Hey there! If I asked you to name the countries with the biggest economies, you’d probably say the U.S., China, Germany, India, Japan, and other big countries with big economies. But, have you ever wondered, like how do we actually know this? How do we know which country has the biggest economy, which is the richest, or how Germany, with just around 84 million people, can have a larger economy than many countries with more land and a bigger population? Well, we can know all of these from something called GDP. I believe you’ve heard of GDP before, but have you ever wondered what it is? In this video, we’ll talk about what GDP is, how it’s measured, what GDP per capita is, some pros and cons, and how to increase the GDP. So, let’s get started! Section 1. What is GDP? The word GDP stands for Gross Domestic Product, gross means total or overall, domestic means it happens within a country’s border, and product means goods and services. So, GDP is total value of final goods and services produced within a country in a specific time period, usually a quarter or a year. For example, if your country were a bakery, GDP would be the total revenue of all the bread, cakes, and cookies baked and sold in that bakery over a year. But the flour used to make the bread and cakes wouldn’t be counted as GDP because it’s already included in the value of the finished bread and cakes to avoid double counting. So, GDP counts all final products and services made within a country’s borders in one quarter or one year. Now, if a country primarily sells raw materials and cannot make the finished products, those raw materials are the final products and counted in the GDP. For example again, if your country were a bakery can only make flour but cannot make bread. The flour produced in that country can still be counted in the GDP. However, because flour is cheaper than bread, the GDP of that country will be lower than a country that can make finished products like bread. Also, it doesn’t matter whether they are made by locals or foreigners, as long as the production happens within the country, it’s included in the GDP. For example, if Bob, an American citizen, opened a bakery in the U.K., the bakery’s value wouldn’t be counted in the U.S. GDP because it’s in the U.K. Instead, it would be included in the U.K.’s GDP because the production happens there. Well, pretty simple and easy right? Now, how to calculate all GDP? Well, we’ll talk it in the next section. Section 2. How GDP is Measured? Well, GDP can be calculated using 3 methods: first is calculating the production. This method calculates the total value of all final products and services that are produced in the country. The second is calculating the spending. This method calculates the total value on how much money is spent in the economy. The formula is GDP equals to consumer spending which includes everyday spending by normal people like you. For example, if you spend $100 on groceries, that $100 is counted as part of GDP. Then plus investment which is businesses investing in themselves. For instance, if a factory buys a new machine to increase production, this is counted as investment. Then plus government spending, includes all spending by the government, such as building a new bridge. The cost of materials, workers' salaries, and other expenses involved in the project are included in the GDP. And the last is net export. So, exports are when a country sells products to other countries, while imports are when a country buys products from others. The logic is simple: countries aim to sell more or export than they buy or import to make money. So, net export is calculated as exports minus imports. If a country exports more than it imports, it makes more money, which is included in GDP. The tthird method is calculating the income. This method looks at the total income earned from producing goods and services. It includes salaries, business profits, rents, taxes, and any other types of income, while subtracting any subsidies provided by the government, and the result is the total GDP. While the methods are different, but if they are calculated correctly, it should lead to same result. Simple example, if a bakery produces 10 loaves of bread. Then by calculating the production, the 10 loaves of bread times the average price of bread which let’s say $3 so the GDP is $30. Now, if calculating the spending, when let’s say there’s 10 people buying the bakery’s bread each 1. So, all people buy 10 loaves of bread for $3 which is also $30 as GDP. And if calculating the income, as there’s 10 people each buy 1 loaf of bread for $3 then the bakery’s income from selling 10 loaves of bread is $30 which is the GDP. See, all methods are giving the same result $30 even though they’re using different ways. Okay, you’ve understood how GDP is calculated, but now you’re wondering, from the previous example, if a bakery produces 10 loaves of bread, then the GDP is 10 loaves of bread times the average price of bread which is $3 per loaf which is $30. Now, the problem is, inflation happens every time, and bread prices increase due to inflation, so is the GDP increasing while there’s still 10 loaves of bread? Well, due to this problem, it makes GDP has 2 types that differentiates which are nominal GDP and the real GDP. It may sound confusing, but don’t worry I’ll explain it as simple as I can! First is nominal GDP. Nominal GDP is calculating GDP using the current price, no need to worry about inflation. For example, if a bakery produces 10 loaves of bread in 2024 and the average bread price in 2024 is $3 then it means the bakery is contributing $30 to the GDP. Now, if that bakery still produces same 10 loaves of bread in 2025 and the average bread price in 2025 is let’s say $4 per loaf then it means the bakery is contributing $40 to the GDP. See? The GDP is increasing from $30 to $40 but the bread production is not. That’s why most people say nominal GDP is not accurate because it shows the economy is growing but actually is not due to inflation. And that’s where real GDP comes in. So, instead of using current price that keeps increasing due to inflation, real GDP just uses a specific year price to calculate GDP. For example, you might calculate real GDP based on the 2024 price, so in 2024, the bakery produces 10 loaves of bread price that $3 in 2024 so the GDP is $30. And in 2025, the bakery still produces 10 loaves of bread with $4 price in 2025, but we ignore it and still count it using 2024 price so the GDP is stuck at $30. See? Now we know the bakery didn’t increase its production, so this is why the real GDP is more accurate. So, now you have understood how the GDP works. But you’re wondering, how can we use the GDP to compare countries’ economies when every country has each own size and condition? Well, we’ll talk about it in the next section. Section 3. How to compare GDP between countries? When we compare the economies of different countries, looking only at their total GDP might not give us the complete picture. There are better ways to make this comparison clearer and fairer. First is GDP at Purchasing Power Parity (PPP). You may have seen GDP at PPP mentioned on sources like Wikipedia, but are you wondering what’s this? Well, let’s see an example: Imagine both India and the U.S. each produce 1 loaf of bread. In India, the price of one loaf is 100 rupees, so India’s nominal GDP for bread would be 100 rupees. In the U.S., each loaf costs $3, so the U.S. nominal GDP for the same loaf of bread would be $3. However, we can't compare rupees directly to dollars, so we need to convert the prices using the exchange rate. Let’s assume the exchange rate is 1 U.S. Dollar equals to 100 Indian Rupees. India’s nominal GDP for bread in U.S. Dollar would be $1 while the U.S. which produce the same 1 loaf has GDP of $3. So, to make a fair comparison, we use the PPP ratio, which is 3:1 in this case, meaning 1 loaf of bread in the U.S. equals 3 loaves of bread in India. So, to adjust for this difference, we multiply India’s nominal GDP of $1 by 3, giving India a GDP (PPP) of $3. As GDP PPP uses USD so the U.S. GDP PPP would be the same. So, PPP helps us to compare countries with different prices and exchange rates. Of course, counting PPP is much more complex than that, but I'll keep it simple. Second is GDP per capita. Let’s compare Singapore, a small country with about 5 million people, to its neighbor Indonesia, which has around 280 million people. Indonesia’s total GDP is much bigger than Singapore’s because Indonesia has more people. But why do people say Singapore is richer than Indonesia? This is where GDP per capita comes in. It divides a country’s total GDP by its population, giving us an average value of how much economic output there is for each person. In 2025, Singapore’s GDP per capita is around $93,000 for nominal GDP and $153,000 for GDP at PPP. Meanwhile, Indonesia’s GDP per capita is around $5,000 for nominal GDP and $17,000 for GDP at PPP. This shows that, on average, each person in Singapore produces more economic value than each person in Indonesia. But because Indonesia has a larger population, its total GDP is higher. It’s important to remember that GDP per capita is not the same as salary. GDP per capita is simply the country’s total production divided by its population. You can see how different this is from average salary levels. A high GDP per capita usually suggests a higher standard of living, but it’s not always true. We’ll explain why in the next section. Section 4. Pros and cons of GDP. For now, GDP gives a broad picture of a country’s economic activity. By looking at GDP, you can see the total value of goods and services produced in your country and by comparing it with previous GDP numbers, you can tell whether the economy is growing or shrinking. Governments and central banks use GDP to check how healthy the economy is. For example, if a country’s real GDP drops for 2 quarters or 6 months in a row, it could mean a recession, a term you might have heard a lot from the news. If the recession continues for 3 or more years, it could become a depression, like the Great Depression in the U.S. during the 1930s. Many other economic conditions can also be understood from GDP. But of course, GDP is not perfect as it still has lots of disadvantages and flaws. First is GDP doesn’t count informal activities. Unpaid work like volunteering and other informal activities like illegal activities which can value billions of dollars are not included in GDP calculations. The second is GDP distortion. GDP includes foreign production within a country, and sometimes this number is inflated due to tax haven activities. For example, foreign companies moved and registered their profits in Ireland for tax benefits. These profits were counted as Irish GDP, but the companies immediately sent the money back to their home countries. This means Ireland, and especially the Irish people didn’t really benefit from the high GDP, as the money was just passing through. You can learn more about this in my video on tax havens, the link is in the description. Third is not representing the quality of life. GDP only shows total country economy production so it couldn’t really show whether the people live well. For example, a country like Equatorial Guinea has PPP GDP per capita around $17,000 in 2023 according to the World Bank which is one of the highest in Africa. You might think Equatorial Guinea is rich but actually, its high GDP is due to oil production that’s controlled by the government. While the people? About 70% of the population live below the poverty line and get no benefit from the oil economy due to massive corruption and unequal distribution. That’s why GDP or GDP per capita doesn’t always equal to high quality of life. Despite its flaws and limitations, GDP remains the most popular method for calculating a country’s economy, because it’s the simplest way to measure economy size and performance of a country. Well, if that is, then how to increase the GDP in the right way? Well, we’ll talk about that in the next section. Section 5. How to increase the GDP? I believe that all of you hope your country can have high GDP and GDP per capita, but are you wondering how can a country increase its GDP in a sustainable and a beneficial way? Because increasing GDP isn’t just about boosting numbers on paper, it’s about making sure the people are getting the benefits. You might say that increasing GDP needs lots of money to invest, then how about a country that doesn’t have so much money? For low budget countries, the best and most proven way to increase GDP is encouraging foreign investment. When foreign investors invest in a country, they bring money, technology that creates jobs and increase production in that country. If the production increases, then the GDP will also increase. When GDP increases, the government revenue will also increase. After that, the best next step is to invest the money into education and the skills of its own people. More educated workers lead to higher productivity, innovation, and higher salaries. But remember! Being too dependent on foreign investors is not ideal in the long run, it can limit a country's economic independence. So, the solution is to support local businesses in learning from foreign companies, so that in the future, locals can replace the foreign businesses. Believe it or not, this is the fastest way for a country to get out from poverty and make their GDP skyrocket. You want a real example? There’re too many! Japan, South Korea, China, Singapore, these used to be super poor back then and have so many challenges. So, by attracting foreign investment and learn from them, now they are capable of making their own and becoming an economic power. Also, a country like Vietnam is also a new example that currently is using this strategy to not only increase their GDP but also their quality of life. If you want me to make other videos explaining these topics, please like and subscribe. Thanks for watching.