Gross domestic product, or GDP, measures the size of an economy. In essence, it puts a dollar figure on all the goods and services that a country produces in a given year (or other period).
Tracking a country’s GDP tells us two things:
Investors, governments, and others watch GDP closely because it’s generally considered the single best measure of how an economy is doing.
In normal times, GDP should be increasing at a steady pace (that’s called an expansion), workers are generally able to find jobs, corporations are turning profits, and, typically, stocks are rising.
The opposite state of affairs is when the economy shrinks—called a recession. That can mean workers are losing their jobs and corporations are losing money. If unchecked, recessions can turn into economic death spirals (see: the Great Depression). Governments may watch GDP closely for any clues the economy could be headed for a recession so that it can take steps to try to avoid or soften one.
GDP includes four basic components:
GDP has many different uses:
“While GDP and the rest of the national income accounts may seem to be arcane concepts, they are truly among the great inventions of the twentieth century.“
—Paul A. Samuelson
GDP at a specific moment in time doesn’t always paint a full picture of economic strength. Economists instead look at GDP growth (the difference in GDP year-to-year or quarter-to-quarter) over time to see how an economy has performed and project what it might do in the future.
GDP growth (%) = (GDP this period – GDP last period)
GDP last period
The percentage can be either positive (indicating growth) or negative (indicating contraction). Two or more quarters of negative growth in a row indicate a recession. A depression is a downturn sustained for a few years.
GDP is a measure of an economy’s health. Economists, investors, governments, and others around the globe use it to compare countries to each other, set spending policies, and decide where to invest.