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. 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 >>
  3. 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 >>
  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 >>
Related Articles
  1. Economics

    Why is Puerto Rico in So Much Debt?

    Learn about the origins and economic factors that led to the downfall of the Puerto Rican economy and what the U.S. government can do to fix the situation.
  2. Forex

    What Is GDP?

    GDP is like a price tag on a country's output, and it measures the size of the economy. Find out what it means.
  3. Insurance

    Medicare 101: Do You Need All 4 Parts?

    Medicare is the United States’ health insurance program for those over age 65. Medicare has four parts, but you might not need them all.
  4. Economics

    Long-Term Investing Impact of the Paris Attacks

    We share some insights on how the recent terrorist attacks in Paris could impact the economy and markets going forward.
  5. Economics

    5 States with the Highest GDP Per Capita

    Learn about the top five states ranked by their real gross domestic product (GDP) per capita as of 2014: Alaska, North Dakota, New York, Connecticut and Wyoming.
  6. Economics

    Understanding Donald Trump's Stance on China

    Find out why China bothers Donald Trump so much, and why the 2016 Republican presidential candidate argues for a return to protectionist trade policies.
  7. Economics

    Will Putin Ever Leave Office?

    Find out when, or if, Russian President Vladimir Putin will ever relinquish control over the Russian government, and whether it matters.
  8. Economics

    The Difference Between Finance And Economics

    Finance and economics are often taught as separate subjects, but they are interrelated disciplines that influence one another in many ways.
  9. Economics

    Understanding Tragedy of the Commons

    The tragedy of the commons describes an economic problem in which individuals try to reap the greatest benefits from a given resource.
  10. Markets

    Will Paris Attacks Undo the European Union Dream?

    Last Friday's attacks in Paris are transforming the migrant crisis into an EU security threat, which could undermine the European Union dream.
  1. Sales Tax

    A consumption tax imposed by the government on the sale of goods ...
  2. Stock Market Crash

    A rapid and often unanticipated drop in stock prices.
  3. Crowding Out Effect

    An economic theory stipulating that rises in public sector spending ...
  4. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced ...
  5. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s ...
  6. Surplus

    The amount of an asset or resource that exceeds the portion that ...

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center