GDP is an important statistic because it represents a country’s economic output. The White House and Congress use GDP numbers to make budget decisions, while central banks like the Federal Reserve use them to set monetary policy. Businesses also track GDP to see how fast the economy is growing and where it’s slowing down so they can better plan their future.
To determine GDP, the BEA assembles seven summary accounts tracing receipts and outlays for businesses, households, nonprofit organizations, and governments. The BEA then adds up the value of all final goods and services produced in the nation using a “production method” that calculates the amount of labor, resources, energy, and materials that went into producing each good or service. This method excludes the value of informal or unrecorded economic activity (such as under-the-table employment, black-market activities, and unremunerated volunteer work) because it’s difficult to measure accurately.
Consumption (C) is the largest component of GDP, representing the amount of goods and services purchased by consumers. Professionals typically view a steady increase in C as an indicator of consumer confidence and willingness to spend, while a slowdown indicates that people are uncertain about the future and are less willing to invest. Investment (I) is the amount of money spent on goods and services that will provide future benefits, such as building new machinery or repairing existing buildings.
When comparing GDP between countries, it’s necessary to adjust for the fact that each country has its own currency. Purchasing power parity (PPP) exchange rates are often used for this purpose.