GDP is one of the most important economic indicators. It tells us how big a country’s economy is and, when compared to the past, whether it’s growing or shrinking. It’s a critical number for investors, economists, and policymakers alike.
GDP measures the monetary value of all final goods and services—that is, those sold on the market—produced within a country in a given period, usually a year. This includes all market and nonmarket production, like government spending and household production. A similar measure is gross national product (GNP), which also includes household production but excludes foreign ownership of capital.
Unlike other measures of production, GDP uses current, or nominal, prices. This means that a rise in GDP from one year to the next must be adjusted for inflation. This is done using a statistical tool called a price deflator, which converts GDP from nominal to constant prices. This process allows economists to tell whether the increase in GDP is due to more output or simply higher prices.
Another problem with GDP is that it only accounts for products that are sold to consumers or businesses. It does not account for the value of unrecorded or informal production, such as work done by volunteers or in households. This means that while GDP may show an increase in the sale of pollution control equipment, it does not address how much dirtier or healthier the air and water actually are. Likewise, GDP does not include the cost of raising children or acquiring education.