GDP is the most widely used measure of economic performance and one of the most important indicators of overall economic health. It is calculated as the sum of the output of a country or region’s economy, including all domestic production of goods and services. This includes all production activity, whether a product is consumed by households or used for investment. However, unpaid work (such as housework or volunteering) and black-market activities are not included in GDP.
Consumer spending, or C, accounts for two-thirds of GDP. It includes all spending by private consumers on goods and services. Investment, or I, consists of purchases by businesses on equipment and other assets. Government spending, or G, includes all purchases made by federal, state, and local governments. Other notable categories in GDP include net exports and gross national product.
Purchasing power parity, which adjusts for price differences between countries, is also a subset of GDP. To determine “real” GDP, prices must be adjusted to account for inflation. This allows comparisons between periods of time.
In addition to price adjustment, a number of other factors can affect GDP, such as quality improvements and the inclusion or exclusion of new products. Some economists have criticized GDP because it fails to take into account these changes. They advocate alternative measures that focus on the wellbeing of a population and the environment, such as the Human Development Index or Better Life Index. Nonetheless, GDP remains the most commonly used measure of economy in the world and is monitored closely by investors, analysts, policymakers, and central banks. Advance release of GDP data is often expected to move markets, although its impact can be limited by other economic news and market conditions.
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