Gross Domestic Product (GDP) is the dollar value of all goods and services produced within a country during a specific period — usually a year. GDP is important because it provides a snapshot that can be used to gauge the size of an economy and its growth over time.
What it means:
A country’s GDP summarizes its annual income from all economic activity. Whether the sale of lumber for a construction project, the signing of a consulting contract or the production of car parts, all the goods and services produced within a country count towards its GDP. When GDP rises, it’s an indication that an economy is doing well. When GDP falls, the country’s economy is likely shrinking. In this way, GDP is a useful measurement of economic activity and health over time for economists, governments and policymakers.
The goal of most nations is to have a surplus GDP, or what’s called a trade surplus. This means the country is producing more than it is purchasing. If, on the other hand, a country is purchasing more than it’s producing, the country is said to have a trade deficit. Countries like the U.S. and China have high GDPs, while countries like Greenland have lower GDPs.
When looking at GDP, economists like to know whether the data used accounts for inflation — known as real GDP — because it paints a more accurate picture for comparing and analyzing growth over time. When GDP is calculated on a nominal basis — nominal GDP — inflation has not been considered. This may seem counterintuitive, but in fact nominal GDP is very helpful in certain calculations. For example, when assessing national debt. GDP per capita is another useful tool when considering a country’s economic output per person and is calculated by dividing a country’s GDP by its population.
It’s important to note that GDP fails to account for key factors such as domestic living conditions, resource extraction, environmental impact and unpaid domestic labour. Therefore, while it can help track a country’s economic growth over time and in relation to other countries, GDP doesn’t tell the whole story.