The gross domestic product (GDP) is one of the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period; you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year.

Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive at roughly the same total.

The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.

As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy. A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It's not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.

For more on this topic, see Is real GDP a better index of economic performance than GDP? and Macroeconomic Analysis.

  1. What is the difference between GDP and GDP accounting for PPP (purchasing power parity)?

    The standard measure of gross domestic product, or GDP, is absolute. In contrast, some accounts of GDP are adjusted for relative ... Read Full Answer >>
  2. When do economists use real GDP instead of GDP?

    Economists use real GDP when they want to monitor the growth of output in an economy. Nominal GDP, typically referred to ... Read Full Answer >>
  3. Is real GDP a better index of economic performance than GDP?

    Real GDP is a much better index for expressing the output of an economy, as it takes into account the fluctuating value of ... Read Full Answer >>
  4. What are some alternatives to real GDP?

    Real GDP is used for assessing a country’s economic performance over a given time. Other measures used for this are nominal ... Read Full Answer >>
  5. Which countries are most productive in terms of GDP?

    If you are measuring productivity based on Gross Domestic Product (GDP), the ten most productive countries in the world are, ... Read Full Answer >>
  6. What is the benefit of using real GDP over GDP?

    Economists use the gross domestic product (GDP) to compare the relative prosperity of different nations and measure the overall ... Read Full Answer >>
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