for guiding policymakers, investors and businesses in their strategic decisions.

GDP tracks the health of a country's economy. It represents the value of all goods and services produced within a country within a specific time period. Economists can use GDP to determine whether an economy is growing or experiencing a recession. Investors can use GDP to make investment decisions - a bad economy means lower earnings and lower stock prices.

GDP is frequently cited in newspapers, TV news, and reports from governments, central banks, and business. It has been widely used as a reference point for national and global economic health. When GDP is growing, especially when inflation is not an issue, workers and businesses are generally better off than when they are not.

- Real GDP

Real GDP is a macroeconomic statistic that measures the value of goods and services produced by an economy in a given period, adjusted for inflation. Essentially, it measures a country's total economic output, adjusted for price changes. 

The government uses nominal GDP and real GDP as measures of economic growth and purchasing power over time. This is done using the GDP price deflator (also known as the implicit price deflator), which measures price changes for all goods and services produced in an economy. 
 

- Nominal GDP

 GDP is usually measured by the monetary value of the goods and services produced. Nominal GDP is an assessment of economic production in an economy that includes current prices in its calculations. In other words, it doesn't strip out the pace of inflation or price increases, which could inflate growth numbers. 

All goods and services included in nominal GDP are priced at actual sales prices for the year. Since nominal GDP does not eliminate the pace of price increases when comparing one period to another, it may inflate growth figures.

- GDP Price Deflator

Gross Domestic Product (GDP) represents the total output of goods and services. However, as GDP rises and falls, the indicator does not incorporate the effects of inflation or price increases into its results. The GDP deflator addresses this problem by showing the impact of price changes on GDP, first by establishing a base year, and second by comparing current prices with the base year's prices. 

In short, the GDP price deflator shows how much changes in GDP depend on changes in the price level. It expresses the degree of price level change or inflation in the economy by tracking the prices paid by businesses, governments and consumers.

- Purchasing Power Parity (PPP) and Exchange Rate

Purchasing Power Parity (PPP) is a popular metric used by macroeconomic analysts to compare the currencies of different countries through a "basket of commodities" approach. PPP allows economists to compare economic productivity and living standards between countries. Some countries adjust their gross domestic product (GDP) data to reflect purchasing power parity.

According to this concept, two currencies are in equilibrium (called currency equivalence) when a basket of goods is priced the same in both countries when exchange rates are taken into account. 

Purchasing Power Parity (PPP) Exchange Rate -- The rate at which one country's currency must be converted into another country's currency to purchase the same amount of goods and services in each country.