GDP measures the monetary value of all final goods and services produced in a country. It is calculated by a country’s statistical agency, following international standards set by the International Monetary Fund, European Commission, Organization for Economic Cooperation and Development, and the World Bank.
GDP is widely watched by economists, investors, and businesses, and is a key indicator of economic health. A rising GDP suggests a growing economy, while a shrinking GDP points to an economic slowdown. Investors watch GDP growth to forecast future corporate earnings, while governments use it as a guide for macroeconomic policies.
Government spending (G) is a component of GDP that includes expenditures such as salaries for public servants, purchases of weapons for the military, and construction of roads. Private domestic investment (I) is a component of GDP that includes purchases by individuals and businesses, such as the purchase of new machinery or computers. X (exports) is a component of GDP that captures the amount of goods and services a country produces for consumption outside its borders, while M (imports) is a subtraction that excludes foreign supply.
GDP is typically measured in a country’s own currency, which requires adjustment when comparing across countries with different currencies. This is done using market exchange rates, which are the values that prevail in the foreign exchange market, or purchasing power parity (PPP) equivalent exchange rates, which are defined as the number of units of a country’s currency that would be needed to buy one unit of another country’s currency at its current market price.