GDP measures the total market value of all the goods and services produced within a nation in a given year. The statistic is the broadest measure of a country’s economic activity and is used by investors, analysts, and policymakers to gauge a nation’s health. When released, GDP numbers are often cited in news reports and can have an impact on global markets.
The most widely used method to determine GDP is known as the production approach, also called the value-added measurement. This calculates the gross value of a country’s production at basic prices, then subtracts the value of all intermediate consumption (the cost of materials, supplies and services used to produce final goods). The result is a country’s gross domestic product at market prices.
Another way to determine GDP is through a calculation known as the expenditure method. This estimates the value of all final goods and services purchased by consumers in a nation, including the purchases of foreign-made products. The sum is then divided by the number of citizens in a country to yield per-capita GDP.
A third method involves calculating net exports, which is the gross domestic product minus the value of all imported goods and services. This includes the value of all final goods and services that a country sells to other nations, as well as the value of all capital investment in equipment and technology. It excludes all transfer payments, such as social security and unemployment benefits.