GDP is one of those acronyms that pops up in the news and moves the stock market. It’s a key indicator of how healthy a country’s economy is; two quarters of declining growth can spell a recession. It also helps businesses, investors and others make decisions. A growing GDP means more people are producing goods and services, while a shrinking GDP suggests the economy isn’t as productive as it once was.
GDP represents the total monetary value of all the goods and services produced within a nation in a certain time frame, usually a quarter or a year. It’s the sum of all domestic consumption, business investment and government spending, minus imports.
Consumption is the largest component of GDP; it includes items such as food, jewelry and clothing. Investment is the money spent by companies on things like equipment, vehicles and inventory. And government spending includes all local, state and federal spending.
A rising GDP indicates more people are making and using more goods and services, while a falling GDP points to less economic activity and, potentially, unemployment. It’s important to note, however, that GDP is measured at current, or nominal, prices, not actual, or real, prices. To compare GDP between different periods, it’s necessary to adjust for inflation using a statistical tool called a price deflator.
GDP is a complex calculation that relies on a lot of data from many sources, including surveys of households and companies. As such, it has its flaws. For example, it fails to take into account the value of some informal economic activity, such as under-the-table jobs or black-market transactions, and unremunerated volunteer work. It also doesn’t capture some phenomena that impact citizens’ well-being, such as pollution from traffic jams.