Gross Domestic Product (GDP) measures the total value of final goods and services produced within a given country’s borders. It is the most popular method of measuring an economy’s output and is therefore considered a measure of the size of an economy. When people say one economy is larger than another or that an economy is growing or shrinking, usually they’re referring to GDP figures.
GDP is defined as all consumption by households, all investment by businesses, and all purchases by the government, plus purchases made by foreigners minus purchases of things made abroad.
So the cars the auto dealer sells, the money you pay to a day care center, your health insurance premiums — all of those are included in GDP.
Likewise, all of the investment in finished products involved in making those products — the machinery the auto manufacturer buys or the oven the restaurant purchases — those are counted, too. Business investment in inventories is counted as well. When a factory makes a lot of cars this year but doesn’t sell them until next year, the value of that production is counted in GDP for this year.
And when the government makes purchases, like buying fighter jets or paying contractors or buying food to serve at a White House state dinner, that’s a part of it, too.
In addition to all that spending, the value of US exports is added on to GDP measurements, while the value of imports is subtracted out.
GDP is important because it gives a bird’s-eye view of how an economy is doing. If GDP speeds up, it can be a sign that good things are happening or are about to happen in a number of areas — people getting more jobs or better pay, for example, or businesses feeling confident enough to invest more. It’s not a complete picture of a national economy by any means, but it’s a good start at a quick summary.