Gross domestic product Wikipedia

what is the meaning of gross domestic product

As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health. Investors juggle dozens of monthly data releases, but gross domestic product (GDP) is “king of the hill” as the ultimate measure of economic health. At a high level, GDP reports tell you if the U.S. economy is expanding or contracting and why. Companies and the Federal Reserve often base decisions on GDP trends, so investors should understand the data and be ready to adjust their portfolios accordingly. The sum of COE, GOS and GMI is called total factor income; it is the income of all of the factors of production in society.

If this sounds complicated, remember the point is to only count things that get produced once. Because the BEA calculates GDP three times consecutively each quarter (advance, second, and third estimate). This way, data that’s still coming in can be incorporated into the estimates, making each quarterly report more accurate. GDP increased by 3.2% on an annualized basis for the fourth quarter of 2023 compared to an increase of 4.9% in the third quarter of 2023. The sum of the gross value added in the various economic activities is known as “GDP at factor cost”. The biggest downside of this data is its lack of timeliness; investors only get one update per quarter, and revisions can be large enough to significantly alter the percentage change in GDP.

Comparing the GDP growth rates of different countries can play a part in asset allocation, aiding decisions about whether to invest in fast-growing economies abroad and if so, which ones. GDP’s market impact is generally limited since it is backward-looking, and a substantial amount of time has already elapsed between the quarter-end and GDP data release. However, GDP data can have an impact on markets if the actual numbers differ considerably from expectations.

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what is the meaning of gross domestic product

If a GDP release reflects what analysts and investors have already estimated, the market might not react much. Typically, GDP doesn’t surprise the market because analysts and investors keep an eye on all the data that goes into GDP. If things are going well or badly, it’s often easy to tell long before the GDP comes out. GDP is estimated on a quarterly and annual basis, although statistics are released each month. That’s compared to an increase of 4.9% in the third quarter of 2023.

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The standards are designed to be flexible, to allow for differences in local statistical needs and conditions. GDP is a product produced within a country’s borders; GNI is product produced by enterprises owned by a country’s citizens. The two would be the same if all of the productive enterprises in a country were owned by its own citizens and those citizens did not own productive enterprises in any other countries. In practice, however, foreign ownership makes GDP and GNI non-identical.

It is used throughout the world as the main measure of output and economic activity. Gross domestic product (GDP) is one of the most widely used indicators of economic performance. Gross domestic product measures a national economy’s total output in a given period and is seasonally adjusted to eliminate quarterly variations based on climate or holidays. The most closely watched GDP measure is also adjusted for inflation to measure changes in output rather than changes in the prices of goods and services.

  1. GDP can be determined in three ways, all of which should, theoretically, give the same result.
  2. In other words, these critics drew attention to a distinction between economic progress and social progress.
  3. Nominal GDP measures gross domestic product in current dollars; unadjusted for inflation.
  4. This can lead to increased economic activity and potential GDP growth.
  5. A trade surplus occurs when a country exports more goods than it imports.

A trade surplus can contribute to higher aggregate demand as it adds to domestic production and income. Conversely, a trade deficit occurs when a country imports more goods than it exports. A trade surplus occurs when a country exports more goods than it imports.

GDP enables policymakers and central banks to judge whether the economy is contracting or expanding, whether it needs a boost or restraint, and if a threat such as a recession or inflation looms on the horizon. In recent decades, governments have created various nuanced modifications in attempts to increase GDP accuracy and specificity. Means of calculating GDP have also evolved continually since its conception to keep up with evolving measurements of industry activity and the generation and consumption of new, emerging forms of intangible assets. Beginning in the 1950s, however, some economists and policymakers began to question GDP. Some observed, for example, a tendency to accept GDP as an absolute indicator of a nation’s failure or success, despite its failure to account for health, happiness, (in)equality, and other constituent factors of public welfare. In other words, these critics drew attention to a distinction between economic progress and social progress.

The difference is that GDP defines its scope according to location, while GNI defines its scope according to ownership. In a global context, world GDP and world GNI are, therefore, equivalent terms. This method measures GDP by adding incomes that firms pay households for factors of production they hire – wages for labour, interest for capital, rent for land and profits for entrepreneurship. For example, a country could have a high GDP and a low per-capita GDP, suggesting that significant wealth exists but is concentrated in the hands of very few people. One way to address this is to look at GDP alongside another measure of economic development, such as the Human Development Index (HDI).

Trade Surplus and GDP Growth

When GDP growth is sluggish or negative, governments might implement expansionary fiscal policies, like tax cuts or increased public spending, to stimulate economic activity. In addition, international organizations such as the World Bank and the International Monetary Fund (IMF) periodically publish and maintain historical GDP data for many countries. In the United States, GDP data are published quarterly by the Bureau of Economic Analysis (BEA) of the U.S. GDP and its components are part of the National Income and Product Accounts data set that the BEA updates on a regular basis. To avoid this problem, which would overstate the size of the economy considerably, when government statisticians compute the GDP at the end of the year, they count just the value of final goods and services in the chain of production. Intermediate goods, which are goods that are used in the production of other goods, are excluded from GDP calculations.

Real GDP provides the most accurate representation of how a nation’s economy is either contracting or expanding. Economic health, as measured by changes in the GDP, matters a lot for the prices of financial assets. Because stronger economic growth tends to translate into higher corporate profits and investor risk appetite, it is positively correlated with share prices. Conversely, stronger GDP growth can hurt fixed-income investments, like bonds, by making their returns less attractive on a relative basis. GDP are based on national income and product accounts (NIPAs) for sectors including businesses, households, nonprofit organizations, and governments.

It is measured frequently in that most countries provide information on GDP every quarter, allowing trends to be seen quickly. It is measured widely in that some measure of GDP is available for almost every country in the world, allowing inter-country comparisons. It is measured consistently in that the technical definition of GDP is relatively consistent among countries. Another thing that it may be desirable to account for is population growth. Constant-GDP figures allow us to calculate a GDP growth rate, which indicates how much a country’s production has increased (or decreased, if the growth rate is negative) compared to the previous year. The raw GDP figure as given by the equations above is called the nominal, historical, or current, GDP.


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