A country’s gross domestic product, or GDP, is the measure of all the goods and services produced in a country in a given period. It’s one of the most closely watched economic indicators, and the advance release of quarterly data often moves markets. The White House and Congress track GDP growth to plan spending, tax policy and other initiatives. The Federal Reserve uses it to set monetary policy, and businesses rely on it when making decisions about hiring, expansion and investment.
GDP is determined by summing consumption, investment and government expenditures (known as the “expenditure approach”). This measure excludes activities that occur outside the market, such as household production or bartering and unpaid volunteer work. Critics point out that GDP emphasizes material output and fails to consider many phenomena that impact citizens’ well-being, such as environmental damage, traffic jams and depletion of nonrenewable resources. Alternative measures such as the Genuine Progress Indicator and the Gross National Happiness Index have been developed in an attempt to address these criticisms.
The other main way to measure the economy is by summing the value of all final private and public expenditures, including the cost of imported inputs. This is known as the “production approach” and it includes the sale of finished goods as well as the sale of intermediate inputs, such as flour used to make bread or an architect’s services used to design a building. When the depreciation of machinery and other assets used in production is subtracted from GDP, it’s called net domestic product.
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