GDP measures the market value of all the final goods and services produced within a country in a given time period. It is the most important gauge of a nation’s economy, and business owners should pay close attention to this statistic.
The statistic is calculated by the Bureau of Economic Analysis (BEA) using data gathered from many different sources. The BEA releases GDP statistics by month, quarter and year. GDP is measured at current prices, which means that comparing one year’s GDP to another requires adjustment for inflation. This process is called “deflating” GDP and allows economists to determine whether GDP rose because more was being produced or because prices were rising faster than usual.
In the formula for calculating GDP, C represents private consumption, G represents government spending, X represents investment, and M represents gross exports and minus Y, which equals a country’s imports. When a country produces more of its own goods and services than it consumes, its GDP will increase. When a country spends more money on imports than it makes on exports, its GDP will decline.
Although GDP is the most widely used metric for gauging an economy’s health, it does not tell the whole story. For example, a country’s GDP may grow fast but that growth could reflect only the rich getting even wealthier and leaving the poor behind. It also doesn’t take into account environmental degradation or climate change. Finally, GDP per capita is often more useful than simply comparing GDPs among countries because it takes population size into account.