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. To stay on top of the latest macroeconomic news and analysis, sign up for our free News to Use newsletter.
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Is real GDP a better index of economic performance than GDP?
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When do economists use real GDP instead of GDP?
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Are Social Security payments included in the US GDP calculation?
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How does the United States government measure economic growth?
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How does the stock market affect gross domestic product (GDP)?
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How can I use the rule of 70 to estimate a country's GDP growth?
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Real Gross Domestic Product (GDP)
An inflation-adjusted measure that reflects the value of all ... -
Expenditure Method
A method for calculating GDP that totals consumption, investment, ... -
Inflationary Gap
A macroeconomic condition that describes the distance between ... -
Negative Growth
A contraction in a country's economy, as evidenced by a decrease ... -
Economic Indicator
An economic indicator is a piece of economic data, usually of ... -
Net Exports
The value of a country's total exports minus the value of its ...