GDP is a measure of the market value of all the goods and services produced within a country in a certain time period, usually a quarter or year. It includes both market-based and nonmarket production, such as government spending on education or defense. GDP is often compared across countries to provide insight into a nation’s economic strength and health, and its growth trends over time.
Economists closely follow GDP statistics issued each quarter by the Bureau of Economic Analysis (BEA) for their insights into domestic productivity and how that compares to other countries. Politicians use these reports to judge the state of their economies, and central bankers often consult them when deciding on future monetary policy.
Various methods exist to calculate GDP, but they all produce the same result: market-based measurements of the value of all goods and services produced in a country’s economy. There are three main approaches: the Output approach, Income approach, and Expenditure approach. The Output approach is the most widely used. It takes the market-based value of all final goods and services produced in a nation’s borders, and subtracts depreciation and net indirect taxes from that amount. It also excludes production that takes place outside the market, such as household production and some black-market activities.
The Income approach takes into account all factor income received by a nation’s citizens and residents, such as salaries paid to employees, rent paid to property owners, profits earned by businesses, and interest income on investments. It does not, however, include speculative transactions such as buying company shares, which represents a swap of claims on future production, and the purchase of weapons, which would represent an investment in military technology that a country could easily renounce at any time.