GDP reflects the total market value of all goods and services produced within a nation in a given time frame—usually a quarter or a year. It includes all private consumption, business investment, and government spending, minus exports.
Economists use GDP to assess the health of an economy, understand economic cycles, and predict future growth. Policymakers, such as the White House and Congress, rely on GDP figures when making decisions about public spending and taxation. Central banks, such as the Federal Reserve, closely track GDP growth to determine interest rates and money supply.
A nation’s GDP is determined by its national statistical agency, following international standards set in the System of National Accounts, 1993, compiled by the International Monetary Fund, European Commission, Organization for Economic Cooperation and Development, and the United Nations. There are several ways to calculate GDP, but the most common approach is known as the production method. This combines all industries’ outputs using their final sales receipts and subtracts intermediate inputs—for example, auto parts that are used by a car manufacturer to produce cars, but not sold separately, count towards GDP.
GDP is an important metric, but it has limitations. It emphasizes material output without taking into consideration social and environmental costs. It also fails to capture certain phenomena that impact citizens’ well-being, such as traffic jams. And, it overstates the importance of consumption relative to production, as it intentionally nets out intermediate inputs and business-to-business transactions.