GDP is a key economic statistic that the White House and Congress use to plan budgets, the Federal Reserve uses when setting monetary policy, and business people rely on when making decisions about jobs, expansions, and investments. It represents the total amount of goods and services produced within a country during a given period. The data are collected and reported by governments, private enterprises, and international organizations such as the Organization for Economic Co-operation and Development. GDP is calculated in many ways, but three methods are most widely used: the production (or output) approach, the income approach, and the speculative expenditure approach.
The production method adds up the value of all final goods and services in an economy at market prices. Intermediate consumption is subtracted to arrive at gross domestic product (GDP) at basic prices. Examples of intermediate goods include steel sold to a car manufacturer and flour sold to a bakery. A third step subtracts the cost of materials, supplies and services that are consumed in the production process to arrive at net industrial investment.
Economists can adjust the data to strip out inflation and other changes in price levels to come up with real GDP. These figures are more useful when comparing economies over time because they take into account differences in prices. Real GDP is also useful when comparing the standard of living between nations, since it makes adjustments for purchasing power parity.
Another drawback to GDP is that it emphasizes material output without capturing other aspects of well-being. For example, the increased production of goods and services might come at the expense of environmental damage or depletion of natural resources. This is why GDP growth alone cannot provide a complete picture of economic progress.
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