In economics, the gross domestic product (GDP) is a measure of the amount of the economic production of a particular territory in financial capital terms during a specific time period.
Whereas nominal GDP refers the total amount of money spent on GDP, real GDP refers to an effort to correct this number for the effects of inflation in order to estimate the sum of the actual quantity of goods and services making up GDP. The former is sometimes called "money GDP," while the latter is termed "constant-price" or "inflation-corrected" GDP -- or "GDP in base-year prices" (where the base year is chosen arbitrarily). See real vs. nominal in economics.
Aggregate expenditures are calculated in a similar way, although the aggregate expenditures formula does not account for unplanned investment (left over inventory at the end of the reporting cycle) and is more commonly used by economic theorists.
GDPs of different countries may be compared by converting their value in national currency according to either
current exchange rate method: GDP calculated by exchange rates prevailing on international currency markets
The relative ranking of countries may differ dramatically between the two approaches.
The purchasing power parity method accounts for the relative effective domestic purchasing power of the average producer or consumer within an economy. This can be a better indicator of the living standards of less-developed countries because it compensates for the weakness of local currencies in world markets.
The current exchange rate method converts the value of goods and services using global currency exchange rates. This can offer better indications of a country's international purchasing power and relative economic power.
GDP doesn't measure the sustainability of growth, as a country may achieve a temporary high GDP by over-exploiting natural resources.
GDP counts work that produces no net gain, and does not account for negative externalities. For example, if a factory pollutes a river, that boosts GDP, and when the taxpayers pay to have it cleaned up, that boosts GDP again. Seeparable of the broken window.
(1) Although the European Union is not formally a nation, it is tied together with a single currency (excluding the UK, Sweden, Denmark, and the 10 new member states) and is considered by some to be a single entity.
The methodology for deriving accurate PPP comparisons remains under constant review, and questions have been raised as to whether the relative size of Mainland China's GDP may be overstated to some extent.
