GDP measures the monetary value of all final goods and services produced within a country in a given period. It is calculated by adding up the total value of consumer spending, business investment, and government spending (plus net exports). GDP can be calculated in three different ways, but only real GDP matters because it is adjusted for inflation. The BEA uses a method called the “value-added approach” which subtracts the cost of intermediate goods and services from the gross domestic product to obtain the real GDP.
Real GDP is one of the most closely watched economic indicators; its advance release usually moves markets, although this impact can be limited by a substantial amount of time that has already passed between the quarter-end and the release of the data. It is used by economists, investors, and businesses to gauge the health of a nation’s economy. It is also a significant consideration for policymakers, particularly central banks, who may adjust their monetary policies to respond to changes in GDP.
While GDP can give us a general sense of the economy’s direction, it is not a measure of a country’s wealth or well-being. For example, GDP growth might increase due to a new oil refinery, but it might not improve citizens’ quality of life if it leads to increased pollution or traffic congestion. Moreover, GDP understates true economic growth by failing to account for quality improvements and the introduction of new products.