Definition of GDP

GDP is the best-known three-letter acronym in economics. But what exactly is GDP?

GDP, or Gross domestic product, is the total market value of all final goods and services produced in an economy in a given year.

It measures the production of goods like pizza, new houses, cell phones, and services like your favorite streaming channels.

The calculations are simple accounting – multiplying the prices of the goods and services by the quantities sold and adding it all up… for the entire economy.

It’s important to note that all these goods are measured in the price at which they are sold to the end consumer, in U.S. Dollars.

Because one person’s spending is another person’s income, GDP can be tracked by either adding up income earned from selling goods and services, or by tracking spending on goods and services. As we’ll find out later, the spending, or “expenditure” approach, is a useful way to learn about the economy.

GDP is measured on a quarterly basis – that is -- the U.S. Department of Commerce releases GDP data four times per year. Economists analyze the numbers to see if the economy is growing – producing more goods and services, or contracting – producing fewer goods and services. A growing economy is associated with more jobs and rising standards of living. A contracting economy indicates the economy is likely in recession and will experience rising unemployment.

In other words, GDP is a very useful indicator of the economy’s health.