Economics & Markets · definition
Gross Domestic Product (GDP)
GDP is the total market value of all final goods and services produced in a country during a period. It is the most used yardstick for the size and growth of an economy.
Gross domestic product (GDP) is the total market value of all final goods and services produced within a country's borders in a given period, usually a quarter or a year. It is the standard measure of the size of an economy, and its growth rate is the headline figure in most economic news.
Key takeaways
- GDP counts final goods and services produced domestically, regardless of who owns the producer.
- Real GDP removes the effect of inflation; nominal GDP does not.
- Two consecutive quarters of falling real GDP is a common informal marker of a recession.
- GDP measures production, not wellbeing, sustainability or the distribution of income.
How GDP is measured
Statistical agencies compute GDP three equivalent ways: by adding all spending (consumption, investment, government purchases and net exports), by adding all income earned in production, or by adding the value added at each production stage. In the United States the Bureau of Economic Analysis publishes quarterly estimates that are revised as fuller data arrives; first estimates routinely change.
Real versus nominal
Nominal GDP values output at current prices, so it rises when prices rise even if production is flat. Real GDP holds prices constant to isolate changes in actual output, which is why growth rates in the news are almost always real. GDP per capita divides the total by population and is the standard, imperfect shorthand for average material living standards.
What GDP misses
The measure's inventor, Simon Kuznets, warned from the start that it is not a welfare metric. GDP omits unpaid work, ignores environmental costs, says nothing about how income is distributed, and counts rebuilding after a disaster as growth. Alternatives and complements exist (median income, the Human Development Index), but none has displaced GDP as the common language of economic size.
Frequently asked questions
Why do markets react to GDP releases?
Because growth surprises shift expectations for corporate earnings and for central-bank policy. A much weaker quarter than expected can move Federal Reserve rate expectations within minutes.
What is the difference between GDP and GNP?
GDP counts production inside a country's borders. GNP (gross national product) counts production by a country's residents wherever it happens. Most countries headline GDP.
Sources
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