Few numbers convey as much information about a country’s economy in one glance as gross domestic product (GDP), which represents the total monetary value of all finished goods and services produced within a nation’s borders over a certain period, such as a year or quarter. Governments, businesses and investors all use GDP to assess whether the economy is growing or not, as well as how quickly. Economists also use it to compare the health of economies around the world and as a means to study the effects of different economic policies.
There are two main types of GDP, “nominal” and “real.” Nominal GDP figures are collected at current market prices, while real GDP takes into account changes in market price levels to determine a true measure of growth. Using a statistical tool known as a price deflator, the nominal GDP figure can be converted to a real GDP number that accounts for inflation.
The calculation for GDP is complex, but it typically breaks down into three components: C (consumption), G (government spending) and I (investment). Consumption includes the purchases of final goods and services by both households and the government. Investment expenditures, on the other hand, include spending on assets that will provide future benefits like buying new equipment or building a company’s headquarters. The last piece of the equation, X (exports) minus M (imports), measures how much a nation is producing that is being sold overseas. A positive export number indicates a trade surplus, while a negative number points to a deficit.
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