GDP measures the market value of a country’s total output of goods and services during a specific period. It is the best indicator we have of a nation’s economic health. It is widely used as a benchmark for measuring the performance of an economy and as a gauge to determine if a nation needs to stimulate its economy with more money or slow down its economy with less spending.
GDP is typically collected at current prices, or nominal GDP, but must be adjusted to remove the effect of inflation to reveal real GDP, or purchasing power parity (PPP) GDP. Because it relies on recorded transactions and official data, GDP does not account for the full range of economic activity. For instance, the proceeds of under-the-table employment, underground market activities, and unremunerated volunteer work are not counted.
It can be broken down further to reveal per-capita GDP, which offers insight into the average standard of living in a country. When per-capita GDP goes up, it means that a nation is producing more with the same amount of people—or that people are wealthier, or that resources are being utilized more efficiently.
Keeping track of GDP is important for businesses, government entities, and investors. When a nation’s GDP grows, it suggests that consumers are willing to spend more and that businesses are investing in production and expansion. In contrast, when a nation’s GDP shrinks, it suggests that consumers are saving more or that businesses are cutting back on investment and production. Governments use GDP numbers to plan for tax policy and stimulus packages, while central banks use them to set monetary policy.