What is GDP?

Calculation methods

Gross Domestic Product (GDP) represents the total income generated by the production of goods and services within a country over a given period of time, normally one year. GDP may also be defined as the value of a country’s wealth or well-being.

We speak of “Product”, since GDP measures the value of the end goods produced, “Domestic” because the definition and calculation of GDP takes into consideration the end value of goods and services produced within a certain country (regardless of the nationality of the producer), unlike the Gross National Product (GNP) which is partly generated abroad.  GDP includes the profits realised by foreign companies in Italy, whereas the profits realised by Italian companies abroad are included in Italy’s GNP and the GDP of the State where such companies are located.
On the other hand, the term “Gross” refers to the fact that Depreciation has not been subtracted from the value considered for GDP purposes.

There are three different methods of calculating this statistic.  The first, referred to as the "Spending Method", allows GDP to be obtained by adding together Consumption (household expenditure on durables, consumables and services), Investments (company and household expenditure on real estate), Public Spending and net Exports (difference between exports and imports).

The second criterion is based on the "Value-Added Method". In this case, GDP is quantified by adding together the values of Goods and Services produced by companies.  To avoid the duplications that occur in the value chain of an asset, at each stage of production only the value added to the asset in question at that particular status of production is recorded, as part of GDP.  The Value Added may therefore be defined as the difference between the income obtained from sale and the sum paid to purchase the raw materials and part-finished items used in the production process.

The last method which can be used to measure GDP is the "Income Method". Gross Domestic Product can, in fact, be calculated as the sum of Salaries and Unearned Income. It is, however, equally important to point out that these three methods all lead to the same result.

A final distinction that can be made in connection with GDP concerns the difference between nominal and real GDP. Nominal GDP measures the end value of production over a given period of time based on the prices for such period (current prices); this means that the value of wealth of a certain nation during a certain period is affected by inflation, namely the phenomenon of a constant rise in prices.  Conversely, real GDP expresses a real value of the production of goods and services, after removing the effect of inflation, and measures production in terms of the community’s actual buying power.  In order to change from monetary GDP to real GDP the consequences on prices due to the inflation rate must be eliminated.

An unexpected growth in GDP has a positive impact on the equities markets since it implies an increase in company profits and therefore in share prices.  However, an excessive and unexpected rise in GDP can have the opposite effect on the stock markets, since too strong a growth in the economy can trigger a rise in inflation.  For the various different reasons described above, the trend in GDP represents a key measurement in a country’s macroeconomic scenario and is therefore closely monitored by financial operators.