GDP is one of those acronyms that appears in the news, moves the stock market, and probably has some mystery behind it. But the concept is simple: It’s the total market value of all the goods and services produced in a country within a given time frame, like a quarter or year. Consumer spending, investment, and government spending all make up GDP. The biggest component is consumption, which includes everything people buy — from food and drink to cars and houses. That consumption can be broken down further into durable and nondurable goods. Investment includes anything companies spend on equipment or facilities that will provide future benefits, such as building new factories. And government spending is the amount of money the federal, state, and local governments spend on things like employee salaries and infrastructure projects.
The number is calculated by a country’s statistical agency using an international standard set by the United Nations, the Organization for Economic Co-operation and Development, and the European Commission. There are three different ways to calculate GDP, known as the expenditure, income, and value-added approaches. Each should give the same result, but the production or value-added approach is the preferred method of many economists because it reflects what is actually produced in the economy rather than just the value of the final products sold.
Economists use GDP to analyze the health of an economy, understand economic cycles, and predict future growth. Policymakers and central banks closely track GDP to assess whether the economy is growing too fast or slowing down, so they can adjust interest rates and money supply accordingly.
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