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The gross domestic product (GDP) of a country is the overall value of all the goods and services produced by and within a country over a given span of time. Generally, it is calculated on an annual basis. The potential GDP of a country is the ideal, or maximum possible GDP for that country if unemployment is at a minimum and all industries, offices, and services are operating at maximum possible output. The actual GDP of a country is the real, or actual, value of all goods and services produced. Actual and potential GDP are often compared to produce one indicator of a country's relative economic health.
Economists use several methods for calculating the GDP of a country, but the differences are really nothing more than variations on adding up the separate components, and each method will result in very similar numbers. Actual and potential GDP are used to produce an indicator of the relative economic condition of a country. The difference between potential and actual GDP is the GDP or output gap and is found by comparing the potential GDP to the actual one.
In times of economic boom, the actual GDP can surpass the potential GDP. This is due to a number of factors, primarily the international demand for that country's goods and services, which increases their value. Unemployment is at a minimum, and business and industry are operating at maximum or even above what are generally thought of as maximum levels due to overtime hours and production improvements.
During times of economic recession or depression, the actual GDP will be less than the potential GDP. This is generally due to the fact that during such economic conditions, unemployment is higher, meaning consumers spend less and companies produce fewer goods and services. The greater the gap between the two GDP figures, the greater the boom or downturn. The annual rate of growth of actual GDP can be another indicator of economic health.
Actual GDP, while often used as a primary indicator of a country's relative economic health, can also be used to derive several other kinds of information. By comparing this figure to population figures, for example, it can be used to determine the relative standard of living for a given country. This figure is called per capita GDP. The higher the actual GDP and the lower the population, the higher the per capita GDP will be, implying a higher standard of living.
@turquoise-- Actual GDP can be used to make accurate comparisons between countries too, if you look at actual GDP growth rates.
I was just reading an article about United States' growth rates, which are impressive. We have been growing by at least three percent since the 1950s! That's a really good number! Very few countries have enjoyed such growth rates in the world.
I think the only country which has been growing faster than the US has been Japan. They did a comparison between actual GDP growth rates between both countries. Apparently, Japan has been growing at about six percent per year during the same time. And recently, China and India are also catching up, if they haven't already!
@turkay1-- Actual (real) GDP per capita will give the more accurate picture about an economy.
Actual GDP is important, especially when calculating GDP growth from one quarter to another or the GDP gap. But it doesn't give the most accurate picture when you're comparing two different economies.
For example, let's say that India's actual GDP is five hundred billion dollars and Switzerland's actual GDP is one hundred billion dollars. If you look at it this way, India is the more wealthy country and has a better economy. But if you were to look at the actual GDP per capita, the picture is different.
Since Switzerland's population is very small compared to India's the GDP per capita in
Switzerland will come out a lot higher. So Switzerland's economy is doing better because the gross domestic product allocated to a single person is more.
Actual GDP is helpful when making analyses about a single economy and comparing how that economy has been doing in different periods. But when comparing between two or more economies, it's much better to look at actual GDP per capita.
If I wanted to compare the economies of two countries, which would be better to use-- actual GDP or actual GDP per capita?
I have an assignment where I need to make an analysis about the economies of two countries. I know what the actual GDP of each country is, and I know their population so I can figure out GDP per capita. But I'm not sure which gives the more accurate picture about these economies.
Does anyone know?