GDP is the total amount of value produced in a country during an accounting period. The most common definition is that of the Organization for Economic Co-operation and Development (OECD), which defines it as the sum of all market transactions in goods and services.
Purchasing power parity (PPP) exchange rates are used to adjust for differences in price levels between countries when comparing GDP. This makes it easier to identify genuine growth, rather than changes in prices.
The four main components of GDP are consumption, investment, government spending and exports. Consumption expenditure by households is the largest component, reflecting the fact that consumer confidence has a significant impact on economic growth. Business investment, which is a crucial driver of growth, reflects the money businesses spend on new equipment and other assets to improve productivity.
Finally, government spending reflects the money a nation’s authorities spend on things such as building schools and roads. This excludes transfer payments, such as unemployment benefits and pensions, which don’t involve the direct purchase of products or services.
Because GDP is measured in a nation’s currency, it needs to be adjusted for differences in price levels when comparing GDP from different years. This is known as rescaling and is carried out by multiplying the original GDP figure by an inflation index, such as the Consumer Price Index (CPI). The resulting rescaled GDP figures are then divided by the country’s population to give the per-capita measure.