Gross domestic product (GDP) is the total value of all finished goods and services made within a country during a certain time. It serves as a general indicator of the country’s economic health and overall production.
GDP is usually measured every year, but it can also be measured every three months. In the U.S., the government provides an annual GDP estimate for each fiscal quarter and for the whole calendar year. The data in this report is presented in real terms, meaning it has been adjusted for price changes and is free from inflation effects.
Learn more about GDP
A country’s GDP is calculated by adding up all private and public spending, government expenses, investments, changes in private stock, construction costs, and the trade balance. Exports increase the total, while imports decrease it.
The foreign balance of trade is a key part of a country’s GDP. When the value of goods and services sold by local producers to other countries is greater than what local consumers buy from abroad, the GDP usually goes up. This situation is known as having a trade surplus.
A trade deficit happens when domestic consumers buy more foreign products than what local producers sell to foreign buyers. In this case, a country’s GDP usually goes down.
GDP can be calculated in two ways: nominal and real. Real GDP adjusts for inflation, making it a more accurate measure of a country’s long-term economic health because it uses constant dollars.
Imagine a country with a nominal GDP of $100 billion in 2012. By 2022, this nominal GDP increased to $150 billion. During this time, prices also doubled. If you only consider the nominal GDP, it seems like the economy is doing great. But when you look at the real GDP, adjusted for 2012 dollars, it would be only $75 billion. This shows that the actual economic performance has declined over these years.
History of Gross Domestic Product
The idea of GDP was introduced in 1937 in a report to the U.S. Congress as a response to the Great Depression. It was created and presented by economist Simon Kuznets from the National Bureau of Economic Research (NBER).
Back then, the main way to measure economies was GNP. After the Bretton Woods conference in 1944, GDP became the common standard for measuring national economies. However, the U.S. kept using GNP as its official measure of economic health until 1991, when it changed to GDP.
Starting in the 1950s, some economists and policymakers started to doubt GDP. They noticed that many people viewed GDP as the only measure of a country’s success or failure, even though it didn’t consider health, happiness, inequality, and other important aspects of public well-being. These critics highlighted the difference between economic growth and social development.
Many experts, including Arthur Okun, who was an economist for President John F. Kennedy’s Council of Economic Advisers, strongly believed that GDP is a clear sign of economic success. They argued that when GDP goes up, unemployment tends to go down.
Conclusion
In their important book Economics, Paul Samuelson and William Nordhaus highlight how crucial national accounts and GDP are. They compare GDP’s ability to show the economy’s overall condition to a satellite in space that can observe the weather over a whole continent.
GDP helps policymakers and central banks determine if the economy is growing or shrinking, if it requires support or limits, and if risks like recession or inflation are approaching. However, GDP is not perfect. Over the years, governments have made several adjustments to improve its accuracy and detail. The methods for calculating GDP have also changed over time to reflect new ways of measuring industry activity and the creation and use of new intangible assets.