The most common metric for assessing the health of a nation’s economy is gross domestic product (or GDP). This measurement of total economic output includes the value of goods and services produced in a country during a certain period. It also takes into account the cost of production, such as raw materials and labor. It excludes activities that are not conducted in markets, such as unpaid work or illegal transactions, because they are difficult to measure and value accurately.
Two methodologies can be used to calculate GDP: the expenditure approach, which sums up all spending in an economy, and the income approach, which adds up all earnings in an economy. Both should produce the same result. However, the expenditure approach is more sensitive to market fluctuations than the income approach because it nets out intermediate spending and business-to-business transaction activity.
GDP is often reported at current prices — called nominal GDP — or at constant prices, which adjusts for price inflation. It can also be measured in terms of purchasing power parity, which translates GDP into a single currency so it can be compared across countries that use different currencies.
Investors, businesses and policymakers rely on GDP figures to make decisions about hiring, expansion and investments. Governments rely on them to set budgets and tax policies, and the Federal Reserve uses them when setting monetary policy. However, critics point out that GDP growth may come at a cost to the environment or human well-being, and it does not reflect social issues such as inequality or poverty.