What is this metric and why is it important?
Gross Domestic Product (GDP) is the monetary measure of everything that is produced in an economy in a given year. GDP is a useful starting point that gives a sense of how big the economic pie is.
How is Canada doing?
- In 2019 Canada’s GDP was $1.72 trillion USD, compared to an OECD average of $1.60 trillion.
- Ontario by far has Canada’s highest GDP, making up 37.8% of total GDP.
There are three primary methods for measuring GDP: the production approach, the expenditure approach, and the income approach. All three focus on measuring the value added in a country. For example, if a country imported wood to build some houses and we were trying to determine the contribution of those houses to GDP, we would not want to include the value of the wood because the country did not put in the work to produce it. We use here the most common method, the expenditure approach, which combines consumption, investment, government spending, and net exports.
We account for cost of living by adjusting in terms of a country’s purchasing power parity. We adjust for inflation by picking a base year of 2015 and reporting our numbers in US dollars of that year.
GDP by itself is skewed by the size of the country's population, so we often divide it by the population of a country to get GDP per capita. No matter the adjustments made to the number, though, GDP measures a very specific thing, and caution should be used when trying to glean a broader narrative from it. For example, GDP is often used to determine a country’s general well-being, which it is not designed to do. It does not capture happiness, the distribution of output, or any outcomes from economic activity that create negative value for society.