The finance world is full of all kinds of acronyms and jargon. One that you’re likely to hear every so often is “GDP,” which stands for “gross domestic product.”
GDP is a measure of the total goods and services produced by an economy (or country) within a given time frame. For example, the United States GDP for 2021 was almost $23 trillion. That’s a total accumulation of everything that the economy produced in the whole country – whether it was washing dishes, or building washing machines.
We use GDP to gauge how big or small an economy is, and look at quarterly GDP numbers to determine if the economy is growing or shrinking.
Why GDP numbers matter
The Bureau of Economic Analysis, a part of the U.S. government, calculates and releases GDP numbers every quarter. So, we get GDP figures four times per year. These numbers are estimates, as it’s extremely difficult to get a precise GDP figure, and are often revised as more data is accumulated.
But what GDP numbers tell us is whether the economy is growing, and how fast it’s growing or shrinking. If GDP numbers are negative, we know that the economy has contracted – that is, we’ve produced less than we did during the previous quarter. Generally, we consider two-straight quarters of negative GDP growth to mean that we’re in a recession, but there are other factors that play into that as well. The National Bureau of Economic Research, a panel of economists, actually declares a recession.
Even so, GDP numbers matter because they give us a gauge of the current state of the economy, and how it measures up to other economies around the world.
Getting granular on GDP
GDP numbers can be expressed as a percentage (GDP was up 2.6% during Q3 2022, for example) or as a monetary value (U.S. GDP was $21 trillion in 2021). So, you may run into different ways of discussing or expressing it.
There are also a few ways of calculating GDP: The income approach (adding up everyone’s wages and profits), the expenditure method (calculating all consumption and spending), and adding up the value of goods and services produced. Again, this is a massive undertaking and not an exact science. This is why we get GDP estimates that are revised up or down over time.
For the average person, GDP is really merely another economic indicator that can be used to tell how well the economy is performing. It’s a large, broad indicator, too – not like a monthly jobs report, which is bit more granular with monthly data. And just because GDP is down one quarter doesn’t necessarily mean that you will notice it in your local economy.
That said, it’s important to know what GDP is, what it means, and how it fits into the spectrum of economic indicators that are out there.
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