Gross domestic product, usually abbreviated GDP, is the monetary value of all final goods and services produced within the geographical boundaries of an economy during a specified period, commonly a quarter or a year. It is one of the principal measures used to describe the size and activity of an economy.
The word gross indicates that depreciation of capital assets has not been deducted, domestic means production occurring within the economic territory is counted regardless of whether the producers are domestically or foreign owned, product refers to the value of output produced, and the monetary expression allows different goods and services to be aggregated into a single statistical measure. GDP is a measure of production, not a direct measure of wealth or wellbeing.
GDP can be calculated using three theoretically equivalent approaches: the production approach, the expenditure approach, and the income approach. The production approach adds the value added generated by industries and economic activities, where value added is output minus intermediate consumption. The expenditure approach measures final expenditure on goods and services and is commonly represented by consumption plus investment plus government expenditure plus exports minus imports.
The income approach adds incomes generated through production, including compensation of employees and operating surpluses, with appropriate adjustments for taxes and subsidies. In a correctly constructed national accounts system, these approaches should produce the same aggregate GDP figure because expenditure on final output corresponds to income generated by producing that output.
The distinction between final and intermediate goods is essential. If a bakery buys flour and uses it to produce bread, counting the full value of the flour and the full value of the bread would double count the flour. National accounting avoids this by counting final output or, alternatively, the value added at each stage of production. GDP therefore measures the additional value created by economic production rather than simply adding every transaction involving inputs. Some transactions are excluded because they do not represent current production, such as purchases of existing financial assets. Sales of used goods generally do not represent new production, although associated current services such as brokerage can be included.
Nominal GDP and real GDP measure different things. Nominal GDP values current production using prices prevailing during the period being measured. It can increase because more goods and services are produced, because prices rise, or because both occur. Real GDP attempts to remove the effect of price changes so that changes in production volume can be examined over time. GDP deflators and other price indices are used to distinguish changes in nominal values from changes in real output. Real GDP growth is consequently more informative than nominal GDP growth when the objective is to determine whether an economy has produced more goods and services in volume terms.
GDP can also be measured in different geographic and institutional ways. Gross domestic product counts production within an economy's territory, whereas gross national income focuses on income received by residents and nationals, subject to the precise national accounting definitions. A country can have substantial foreign owned production within its borders, causing GDP to exceed the income accruing to domestic residents. Conversely, residents can own productive assets abroad and receive income from them, causing national income to exceed domestic production in some circumstances. This distinction is important for economies with large foreign investment sectors, substantial overseas assets, or significant cross border income flows.
GDP is useful because it provides a standardised measure of aggregate economic activity. Governments use it to monitor economic cycles, plan fiscal policy, evaluate broad economic performance, and construct ratios such as government spending or debt relative to GDP. Businesses and investors use GDP data as one indicator of market conditions and demand. Economists use GDP to analyse productivity, economic growth, recessions, structural change, and relationships among sectors. International organisations use national accounts data to compare economic activity across countries. Nevertheless, GDP is not designed to measure whether economic activity improves individual wellbeing.
Important economic activities are omitted or imperfectly measured. Unpaid household labour, such as childcare and cooking performed without market payment, generally does not enter GDP even though it creates valuable services. Informal economic activity can be difficult to measure accurately. Illegal production may be included in some national accounting systems when sufficiently measurable, while purely financial transactions are not treated as production in the same way as goods and services. Environmental degradation is also not automatically subtracted from GDP when production causes it. Consequently, GDP can rise alongside pollution, resource depletion, or other costs that are not fully represented in the headline measure.
GDP should therefore be interpreted as a measure of economic production rather than a comprehensive measure of prosperity. High GDP can coexist with inequality, poverty, poor health outcomes, environmental damage, or weak social services. GDP growth can nevertheless create opportunities for higher employment, investment, tax revenue, productivity, and household income, depending on the composition and distribution of growth. Analysts therefore supplement GDP with GDP per capita, productivity, household income, poverty, inequality, employment, environmental indicators, and human development measures. Understanding exactly what GDP counts and excludes is essential for using it correctly and avoiding the common misconception that a larger GDP automatically means a better quality of life for every person.
