GDP measures the market value of all goods and services produced in a country’s economy during a certain period of time. It is the most commonly used indicator of economic health and serves as a key yardstick for comparisons between countries. GDP figures are closely watched by economists, analysts and investors. The release of new GDP numbers can cause a significant movement in markets.
There are several methods for calculating GDP. The most common is called the expenditure approach, which splits GDP into consumption, investment and government spending. It also subtracts the depreciation of existing machinery and buildings from gross domestic product to arrive at net domestic product.
Consumption in the expenditure approach includes personal purchases of durable and nondurable goods and services, such as food, jewelry, gasoline, medical expenses and rent. It does not include utilities such as electricity or telephone service. Investment includes purchases of equipment or plants that are intended to increase production in the future, such as a company purchasing a new production line. It does not include purchases of shares in a company or bonds, which are swaps of deeds on future production rather than purchases of products themselves.
Finally, government spending is defined as the amount of money a country’s central or local government spends on goods and services. It excludes transfer payments, such as unemployment benefits or social security payments to retirees. It does include military spending, construction of highways and schools, and the purchase of foreign currency.