Loading the player...
A:

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. Currently, the United States has a GDP of $18,869.4 billion according to a report released by the Bureau of Economic Analysis in March 2017.

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 earnings for companies, which translates into 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. To stay on top of the latest macroeconomic news and analysis, sign up for our free News to Use newsletter.

RELATED FAQS
  1. What is the benefit of using real GDP over GDP?

    Find out why real GDP allows economists to measure changes in the economic growth or decline of a country more accurately ... Read Answer >>
  2. Is real GDP a better index of economic performance than GDP?

    Learn why real GDP is a better index for expressing the output of an economy, as it takes into account the factors that distort ... Read Answer >>
  3. Is the nominal value of GDP a sufficient metric for measuring the economy's health?

    Find out whether the nominal value of gross domestic product is sufficient for measuring the health of an economy and how ... Read Answer >>
  4. How much of an economy's performance is captured by real GPD?

    Learn about the economic information captured by real GDP. Find out how real and nominal GDP are constructed and the purposes ... Read Answer >>
  5. How does the stock market affect gross domestic product (GDP)?

    Find out how the stock market affects gross domestic product (GDP) through two different channels: financial conditions and ... Read Answer >>
Related Articles
  1. Insights

    Why Investors and Economists Care About GDP

    Gross Domestic Product is the total dollar value of all goods an economy produces over a given time.
  2. Insights

    The GDP and its Importance

    GDP is an accurate indication of an economy's size. Few data points can match the GDP and its growth rate's conciseness.
  3. Insights

    How The GDP Of The US Is Calculated

    The US GDP may not be a perfect economic measure, but the ability to compare it to prior periods and other countries makes it the most applicable.
  4. Insights

    Is GDP Really an Accurate Measure of Economic Growth?

    What does GDP tell us about real economic growth or well-being? It turns out that the answer is quite different than what you might expect.
  5. Insights

    How Is The GDP Of India Calculated?

    India is a front-runner among developing economies. Investopedia explains how India calculates its GDP, an indicator of economic health and performance.
  6. Insights

    Why GDP Is Not an Accurate Measure of the Economy

    Is gross domestic product (GDP) an accurate measure of the strength or weakness of the U.S. economy?
  7. Trading

    Calculating the GDP Price Deflator

    The GDP price deflator adjusts gross domestic product by removing the effect of rising prices. It shows how much an economy’s GDP is really growing.
  8. Trading

    The Delicate Dance of Inflation and GDP

    Investors must understand inflation and gross domestic product, or GDP, well enough to make decisions without becoming buried in data.
RELATED TERMS
  1. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced ...
  2. Real Gross Domestic Product (GDP)

    An inflation-adjusted measure that reflects the value of all ...
  3. GDP Price Deflator

    An economic metric that accounts for inflation by converting ...
  4. Nominal GDP

    A gross domestic product (GDP) figure that has not been adjusted ...
  5. Below Full Employment Equilibrium

    A macroeconomic term used to describe a situation where an economy's ...
  6. Inflationary Gap

    A macroeconomic condition that describes the distance between ...
Hot Definitions
  1. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  2. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that eventually eliminated tariffs to encourage economic activity between the United ...
  3. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  4. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
  5. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  6. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
Trading Center