Final answer:
GDP is the total value of all final goods and services produced within a country in a year and is essential for assessing the economy's health. It is influenced by the business cycle and factors like depreciation, and is corrected for double counting. Comparing economies also involves using GDP per capita and understanding the difference between GDP and GNP.
Step-by-step explanation:
The term 'Gross Domestic Product' (GDP) refers to the value of the output of all final goods and services produced within a country in a year. It is a comprehensive measure that helps to assess the health of an economy by accounting for all economic activities, except for intermediate goods and services, to avoid double counting. GDP is affected by the business cycle, which is the economy's relatively short-term movement in and out of recession and includes periods of significant decline in economic activity known as depressions. The depreciation of capital goods over time and how it affects the economic output is also taken into account. To facilitate comparisons between different countries, economists also use GDP per capita, which is GDP divided by the population, and may adjust figures according to exchange rates to reflect different currencies' values.
Understanding GDP also involves recognizing its limitations, such as avoiding the mistake of double counting where the economic output is counted more than once as it travels through the stages of production. Moreover, the GDP includes durable goods, or long-lasting goods like cars and refrigerators, which make a significant contribution to the total value of GDP due to their higher worth and extended service life.
When analyzing GDP, economists also look at the gross national product (GNP), which includes what is produced domestically and what is produced by domestic labor and business abroad in a year. The distinction between GDP and GNP is important for understanding a nation's actual economic reach.