The gross domestic product (GDP) of a country is the overall value of all the goods and services produced by and within a country over a given span of time. Generally, it is calculated on an annual basis. The potential GDP of a country is the ideal, or maximum possible GDP for that country if unemployment is at a minimum and all industries, offices, and services are operating at maximum possible output. The actual GDP of a country is the real, or actual, value of all goods and services produced. Actual and potential GDP are often compared to produce one indicator of a country's relative economic health.
Economists use several methods for calculating the GDP of a country, but the differences are really nothing more than variations on adding up the separate components, and each method will result in very similar numbers. Actual and potential GDP are used to produce an indicator of the relative economic condition of a country. The difference between potential and actual GDP is the GDP or output gap and is found by comparing the potential GDP to the actual one.
In times of economic boom, the actual GDP can surpass the potential GDP. This is due to a number of factors, primarily the international demand for that country's goods and services, which increases their value. Unemployment is at a minimum, and business and industry are operating at maximum or even above what are generally thought of as maximum levels due to overtime hours and production improvements.
During times of economic recession or depression, the actual GDP will be less than the potential GDP. This is generally due to the fact that during such economic conditions, unemployment is higher, meaning consumers spend less and companies produce fewer goods and services. The greater the gap between the two GDP figures, the greater the boom or downturn. The annual rate of growth of actual GDP can be another indicator of economic health.
Actual GDP, while often used as a primary indicator of a country's relative economic health, can also be used to derive several other kinds of information. By comparing this figure to population figures, for example, it can be used to determine the relative standard of living for a given country. This figure is called per capita GDP. The higher the actual GDP and the lower the population, the higher the per capita GDP will be, implying a higher standard of living.