GDP measures the monetary value of all the goods and services produced in a country during a certain period of time, typically a year. It includes both market and nonmarket production, such as government spending on defense or education. GDP is an important metric for countries, businesses and individuals. Economists use it to assess a country’s economic health and understand the economy’s cycles. It is also used to compare economies and predict future growth.
The official definition of GDP is determined by the Organisation for Economic Co-operation and Development (OECD). It defines production as the sum of gross domestic product by final consumption, investment, and net exports at market prices. The consumption method of calculating GDP does not account for business-to-business transactions, and therefore it is less sensitive to economic fluctuations than metrics that include all transactions.
One criticism of GDP is that it focuses on material output, without considering the impact to citizens’ well-being. For example, an increase in GDP may come at the cost of air pollution or inequality. It also does not fully take into account quality improvements or new products, as they are only reflected in GDP in their monetary value.
However, most economists agree that GDP is a good indicator of overall economic progress. It is closely followed by analysts, investors, and policymakers. The advance release of GDP is often anticipated and can move markets, although the impact is usually limited since GDP data is backward-looking.