GDP stands for Gross Domestic Product. It represents the total value of everything a country makes in a year, such as goods (like mobile phones and food) and services (like health or education), as well as the associated expenditures and incomes. GDP is a key economic indicator within the framework of national accounts.
GDP gives us an idea about the size — in monetary terms — of an economy.
In this article you will learn how to compare GDP of different economies and avoid drawing misleading conclusions because of different sizes of population, price level differences and inflation (or price changes overtime).
How can we compare different countries' GDP?
GDP is calculated both annually and quarterly. It is generally expressed in millions of euros at current market prices that represent the total value of the whole economy. This is also known as nominal GDP, which can be used to compare the size of different economies when expressed in the same currency (e.g. the euro). However, different factors such as: population size, variations in the cost of living between countries and the effects of inflation should be considered when comparing the economies.
How do we take into account different sizes in population?
Since large countries usually have higher GDP figures than smaller countries, we can use GDP per capita to compare countries with different population sizes and their economic development.
GDP per capita is calculated by dividing a country’s total GDP by its population. This gives a value that reflects the average economic output per person. In simple terms, it shows how much money each person might get if the economy’s total output was divided equally among everyone.
On 1 January 2024, the EU population was 452 million. Dividing the EU GDP figure of
€17 960 000 million by the population results in a GDP per inhabitant, or per capita, of around
€39 700. The GDP per capita is comparable across countries of different sizes, and a bit easier to understand, we can think of it like an average annual salary per person.
In 2024, Germany's GDP was €4.3 trillion and Ireland’s GDP was €0.6 trillion. Germany has the highest population in the EU and Ireland has a much smaller population. But when we divide GDP by their respective populations, Germany has a GDP per capita of €50 800, compared to €99 100 in Ireland.
The figures above show how smaller countries like Ireland might be wealthier per capita even if their overall GDP isn’t as large. In this way, GDP per capita also helps us understand how wealthy or poor a country's residents might feel. Generally, a higher GDP per capita indicates a richer country, where people might have a higher standard of living.
How to take into account different prices
Prices can vary between countries, even countries using the same currency (e.g. the euro). Therefore the amount of goods and services you can buy in Germany with €100 might be different from what you can buy in Ireland with the same amount of money.
To adjust for such price level differences between economies, the value of GDP is converted using purchasing power parity (PPPs) a special exchange rate that takes price differences into account.
After applying purchasing power parity, data are no longer measured in euro, but in an artificial currency called a purchasing power standard (PPS). With 1 unit of this currency someone could, in theory, buy the same amount of goods and services in any economy. In this way, it adjusts GDP for price level differences.
In 2024, GDP in the EU was 17.9 trillion PPS (17 960 billion PPS). Normal practice is to treat
1€ as equal to one PPS on average for the EU as a whole.
Since price levels are different in each country, the conversion to PPS gives a GDP counted in PPS of around 3.8 trillion in Germany and of PPS 0.5 trillion in Ireland. Because both numbers are smaller than the numbers given earlier in € terms we can see that prices in Germany and Ireland are on average higher than in the EU as a whole. This means that you can buy less with €100 in these 2 countries than in other countries, which have lower prices.
If we now divide these values by the population, we can also calculate GDP per capita in PPS. This indicator takes into account not just the differences in the size of population but also the differences in prices between economies (countries or regions).
This indicator can also be expressed as a volume index of GDP per capita in PPS, in relation to the EU average (set to equal 100). If the index of a country is higher/lower than 100, that country’s level of GDP per head is above/below the EU average; this index is normally used for cross-country comparisons rather than comparisons over time.
In the visualisation below you can check GDP in current prices (€ million) and GDP per capita in PPS for the different regions. The colour of the bubbles in the map reflects GDP per inhabitant in PPS, with darker shades indicating higher values.
How to consider inflation in GDP?
We can compare GDP over time to see the evolution of a country or region's economy, for example, from year to year and even further back, 5, 10 or 20 years ago. To do this, we calculate a rate of change, which is called a growth rate. In healthy economic situations, GDP normally goes up from year to year. However, in times of recession or crisis, GDP decreases.
When we do this, we face the problem that GDP is measured in monetary terms and that the value of money changes over time, because of inflation (i.e. general changes in prices).
Nominal and real GDP
When we calculate GDP for any given year, we use the prices of that year (2024 GDP in 2024 prices, 2023 GDP in 2023 prices and so on); this is called nominal GDP or GDP in current prices.
When we compare values between 2 or more years, we must take into account that changes in nominal GDP are also the result of changes in prices. Therefore, if we have data for GDP in current prices for a time series (a series of years, for instance), we need to adjust it according to the price changes to really know how the economy has changed. This process is referred to as "deflating" the current price data. The GDP "deflator" is a price index which measures the average price trend of a basket of goods and services representative of national output. As formula we use: Real GDP = (Nominal GDP/GDP Deflator).
Thus, changes in real GDP (or GDP adjusted for inflation) eliminate the effect of inflation.
The EU’s GDP was 15% higher in 2024 compared with 2014 (10 years earlier) in real terms, while over the same period GDP in current prices grew by 51%. This means that less than half of the growth observed in current prices (nominal growth) was due to real economic growth (changes in quantities of good and services produced, called 'economic growth') while the rest was due to inflation (changes in prices).
| Nominal GDP | Real GDP | |
|---|---|---|
| Calculation | Uses prices of goods and services of a specific year | Uses prices of goods and services of the previous year to remove inflation (price increase between years) |
| Use | Compare GDP between different countries in the same year (in EUR or PPS) | Compare GDP changes over time |
The real rate of change of GDP – the most popular GDP indicator
From the deflated GDP (as explained above) we can calculate the real rate of change of GDP (also called change in the volume of GDP). When we hear or read that GDP grew by a certain amount or a certain percentage, it is nearly always this real change (or volume change) that we are referring to.
The GDP rate of change refers to the percentage change in a country's deflated (real) GDP over a specific period. Typically, the specific period is either a quarter (compared to the previous quarter or to the same quarter of the previous year) or a year (compared to the previous year). It is a key economic indicator that helps economists and policymakers assess the health of the economy. The real rate of change of GDP is the most popular GDP indicator and is the one you normally read about in the media.
Play with the visualisation and find out how your country’s GDP has changed over time. You can see how GDP has changed compared to the previous quarter or to the same quarter of the previous year.
Play with statistics
Do you want to test your knowledge on GDP and other statistics? Take Eurostat’ s quiz and learn more about the EU countries in a fun way. You can test yourself, your friends and family, students and colleagues.
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