What Is Gross Domestic Product (GDP)?

Gross Domestic Product (GDP) includes consumer spending, government spending, net exports, and total investments. It functions as a comprehensive scorecard of a country’s economic health. GDP may be adjusted for inflation and population to provide deeper insights. Real GDP accounts for inflation, while 澳洲幸运5开奖号码历史查询:Nominal GDP does not.

Understanding Gross Domestic Product (GDP)

The calculation of a country’s GDP encompasses all private and public consumption, government outlays, investments, additions to private inventories, paid-in construction costs, and the foreign 澳洲幸运5开奖号码历史查询:balance of trade. Exports are added to the value, and imports are subtracted.

Of all the components that make up a country’s GDP, the foreign balance of trade is especially important. The GDP of a country tends to increase when the total value of goods and services that domestic producers sell to foreign countries exceeds the total value of foreign goods and services that domestic consumers buy. When this situation occurs, a country is said to have a 澳洲幸运5开奖号码历史查询:trade surplus.

If the opposite situation occurs—that is, if the amount that domestic consumers spend on foreign products is greater than the total sum of what domestic producers can sell to foreign consumers—it is called a 澳洲幸运5开奖号码历史查询:trade deficit. In this situation, the GDP of a country tꩲends to decrease.

GDP can be computed on a nominal basis or a real basis, the latter accounting for 澳洲幸运5开奖号码历史查询:inflation. Overall, real GDP is a better method for expressing long-term national economic performance since it uses 澳洲幸运5开奖号码历史查询:constant dollars.

Let’s say one country had 𓃲a nominal GDP of $100 billion in 2014. By 2024𝕴, its nominal GDP grew to $150 billion. Prices also rose by 100% over the same period. In this example, if you look solely at its nominal GDP, the country’s economy appears to be performing well.

However,ꦰ th꧂e real GDP (expressed in 2014 dollars) would only be $75 billion, revealing that an overall decline in real economic performance actually occurred during this time.

What Does GDP Tell You?

A country’s GDP represents the final market value of all ꦑthe products and services that a country produces in a single ye꧅ar. Another way to measure GDP is as the sum of four factors: consumer spending, government spending, net exports, and total investment.

In the United States, GDP is calculated every three months by the 澳洲幸运5开奖号码历史查询:Bureau of Economic Analysis (BEA). The BEA makes its estimate based on price estimates, survey data, and other information collected by other agencies, such as the Census Bureau, Federal Reserve, Department of the Treasury, and Bureau of Labor Statistics.

Types of GDP

GDP can be reported in several ways, each of which provides slightly different informationﷺ.

Nominal GDP

Nominal GDP is an assessment of econ💦omic production in an economy that includes current pri✨ces in its calculation. In other words, it doesn’t strip out inflation or the pace of rising prices, which can inflate the growth figure.

All goods and services counted in nominal GDP are valued at the prices at which those goods and serv🦹ices are sold for in that year. 💧Nominal GDP is evaluated in either the local currency or U.S. dollars at currency market exchange rates to compare countries’ GDPs in purely financial terms.

Nominal GDP is used when comparing different quarters of output within the same 🌄year. When comparing the GDP o𝕴f two or more years, real GDP is used. This is because, in effect, the removal of the influence of inflation allows the comparison of the different years to focus solely on volume.

Real GDP

Real GDP is an inflation-adjusted measure that reflects the number of goods and services produced by an economy in a given year, with prices held constant from year to year to separate out the impact of inflation or 澳洲幸运5开奖号码历史查询:deflation from the trend in output over time. Since GDP is based on the monetary value of goods and services, it is 𒆙subject to inflation.

Rising prices tend to increase a country’s GDP, but this does not necessarily reflect any change in the quantity or quality of goods and services produced. Thus, by loo💧king just at an economy’s nominal GDP, it can be difficult to tell whether the figure has risen because of a real expansion in production or simply because prices rose.

Economists use a process that adjusts for inflation to arrive at an economy’s real GDP. By adjusting the output in any given year for the price levels that prevailed in a reference year, called the base year, economists can adjust for inflation’s impact. This way, it is possible to compare a country’s GDP from one year to another and see if there is a🏅ny real growth.

Real GDP is calculated using a 澳洲幸运5开奖号码历史查询:GDP price deflator, which is the difference in prices between the current year and the base year. For example, if prices rose by 5% since the base year, then the deflator would be 1.05. Nominal GDP is divided by this deflator, yielding real GDP. Nominal GDP is usually higher than real GDP because inflation is typically a positive number.

Real GDP accounts for changes in market value and thus narrows the difference between output figures from year to year. If ther🐬e is a large discrepancy😼 between a nation’s real GDP and nominal GDP, this may be an indicator of significant inflation or deflation in its economy.

GDP Per Capita

GDP per capita is a measurement of the GDP per person in a country’s population. It indicates that the amount of output or income per person in an economy can indicate average productivity or average living standards. 澳洲幸运5开奖号码历史查询:GDP per capita can be stated in nominal, real (inflation-adjusted), or 澳洲幸运5开奖号码历史查询:purchasing power parity (PPP) terms.

At a basic interpretation, per-capita GDP shows how much economic production value can be attributed to each citizen. This also translates to a measure of overall national wealth since GDP market value per person also🤡 readily serves as a prosperity measure.

Per-capita GDP is often analyzed alongside more traditional measures of GDP. Economists use this metric for insight into their own country’s domestic productivity and the productivity of other countries. Per-capita GDP considers both a country’s GDP and ඣits population. Therefore, it can be important to understand how each factor contributes to the overall result and affects per-capita GDP growth.

If a country’s per-capita🍌 GDP is growing with a stable population level, for example, it could be the result of technological progress that is producing more with the same population level. Some countries may have a high per-capita GDP but a small population, which usually means they have built up a self-sufficient economy based on an abundance of special resources.

GDP Growth Rate

The GDP growth rate compares the year-over-year (or quarterly) change in a country’s economic output to measure how fast an economy is growing. Usually expressed as a percentage rate, this measure is popular for economic policymakers because GDP growth is thought to be closely connected to key policy targets such as inflation and unemployment rates.

If GDP growth rates accelerate, it may be a signal that the economy is overheating, and the central bank may seek to raise interest rates. Conversely, 澳洲幸运5开奖号码历史查询:central banks see a shrinking (or negative) GDP growth rate (i.e., a recession) as a si🦄gnal that rates should be lowered and that stimulus may be🅠 necessary.

GDP Purchasing Power Parity (PPP)

While not directly a measure of GDP, economists look at PPP to see how one country’s GDP measures up in international dollars using a method that adjusts for differences in local prices and costs of living to make cross-country comparisons of real output, real income, and living standards.

GDP Formula

🐼 GDP can be determined via three primary methods. All three methods should yield the same figure when correctly calculated. These three approaches are often termed the expenditure approach, the output (or production) approach, and the income approach.

The Expenditure Approach

The expenditure approach, also known as the spending ap🌜proach, calculates spending by the different groups that participate in the economy. The U.S. GDP is primarily measured based on the expenditure approach. This approach can be calculated using the following formula:

$\begin{aligned}&\text{GDP} = \text{C} + \text{G} + \text{I} + \text{NX} \\&\textbf{where:} \\&\text{C} = \text{Consumption} \\&\text{G} = \text{Government spending} \\&\text{I} = \text{Investment} \\&\text{NX} = \text{Net exports} \\\end{aligned}$​GDP=C+G+I+NXwhere:C=ConsumptionG=Government spendingI=InvestmentNX=Net exports​

All of these activities contribute to the GDP of a country. Consumption refers to private consumption expenditures or consumer spending. Consumers spend money to acquire goods and services, such as groceries and haircuts. Consumer spending is the biggest component of GDP, accounting for more than two-thirds of the U.S. GDP.

Consumer confidence, therefore, has a very sig൩nificant bearing on economic growth. A high confidence level indicates that consumers are willing to spend, while a low confidence level reflects uncertainty about the future and an unwillingness💖 to spend.

Government spending represents government consumption expenditure and gross investment. Governments spend money on equipment, infrastructure, and payroll. Government spending may become more important💧 relative t😼o other components of a country’s GDP when consumer spending and business investment both decline sharply. (This may occur in the wake of a recession, for example.)

Investment refers to private domestic investment or capital expenditures. Businesses spend money to invest in their business activities. For example, a business may buy machinery. Business investment is a critical component of G💯DP since it increases the productive capacity of an economy and boosts employment levels.

The net exports formula subtracts total exports from total imports (NX = Exports - Imports). The goods and services that an economy produces that are exported to other countries, less the imports that are purchased by domestic consumers, represent a country’s net exports. All expenditures by companies located in a given country, even if they are foreign companies, are included in this calculation.

The Production (Output) Approach

The production approach is essentially the reverse of the expenditure approach. Instead of measuring the input costs that contribute to economic activity, the production approach estimates the total value of economic output and deducts the cost of 澳洲幸运5开奖号码历史查询:intermediate goods that are consumed in the process (like those of materials and services). Whereas the expenditure approach projects forward from costs, the production approach looks backward from the vantage point of a state of completed economic activity.

The Income Approach

The income approach represents a kind of middle ground between the two other approaches to calculating GDP. The income approach calculates the income earned by all the 澳洲幸运5开奖号码历史查询:factors of production in an🔯 economy, including the wages paid to labor, the rent earned by land, the return on capital in the form of interest, and corporate profits.

The income approach factors in some🦩 adjustments for those items that are not considered payments made to factors of production. For one, there are some taxes𒉰, such as sales taxes and property taxes, that are classified as indirect business taxes.

In addition, depreciation, which is a reserve that businesses set aside to account for the replacement of equipment that tends to wear down with use, is also added to the national income. All of this together constitutes a nation’s income.

GDP vs. GNP vs. GNI

Although GDP is a widely used metric, there are other ways of measuring the economic growth of a country. While GDP measures the economic activity within the physical borders of a country (whether the producers are native to that country or foreign-owned entities), 澳洲幸运5开奖号码历史查询:gross national product (GNP) is a measurement of the overall production of people or corporations native to a country, including those based abroad. GNP excludes domestic production by foreigners.

Gross national income (GNI) is another measure of economic growth. It is the sum of all income earned by citizens or nationals of a country (regardless of whether the underlying economic activity takes place domestically or abroad).

The relationship between GNP and GNI is similar to the relationship between the production (output) approach andꦛ the income appro𒅌ach used to calculate GDP.

GNP uses the production approach,ౠ whil🐎e GNI uses the income approach. With GNI, the income of a country is calculated as its domestic income, plus its indirect business taxes and depreciation (as well as its net foreign factor income). The figure for net foreign factor income is calculated by subtracting all payments made to foreign companies and individuals from all payments made to domestic businesses.

In an increasingly global economy, GNI has been put forward as a potentially better metric for overall economic health than GDP. Because certain countries have most of their income withdrawn abroad by foreign corporations and individuals, their GDP figure is much higher than the figure t💖hat represents their GNI.

For example, Luxembourg has a significant difference between its GDP and GNI, mainly due to large payments made to the rest of the world via foreign corporations that do business in Luxembourg, attracted by the tiny nation’s favorable tax laws.

On the contrary, GNI and GDP in the U.S. do not differ substantially. U.S. GDP was $29,37 trillion as of Q3 2024, while its GNI was about $27,57 trillion by the end of 2023 (latest available data).

Adjustments to GDP

Several adjustments can be made to a country’s GDP to improve the usefulness of this figuꦐre. For economists, a country’s GDP reveals the size of the economy but provides little information about the standard of living in that country.

Part of the reason for this is that population size and cost of living are not consistent around the world. Economists can use 澳洲幸运5开奖号码历史查询:tax-to-GDP to get a better under♑standing of how a nation’s tax revenue impacts its economy and its peopl﷽e.

For example, comparing the nominal GDP of China to the nominal GDP of Ireland would not provide much meaningful information about the realities of living in those countries because China has approximately 300 times the population of Ireland.

To help solve this problem, statisticians sometimes compare GDP per capita between countries. GDP per capita is calculated by dividing a country’s total GDP by its population, and this figure is frequently cited to assess the nation’s standard of living. Even so, the measure is still imཧperfect.

Suppose China has a GDP per capita of $1,𝔍500, while Ireland has a GDP per capita of $15,000. This doesn’t necessarily mean that the average Irish person ඣis 10 times better off than the average Chinese person. GDP per capita doesn’t account for how expensive it is to live in a country.

PPP attempts to solve tღhis problem by comparing how many goods and services an exchange-rate-adjusted unit of money can purchase in different countries—comparing the price of an item, or a basket of items, in two countries after adjusting for the exchange rate between the two, in effect.

Real per-capita GDP, adjusted for purchasing power p﷽arity, is a heavily ꦦrefined statistic to measure true income, which is an important element of well-being. An individual in Ireland might make $100,000 a year, while an individual in China might make $50,000 a year.

In nominal terms, the worker in Ireland is better off. But if a year’s worth of food, clothing, and other items costs three times as much in Ireland as in China, then the worker in China has a higher 澳洲幸运5开奖号码历史查询:real income.

How to Use GDP Data

Most nations release GDP data every month and quarter. In the U.S., the Bureau of Economic Analysis (BEA) publishes an advance release of quarterly GDP four weeks after the quarter ends and a final release three months after the quarter ends. The BEA releases are exhaustive and contain a wealth of detail, enabling economists and investors to obtain information and insights on various aspects of the economy.

GDP’s market impact is generally limited since it is backward-looking, and a substantial amount of time has already el⛄apsed betwꦜeen the quarter-end and GDP data release. However, GDP data can have an impact on markets if the actual numbers differ considerably from expectations.

Because GDP provides a direct indication of the health and growth of the economy, businesses can use GDP as a guide to their busines𓄧s strategy. Government entities, such as the Fed in the U.S., use the growth rate and other GDP stats as part of their decision process in determining what type of monetary policies to implement.

If the growth rate is slowing, they might implement an 澳洲幸运5开奖号码历史查询:expansionary monetary policy to try to boost the economy. If the growth rate is robust, they might use monetary policy to slow things down toꦛ try to ward of🌠f inflation.

Real GDP is the indicator that says the most about the health of the economy. It is widely followed and discussed by economists, analysts, inv꧙estors, and policymakers. The advance release of the latest data will almost always move markets, although that impact can be limited, as noted above.

GDP and Investing

Investors watch GDP since it provides a framework for decision-making. The corporate profits and inventory data in the GDP report are a great resource for equity investors, as both categories show total growth during the period; corporate profits data also displays pretax profits, 澳洲幸运5开奖号码历史查询:operating cash flows, aꦜnd breakdown🐼s for all major sectors of the economy.

Comparing the GDP growth rates of different countries can p꧂lay a part in ass♛et allocation, aiding decisions about whether to invest in fast-growing economies abroad and, if so, which ones.

One interesting metric that investors can use to get a sense of the valuation of an equity market is the ratio of total market capitalization to GDP, expressed as a percentage. The closest equivalent to this in terms of stock valuation is a company’s market cap to total sales (or revenues), which in per-share terms is the well-known 澳洲幸运5开奖号码历史查询:price-to-sales ratio.

Just as stocks in different sectors trade at widely divergent price-to-sales ratios, different nations trade at market-cap-to-GDP ratios that are all over the map. For example, according to The World Bank, the U.S. had a market-cap-to-GDP ratio of 156.5% for 2022 (latest information), while China had a ratio of 64.1% and Hong Kong had a ratio of 1,273.2%.

However, the utility of this ratio lies in comparing it to historical norms for a particular nation. As an example, the U.S. had a market-cap-to-GDP ratio of 141.6% at the end of 2006, which dropped to 78.5% by the end of 2008 during the financial crisis.

In🌞 retrospect, these represented♒ zones of substantial overvaluation and undervaluation, respectively, for U.S. equities.

The biggest downside of this data is its lack of timeliness; investors only get one update per quarter, and revisions can be large enough to significantlౠy alter the percentage change in GDP.

History of GDP

The concept of GDP was first proposed in 1937 in a report to the U.S. Congress in response to the Great Depression, conceived of and presented by an economist at the National Bureau of Economic Research (NBER), Simon Kuznets.

At the time, the preeminent system of measurement was GNP. After the 澳洲幸运5开奖号码历史查询:Bretton Woods conference in 1944, GDP was widely adopted as the standard means for measuring national economies; however, the U.S. continued to use GNP as its official measure of economic welfare until 1991, after which it switched to GDP.

Beginning in the 1950s, however, some economists and policymakers began to question GDP. Some observed, for example, a tendency to accept GDP as an absolute indicator of a nation’s failure or success, despite its failure to account for health, happines⛎s, inequality, and other constituent factors of public welfare. In other words, these critics drew attention to a distinction between economic progress and social progress.

Most authorities, like Arthur Okun, an economist for President John F. Kennedy’s Council of Economic Advisers, held firm to the belief that GDP is an absolute indicator of economic success, claiming that for every increase in GDP, there would be a corresponding drop in unemployment.

Criticisms of GDP

There are, of course, drawbacks to using GDP as an indicator. In aꦓddition to the lack of timeliness, some criticisms of GDP as a measure are:

• It ignores the value of informal or unrecorded economic activity. GDP relies on recorded transactions and official data, so it does not take into account the extent of informal economic activity. GDP fails to account for the value of under-the-table employment, underground market activity, or unremunerated volunteer work, which can all be significant in some nations and cannot account for the value of leisure time or household production, which are ubiquitous conditions of human life in all societies.
• It is geographically limited in a globally open economy. GDP does not take into account profits earned in a nation by overseas companies that are remitted back to foreign investors. This can overstate a country’s actual economic output. For example, Ireland had a GDP of $545.63 billion and GNI of $421.77 billion in 2023, which is a difference of about $123.86 billion (or almost 23% of GDP) largely being due to profit 澳洲幸运5开奖号码历史查询:repatriation by foreign companies based in Ireland.
• It emphasizes material output without considering overall well-being. GDP growth alone cannot measure a nation’s development or its citizens’ well-being, as noted above. For instance, a nation may be experiencing rapid GDP growth, but this may impose a significant cost to society in terms of environmental impact and an increase in income disparity.
• It ignores business-to-business activity. GDP considers only final goods production and new capital investment and deliberately nets out intermediate spending and transactions between businesses. By doing so, GDP overstates the importance of consumption relative to production in the economy and is less sensitive as an indicator of economic fluctuations compared to metrics that include business-to-business activity.
• It counts costs and waste as economic benefits. GDP counts all final private and government spending as additions to income and output for society, regardless of whether they are productive or profitable. This means that obviously unproductive or even destructive activities are routinely counted as economic output and contribute to growth in GDP. For example, this includes spending directed toward extracting or transferring wealth between members of society rather than producing wealth (such as the administrative costs of taxation or money spent on lobbying and 澳洲幸运5开奖号码历史查询:rent seeking); spending on investment projects for which the necessary complementary goods and labor are not available or for which actual consumer demand does not exist (such as the construction of empty ghost cities or bridges to nowhere, unconnected to any road network); and spending on goods and services that are either themselves destructive or only necessary to offset other destructive activities, rather than to create new wealth (such as the production of weapons of war or spending on policing and anti-crime measures).

Global Sources for Country GDP Data

The World Bank hosts one of the most reliable web-based databases. It has one of the best and most comprehensive lists of countries for which it tracks GDP data. The International Money Fund (IMF) also provides GDP data through its multiple databases, such as the World Economic Outlook and International Financial Statistics.

Another highly reliable source of GDP data is the Organisation for Economic Co-ope🎃ration and Development (OECD). The OECD not only provides historical data but also forecasts GDP growth. The disadvantage of using the OECD database is that it tracks only OECD member countries and a few nonmember countries.

In the U.S., the Fed collects data from multiple sources, including a country’s statistical agencies and the World Bank. The only drawback to using a Fed database is a lack of updating in GDP data and an absence of data for certain countries.

The BEA is a division of the U.S. Department of Commerce. It issues its analysis document with each GDP release, which is a great investor tool for analyzing figures and trends and reading highlights of the very lengthy full release.

The Bottom Line

In their seminal textbook “Economics,” Paul Samuelson and William Nordhaus neatly sum up the importance of the national accounts and GDP. They liken the ability of GDP to give an overall picture of the state of the economy to that of a satellite in space that can survey the weather across an entire continent.

GDP enables policymakers and central banks to judge whether the economy is contracting or expanding, whether it needs a boost or restraint, and if a threat such as ♑a recession or inflation looms on the horizon.

Like any measure, GDP has its imperfections. In recent decades, governments have created various nuanced modifications in attempts to increase GDP accuracy and specificity. Means of calculating GDP have also evolved continually since its conception to keep up with evolving measurements of industry activity and the generation and consumption of new, emerging forms of intangible assets.