The most watched economic indicator is gross domestic product (GDP). When the number comes out, it has a huge impact on investors, market participants and policymakers.
GDP measures the total value of all final goods and services produced within a nation in a given period, typically one year or quarter. This is the best way to get a broad picture of an economy, and it is used by analysts, economists and investors alike to gauge how fast or slow a country’s economy is growing.
It is calculated by adding up all the production of an economy, including government spending and taxes on goods and services, and subtracting subsidies. The calculation can also be adjusted for inflation to give us “real” or “chained” GDP. This allows us to see if the growth in GDP is because more is being produced or simply because prices have increased over time, which can distort comparisons between periods. This adjustment is called a price deflator.
Another method to calculate GDP is the income approach, which measures the amount of money that is paid for all the final goods and services. This includes the wages and salaries of workers, the profits of businesses, and the returns on investments. It is the most widely used method for comparing GDP between countries.
Despite its popularity and importance, there are some significant limitations to GDP as a measure of economic success or well-being. For example, it does not account for activities that are not directly related to producing goods and services, such as pollution or the depletion of nonrenewable resources.