Gross domestic product (GDP) is the value of all goods and services produced in a country during a given period. It is one of the most widely used measures of a nation’s total economic performance in a single year.
Measuring the GDP. One way to determine the GDP is to add up the sum of spending on four kinds of goods and services in any year.
(1) Personal consumption expenditures include private spending on durable goods, such as automobiles and appliances; nondurable goods, such as food and clothing; and services, such as haircuts and motion-picture tickets. In the United States, these expenditures make up about two-thirds of the GDP each year.
(2) Private investment expenditures include spending by business companies for new buildings, machinery, and tools. They also include spending for goods to be stored for future sale. These expenditures average about 20 percent of the annual GDP of the United States.
(3) Government purchases of goods and services include spending for new highways, missiles, and the wages of teachers, fire fighters, and government employees. Such spending amounts to about 20 percent of the United States GDP each year.
(4) Net exports represent the value of domestically produced goods and services sold abroad, less the value of goods and services purchased from abroad during the same period. Currently, the value of U.S. exports is exceeded by that of U.S. imports. Net exports thus show a negative percentage in the U.S. GDP. The negative percentage accounts for percentages in the other three major parts of the U.S. GDP totaling more than 100 percent.
Real GDP. A nation may produce the same amount of goods and services this year as it did last year. Yet this year’s GDP may be 5 percent higher than last year’s. Such a situation would occur if prices of goods and services had risen by an average of 5 percent. To adjust for such price changes, economists measure the GDP in constant dollars. They determine what each year’s GDP would be if dollars were worth as much during the current year as in a certain previous year, called the base year. In other words, they calculate the value of each year’s production in terms of the base year’s prices. When GDP measured in current dollars is divided by GDP in constant dollars, the result is an index of inflation called the GDP deflator.
GDP figures do not tell everything about a nation’s economy. For example, they tell little about the well-being of individuals and families. Even the GDP per capita does not tell who uses various goods and services. It cannot show, for example, how much of the GDP goes to the poorest 20 percent of the population and how much goes to the wealthiest 20 percent. Nor does the GDP per capita tell anything about the quality of a country’s goods and services.
GDP excludes production by facilities that are owned by a nation’s citizens if the facilities are in another country, and it includes production by foreign-owned facilities within the country. Some economists believe another figure, the gross national product (GNP), is a better measure than GDP. GNP includes all production by a nation’s firms regardless of the firms’ location and does not include production by foreign-owned facilities within the country. For many years, the U.S. Commerce Department used GNP to measure the country’s economic performance. It switched to GDP in 1991.