GDP stands for gross domestic product, and it is one of the most widely watched economic indicators in the world. Governments, central banks, and businesses alike rely on it to gauge the health of their economies—and to make decisions about hiring, investment, and more. GDP is a critical component of national accounts, which also measure the value and makeup of a country’s economy, including the types of income it generates.
The basic statistic measures the market value of all final goods and services produced within a nation in a given year. It is often divided by population to give a per-capita measurement, and it can be adjusted for inflation to compare growth rates over time or across countries using purchasing power parity (PPP) exchange rates.
GDP is a broad measure that encompasses all spending on final products and services in a nation, including consumer, business, and government spending. Unlike other measures of economic performance, it does not measure the well-being of a nation or its citizens, which requires more intangible factors such as social capital and innovation. Moreover, the statistic can be misleading if it prioritizes material output over other factors that may have an equal or greater impact on quality of life, such as environmental degradation or income inequality.
Nominal GDP estimates the market value of all final goods and services in a year at current prices. When comparing GDP between years, economists use real GDP to strip out the effect of inflation, as measured by price indexes, to avoid an unfair comparison due to rising prices.