What is GDP?

The U.S. government recently reported that the gross domestic product (GDP) grew 1.9% from July to September. With the data in the spotlight, now would be a good time to answer the question: What is the GDP?

What is the GDP?

The GDP is the total value of everything produced in a country. In this U.S., this figure is measured every three months by the Bureau of Economic Analysis (BEA).

The GDP is calculated by looking at consumer spending (C), business investment (I), government spending (G), and exports (X) minus imports (M). Economists use a formula to determine the nation’s GDP, which goes: C + I + G + (X-M).

Is the GDP a reliable measure? Let’s look at the pros and cons.

Pros

The GDP is a broad indicator of a country’s overall development, making it easy to measure growth. Since the data is easy to collect and simple to formulate, the GDP can serve as an instant measure of whether economic policies are working. It is like a snapshot of everything that has happened in the last three months.

If you want to evaluate economies from around the world, then you can compare GDP rates.

Cons

The biggest drawback to GDP is that it does not determine the real value of goods and services that affect the country’s standard of living. In 1990, the former Soviet Union’s GDP was roughly half of the U.S. GDP. This was surprising since there was widespread misery, suffering, and unhappiness in that country. The problem, however, was not the output but consumption. Russia smelted steel, but it was not used in construction or manufacturing. Russia paved roads, but they did not lead anywhere.

Many economists now contend that GDP omits important household duties that do not produce financial value, like child-rearing and cleaning.