GDP explained: what it measures and what it misses

What GDP counts

GDP adds up the value of all final goods and services produced within a country over a quarter or a year. Final means things that reach their end user: a loaf of bread bought by a family counts, but the flour sold to the bakery is not counted again, so that nothing is counted twice.

Three ways to reach the same number

Statistics offices can calculate GDP in three ways. They can add up what every sector produces. They can add up spending: household consumption, business spending on equipment and buildings, government spending and exports minus imports. Or they can add up incomes: wages, business income and similar earnings. In theory all three give the same result, and in practice they are used to check each other.

Real and nominal

Nominal GDP is measured in current prices, so it can grow simply because prices rose. Real GDP corrects for price changes and shows whether the economy actually produced more. When news reports say that an economy grew by a certain percentage, they usually mean real GDP.

Growth, slowdowns and recessions

GDP growth compares one period with an earlier one. A common rule of thumb calls two quarters of falling real GDP in a row a recession, although in some countries an independent committee makes that judgement using a wider set of data.

What GDP misses

GDP does not include unpaid work such as caring for family members or volunteering. It does not show how income is distributed, so an economy can grow while many households feel no better off. It also does not subtract damage to the environment or measure health and wellbeing. That is why economists often look at GDP alongside other indicators.

GDP per person, which divides the total by the population, is often a better way to compare living standards between countries of different sizes.

This article is general information for learning purposes. It is not professional advice.