Few numbers convey as much about a country’s economy as gross domestic product (or GDP). Understanding what it is, how it works and why it matters is an important skill for any professional in business, politics or investing.
The metric measures the monetary value of all final goods and services produced within a country in one period, such as a quarter or year. It includes all market-based production, such as the output of a factory, and some nonmarket production, such as defense or education services provided by government. A related concept, gross national product (GNP), takes into account all output produced by residents of a country, whether or not it’s sold in markets.
Two main factors drive GDP: consumption and investment. Consumption represents all purchases of final goods and services, including retail items and rent. Professionals generally view a growing consumption figure as an indication of a healthy economy. Investment is any spending by companies that will provide future benefits, such as building new establishments or purchasing equipment.
The calculation of GDP involves a number of assumptions, and it may be difficult to compare GDP figures between countries due to differences in accounting methods. A common method is to convert a country’s GDP into dollars, using either market exchange rates or purchasing power parity (PPP) exchange rates. The Bureau of Economic Analysis (BEA) publishes GDP estimates for the United States three times a quarter. The advance estimate comes out about a month after the quarter ends. The second and third estimates incorporate additional source data, improving accuracy.
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