GDP is widely viewed as the best overall measure of the health of an economy. It is watched closely by economists, analysts, investors, and policymakers. The advance release of the latest GDP statistics almost always moves markets (although it’s important to remember that “real” GDP is not an inflation measure). Policymakers use GDP data when planning budgets, setting monetary policy, and making other decisions about jobs, investment, and taxes.
The calculation of GDP varies slightly between countries, but most follow international standards contained in the System of National Accounts. The four components of GDP are consumption, investment, government spending and net exports. Consumption represents the amount of goods and services bought by consumers; investment represents the amount of money put into businesses; government spending is the amount of tax dollars a country’s government spends; and net exports are the difference between a nation’s exports and imports.
The way real GDP is measured has some inherent limitations. A major one is that it excludes activities that occur outside of the legalized economy. For example, proceeds from off-the-books work, some cash transactions and activities like drug dealing are not included in GDP calculations. It also fails to fully take into account quality improvements and the introduction of new products. For example, a computer today is far more powerful and less expensive than computers that were available in the past.