GDP stands for Gross Domestic Product and it is used to measure the health and wellbeing of an economy. GDP is the monetary value of all the finished goods and services produced within a country's borders – its total output – during a certain period of time. It takes into account all the goods and services produced, imports and exports and government spending. GDP is calculated by using the formula:
GDP = All Private Consumption + All Government Spending + Investment By Businesses + (The Country's Exports – Imports)
However, not all production is included. Any unpaid work or activity in the underground economy, or black market — such as illegal drugs, weapons, pirated music, movies and games and exotic animals — is not taken into consideration when calculating GDP.
In the United States, GDP is measured by the Bureau of Economic Analysis (BEA) and is publicly reported each quarter. To ensure that accurate comparisons can be made from year to year, the BEA computes real GDP, which takes into account yearly inflation. This allows for accurate comparisons because it shows whether GDP is increasing or decreasing and not just whether prices are going up. It is called nominal GDP when inflation is not added into the equation.
Overall, the GDP is the most closely watched economic indicator. Domestically, it is used to determine whether the economy has grown, or slowed down, since the previous quarter. For example, when the GDP has dropped for at least two consecutive quarters, the economy is considered to be in a recession. GDP is also used to compare both the size and growth of economies around the world.
While all three should produce the same results, GDP can be determined using three different approaches: expenditure, value added or income. The most common method is the expenditure approach, which determines GDP using the calculation above. It takes into account private consumption, investments by businesses, government spending and imports and exports. The value added approach takes into account the difference between the value of materials at each stage of production. It is used to avoid double counting. The final way, the income approach, considers how much income is paid to produce the country's goods and services.
History of GDP in the United States
Economist Simon Kuznets first introduced GDP measurements in the United States in the 1930s. In a report to Congress, Kuznets proposed a single economic indicator to measure a country's economic output. However, it wasn't until 1944, following the end of World War II and the establishment of the International Monetary Fund and the International Bank for Reconstruction and Development, that GDP was used as the standard economic measurement worldwide. Historically, the U.S. GDP Growth Rate has averaged 3.2 percent. GDP reached an all-time high of 17.2 percent in 1950 and a low of -10.4 percent eight years later.
When reviewing its accomplishments in 1999, the U.S. Department of Commerce declared the GDP to be one of the greatest inventions of the 20th century.