GDP measures the monetary value of all the final goods and services produced within a country in a given period of time, usually a year. It’s the most widely reported measure of economic activity and is one of the most important numbers that influence our daily lives. Investors, analysts and policymakers all look at the number when making decisions about investments, hiring and spending. GDP reports are closely watched and released every quarter. They’re the most influential piece of economic data that is available. The advance release of GDP figures typically moves markets and is discussed by pundits and journalists.
Despite its prominence, GDP tells us only so much about a nation’s economy. For one thing, it doesn’t take into account the cost of things that may be considered bad for a society, like pollution or the depletion of nonrenewable resources. Another shortcoming is that GDP only counts production from scratch: the goods and services that are sold to consumers, businesses or other producers in a country. This ignores goods that are traded between producers, such as a company buying tyres from its supplier to use in its own production process. It also excludes investment in other companies’ production capacity, such as buying machinery that will be used over many years.
Finally, GDP figures are only recorded at current prices, not their original, or “real”, value. To get a real sense of the growth of a country’s economy, it’s necessary to adjust for price inflation using a statistic called a price deflator.
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