GDP is an important measure of economic activity and a key indicator of national wealth. It represents the total market value of all final goods and services produced within a country in a given period. It is measured at current, or nominal, prices and can be adjusted for inflation using Purchasing Power Parity (PPP) exchange rates to enable comparisons between countries. GDP can also be divided by population to give per-capita GDP, which is used as a benchmark of average living standards.
Governments track GDP to determine how fast the economy is growing or slowing and what economic policies might be needed. For example, the White House and Congress rely on GDP numbers when planning budgets, and the Federal Reserve uses them to set monetary policy. Businesses rely on GDP statistics to make decisions about jobs, expansion and investments.
Despite its many uses, GDP is not a perfect measure of the economy. It places too much emphasis on material output without taking into account factors such as environmental impact or income inequality. It also excludes some spending, such as the purchase of raw materials and supplies to producers of other goods and services. It also ignores spending by households on things like recreation and education. It does not take into account the ‘black/grey’ or informal economy, such as cash payments for work done outside the tax system, or untracked spending on illegal activities such as drugs and prostitution.
GDP is calculated by each country’s statistical agency, which collects data from a wide range of sources. The data are then compiled into national accounts by international organisations, such as the Organisation for Economic Co-operation and Development (OECD), the European Commission and the United Nations.