What GDP measures
The total value of what a country produces. The most quoted economic number, and one of the most misread.
Gross domestic product is the total market value of goods and services produced within a country over a period. It is a measure of activity, not of wealth, welfare or happiness — and its designers said so.
Real and nominal, again
Nominal GDP counts output at current prices, so it rises when prices rise even if the quantity produced is unchanged. Real GDP adjusts for inflation and is the figure that answers whether the economy actually grew. When a headline says growth, it should mean real — and it is worth checking.
What it deliberately excludes
- Unpaid work. Care, housework and volunteering produce enormous value and are not counted, because there is no transaction to measure.
- The informal economy. Cash work that goes unrecorded.
- Distribution. A country where all growth accrues to a few people has the same GDP as one where it is spread evenly.
- Depletion. Cutting down a forest adds to GDP. The loss of the forest does not subtract.
GDP measures marketed output. The criticisms are valid as criticisms of using it for things it was not built for, and less valid as criticisms of the statistic itself. The error is treating an activity measure as a wellbeing measure.
Revisions
GDP is estimated from incomplete data and revised repeatedly, sometimes for years. Early estimates can change materially, which means a quarter initially reported as growth can later become a contraction — the same revision problem that affects every timely economic statistic.
Why markets care
Because it is the broadest single read on whether activity is expanding, which feeds into corporate earnings, tax receipts and — through both — into what central banks do next.