One of the most widely watched indicators of economic health, GDP is used by investors and policymakers. It can tell you whether an economy is expanding or contracting, which industries are growing and which are slowing down, and whether a country is headed for inflation or recession.
The measure includes all private and public spending on final goods and services, plus the value of what a country sells to other countries (exports) minus the value of what it buys from them (imports). GDP is calculated using three different methods; the production approach adds up the value added by each sector of industry, the expenditure method calculates the sum of all purchases by households and businesses, and the net exports method counts the total value of a country’s gross international investment in machinery and buildings minus its total domestic investment in those same goods and services.
The statistic is often reported at current prices, but comparing the figure between two time periods requires adjustment for inflation using a statistical tool called a price deflator. This is done to make sure we are judging actual changes in output and not just higher or lower nominal prices.
GDP emphasizes material output but does not take into account other factors deemed important to a nation’s well-being. It does not account for things like environmental damage, reductions in leisure time or the depletion of nonrenewable natural resources. It also excludes any business-to-business transactions, such as the buying and selling of shares in a company, since these are a swapping of claims on future production rather than an expenditure on existing products.