Definition

Gross domestic product (GDP)

The gross domestic product is the standard measure of economic output. It represents the monetary value of all final goods and services made within a region or country in a given period.

The gross domestic product (GDP) is perhaps the most widely used indicator of economic output and performance. It measures the monetary value of all the goods and services bought by a final user in a specific period and within the borders of a country or region.

“While a growing GDP may be a good sign, an economy that is growing too fast is at risk of overheating,” cautions Jovanka Charbonneau, Senior Economist at BDC.

For this reason, entrepreneurs need to understand GDP and how they can use it to assess the economic health of their country or even a specific sector.

GDP is the #1 gauge of a country’s economic performance. For this reason, business owners need to track this measure.

What is GDP?

GDP is a standard and widely used monetary measure of the value of all the final goods and services produced (or bought) in a country or region during a specific time. The numbers are generally released by month, quarter or year.

The reason GDP focuses solely on the output of final goods and services and not the production of intermediate goods and services is to avoid double counting, that is, adding the output value more than once.

What is gross national product?

The gross national product (GNP) is similar to GDP. It measures the total value of goods produced by a country’s companies and citizens, as well as the services they provide, whether abroad or inside the country’s borders. While GDP is limited to economic activity within geographic borders of a state, GNP includes the activity of citizens overseas.

What is gross national income?

The gross national income (GNI) is another related measure. GNI is defined as gross domestic product, plus all transfers and financial flows, coming into the country. This includes net receipts from abroad, compensation of employees, property income and net taxes, minus any subsidies on production.

GNI represents all income received by a country, while GNP is all the income earned by companies and citizens, whether it flows back to the country or is spent abroad. Those two indicators are rarely used, since they are not a good measure of a country’s economic health.

Four different types of GDP

GDP numbers can be presented and adjusted in many ways. For this reason, it is essential to understand the different GDP types used and calculated by statistical agencies and analysts.

There are four main types of GDP you are likely to come across when reading about economic output.

1. Nominal GDP

Nominal GDP is the simplest of all four types. It is simply GDP given in current prices without adjusting for inflation.

Comparisons between years may not be meaningful, however, since one cannot know how much of the difference is attributable to a change in prices (inflation) or a change in production volume.

2. Real GDP

Real GDP is an inflation-adjusted measure of GDP.

When comparing GDP numbers between years, real GDP is the best measure. The variation observed between years will be attributable to changes in volume, not price.

There are many ways to calculate real GDP. Still, one simple method is dividing nominal GDP by a GDP deflator, an index tracking price that changes from a base year.

3. GDP per capita

Translated from Latin, per capita means “by heads” or “for each head.” In a GDP context, it means “per unit of population” or “per person.”

“To obtain GDP per capita, you divide GDP, whether nominal or real, by the total population,” explains Charbonneau. It offers a gauge of average living standards and economic well-being.

4. Purchasing power parity GDP

GDP adjusted for purchasing power parity helps make international comparisons.

Since different economies use different currencies, comparing GDP numbers may not be immediately possible. To do this, you would need to convert the monetary values of one country’s GDP into the currency of the other.

However, using market exchange rates to do this conversion can be difficult since they tend to fluctuate. For this reason, economists use the purchasing power parity index, a type of exchange rate that shows what consumers from different countries would pay for the same amount of goods and services.

How to calculate GDP

Calculating GDP is not easy since it involves accounting for everything produced in an economy.

There are three methods to calculate GDP:

1. The expenditure method

Charbonneau says the expenditure approach is perhaps the most common method to calculate GDP.

It involves adding up all the expenditures on final goods and services purchased for a given period. Through this method, GDP equals consumption plus investment, government spending and net exports.

2. The income method

The income method mirrors the expenditure approach: instead of adding up every dollar spent, it represents every dollar earned. The two methods are equivalent since, in principle, the sum of all expenditures in an economy should equal the total income generated by that economy.

More specifically, the income approach represents the total income generated by all goods and services produced.

“To get the GDP, you add up gross profits of companies and the self-employed, all employee wages and compensation, and taxes. You then subtract subsidies,” explains Charbonneau.

3. The production method

The production method is conceptually more complex than the previous two. It is the total gross value of all industries.

Calculating it involves first determining the output of each industry before subtracting the goods and services used in generating that output. Statistics Canada refers to those goods and services as intermediate consumption, or simply inputs.

The gross value added is thus the difference between an industry’s outputs and inputs.

Why is GDP important for entrepreneurs?

Entrepreneurs need to be aware of GDP fluctuations because they give a sense of the economy’s health.

While GDP levels allow you to assess the size of a region’s economy, the growth rate from one given period to another—month, quarter or year—will indicate whether the economy is growing, contracting or stagnating.

“If a business owner is planning to export, for instance, GDP numbers can be useful in helping them evaluate the potential market size,” Charbonneau says. “They can also give a sense of the sector’s dynamism if it’s growing or not.”

Although a growing economy is generally a good thing, business owners need to understand that an economy growing too fast may be overheating. In Canada, the Bank of Canada estimates that the sustainable long-term GDP growth rate is around 2%.

GDP in Canada

Where to find Canadian GDP data?

Statistics Canada produces GDP data for the whole country. You can find most of it publicly and for free, in real and nominal values by year, sector and province.

“Monthly GDP numbers are available only by the production method, while quarterly numbers are available by the expenditure and production methods,” Charbonneau says. Yearly numbers are available for all three methods. However, annual GDP numbers are made available often with a delay of nearly a whole year.

Purchasing power parity GDP numbers are also publicly available. International agencies like the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD typically publish them.

Canadian GDP components

National statistical agencies typically produce highly detailed GDP data.

The GDP data in Canada is available for many industries. Statistics Canada uses the North American Industry Classification System (NAICS), which breaks down the data into very specific sub-sectors. However, confidentiality requirements mean that the data may not be publicly available at a very granular level.

Here are a few examples of NAICS categories: