Measuring the Size of the Economy

Using Gross Domestic Product to Determine Economic Strength and Power

Businessman measuring size of large percentage sign.
Gary Waters/Getty Images

Measuring the size of a country's economy involves several different key factors, but the easiest way to determine its strength is to observe its Gross Domestic Product (GDP), which determines the market value of goods and services produced by a country.

To do this, one must simply count up the production of every type of good or service in a country, from smartphones and automobiles to bananas and college education, then multiply that total by the price at which each product is sold.

In 2014, for instance, the United States' GDP totaled $17.4 trillion, which ranked it as the highest GDP in the world.

What is Gross Domestic Product?

One mean of determining the size and strength of a country's economy is through nominal Gross Domestic Product (GDP). The Economics Glossary defines GDP as:

  1. GDP is the gross domestic product for a region, wherein the GDP is "the market value of all the goods and services produced by labor and property located in" the region, usually a country. It equals Gross National Product minus the net inflow of labor and property incomes from abroad.

The nominal indicates that the GDP is converted into a base currency (typically the U.S. Dollar or Euros) at market exchange rates. So you calculate the value of everything produced in that country at the prices prevailing in that country, then you convert that into U.S. Dollars at market exchange rates.

Currently, according to that definition, Canada has the 8th largest economy in the world and Spain is 9th.

Other Ways of Calculating GDP and Economic Strength

The other way of calculating GDP is taking into account differences between countries due to purchasing power parity. There are a few different agencies who calculate GDP (PPP) for each country, such as the International Monetary Fund (IMF) and the World Bank.

These figures calculate for disparities in the gross product that result from differing valuations of goods or services in different countries. 

GDP can also be determined by either supply or demand metrics wherein one can either calculate the total nominal value of goods or services purchased in a country or simply produced in a country. In the former, supply, one calculates how much is produced regardless of where the good or service is consumed. Categories included in this supply model of GDP include durable and nondurable goods, services, inventories, and structures.

In the latter, demand, the GDP is determined based on how many goods or services the citizenry of a country buys of its own goods or services. There are four primary demands that are considered when determining this type of GDP: consumption, investment, government spending and spending on net exports.