GDP measures the monetary value of all the goods and services produced in a country over a specific period. It is one of the most widely used indicators for economic health, and is viewed as a barometer for a nation’s prosperity.
When the number is higher, it means the economy is growing; when it is lower, it is shrinking. However, comparing numbers over time must take inflation into account. A statistician can use a statistical tool to adjust the GDP data to a constant price index, or “real” GDP, which makes comparisons over time more meaningful.
The three components of GDP are C (consumption), I (investment) and X (exports). Consumption is the largest component of GDP; professionals often view increasing consumer confidence as a sign of healthy economic growth. Investment represents the money that businesses spend on capital expenditures, such as purchasing equipment or building new establishments. X represents the amount of goods and services a country exports; it is subtracted from GDP because it would count as domestic consumption if included in C, I or G.
In addition to measuring consumption, investment and trade, GDP also calculates the cost of government spending on goods and services and subtracts the country’s imports from its total output. However, the measurement does not include activities that are not accounted for in the formal economy, such as under-the-table cash transactions, black-market activity and unremunerated volunteer work. It also ignores the value of natural resources and the environment, which are hard to monetize.