Gross domestic product
Gross domestic product is the total market value of the goods and services produced within a country over a period.
A single number is supposed to capture the size of an entire economy. Gross domestic product is that number, and both its uses and its blind spots are large.
Gross domestic product is the total market value of all the goods and services produced within a country over a given period, usually a quarter or a year. It is the most widely used measure of the size of an economy and, in its growth rate, of its health.
Three ways to the same total
GDP can be measured three ways that, in principle, give the same answer: by adding up everything produced, by adding up all spending, consumption, investment, government, and net exports, or by adding up all incomes earned. That these three approaches converge is a useful check and a reminder that one country's output is another's spending and another's income. The expenditure approach is the most familiar, summarising demand across the economy.
What it does well
As a summary of economic activity, GDP is genuinely powerful. It lets us compare economies, track expansions and recessions, and gauge whether a country is producing more or less over time. Its growth rate is the headline indicator of economic performance, and much of macroeconomic policy is, in effect, an attempt to keep it growing steadily without overheating.
What it misses
GDP is also notoriously incomplete. It counts market transactions but ignores unpaid work, such as care and housework, and the value of leisure. It does not net out environmental damage or resource depletion, so destruction can register as growth. It says nothing about how output is distributed, so a rising figure can mask stagnation for most people. And it counts some spending, on clearing up disasters, say, that reflects loss rather than gain.
GDP is indispensable and routinely over-interpreted. It is a good measure of the scale of market activity and a poor measure of welfare, and treating the two as the same, taking rising GDP as proof that life is getting better, is among the most common confusions in public debate about the economy.