Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.
Though GDP is typically calculated on an annual basis, it is sometimes calculated on a quarterly basis as well. In the U.S., for example, the government releases an annualized GDP estimate for each fiscal quarter and also for the calendar year. The individual data sets included in this report are given in GDP Constant Price terms, so the data is adjusted for price changes and is, therefore, net of inflation. In the U.S., the Bureau of Economic Analysis (BEA) calculates the GDP using data ascertained through surveys of retailers, manufacturers, and builders, and by looking at trade flows.
The calculation of a country's GDP encompasses all private and public consumption, government outlays, investments, additions to private inventories, paid-in construction costs, and the foreign balance of trade. (Exports are added to the value and imports are subtracted).
Of all the components that make up a country's GDP, the foreign balance of trade is especially important. The GDP of a country tends to increase when the total value of goods and services that domestic producers sell to foreign countries exceeds the total value of foreign goods and services that domestic consumers buy. When this situation occurs, a country is said to have a trade surplus. If the opposite situation occurs–if the amount that domestic consumers spend on foreign products is greater than the total sum of what domestic producers are able to sell to foreign consumers–it is called a trade deficit. In this situation, the GDP of a country tends to decrease.
In addition, there are several popular variations of GDP measurements which can be useful for different purposes:
GDP at current market prices is the value of all the final goods and services that an economy produced during a given year. It is calculated by using the prices that are current in the year in which the output is produced. In economics, a current value is expressed in monetary terms. For example, a current value can change due to shifts in quantity and price. Current GDP takes into account all of the changes that occurred for all goods and services produced during a given year. If prices change from one period to the next and the output does not change, GDP at current market prices would change even though the output remained constant.
Constant price GDP is the total value of all of the final goods and services that an economy produces during a given year, accounting for inflation. It is calculated using the prices of a selected base year. To calculate Constant GDP, you must determine how much GDP has been changed by inflation since the base year, and divide out the inflation each year. Constant GDP, therefore, accounts for the fact that if prices change but output doesn’t, current GDP would change.
In economics, real value is not influenced by changes in price, it is only impacted by changes in quantity. Real values measure the purchasing power net of any price changes over time. The real GDP determines the purchasing power net of price changes for a given year. Real GDP accounts for inflation and deflation. It transforms the money-value measure, current GDP, into an index for quantity of total output.
Each country reports its data in its own currency. To compare the data, each country's statistics must be converted into a common currency. The two most common methods to convert GDP into a common currency are "Current" and purchasing power parity (PPP).
PPP basis arguably more useful when comparing differences in living standards between nations. A haircut in New York is more expensive than in Lima; the price of a taxi ride of the same distance is higher in Paris than in Tunis; and a ticket to a cricket game costs more in London than in Lahore. PPP is an exchange rate at which the currency of one country is converted into that of the second country in order to purchase the same volume of goods and services in both countries. If a hamburger is selling in London for £2 and in New York for $4, this would imply a PPP exchange rate of 1 pound to 2 U.S. dollars. PPP exchange rates are relatively stable over time. Drawbacks of PPP is that PPP is harder to measure than GDP in current market prices.
Out of 192 countries/economies, 179 have higher GDP in PPP basis and 12 have higher in current market prices. For United States both are identical.
South Sudan has highest difference between PPP and current GDP calculation. GDP (PPP) of South Sudan is 5.82 times greater than GDP (in current market prices). South Sudan is followed by Sudan (5.70) and Myanmar (5.39) having PPP to Current ratio above five. Five countries have this ratio between 4-5 and 34 economies has higher ppp values by above 3 times. This value is lowest for Switzerland (0.79).
There is a large gap between Current GDP and PPP based GDP in emerging market and developing countries. But for advanced countries, difference is much closer. Out of 12 economies which have PPP to Current ratio less than one (i.e, PPP value is less than value at current market exchange rates), 6 are among 11 richest and 8 are among 21 richest economies in Current basis.