GDP measures the monetary value of all the goods and services produced by a country in a given period. It is calculated by subtracting the country’s total imports from its total exports. GDP is often divided by the country’s population to create per-capita figures that can be used to compare economic output between nations. GDP is an extremely useful metric for researchers, policymakers, investors and businesses, but it has its limits.
The most obvious flaw of GDP is that it ignores the black or informal economy. Since GDP relies on recorded transactions and official data, it fails to account for under-the-table employment, underground market activity, unpaid volunteer work and the production of goods and services for one’s own consumption (such as homemade meals or personal fitness training). GDP also does not take into account quality improvements or the introduction of new products that may raise a consumer’s standard of living.
Another problem is that GDP only accounts for the final output of a nation’s citizens, neglecting business-to-business spending and investments. If a company spends money to build or upgrade a plant, that counts toward its GDP, but the same investment would also count if it gave those funds to another company to build an identical plant, which is why these two transactions are nettled out in the calculation.
The Bureau of Economic Analysis (BEA) estimates a nation’s GDP three times per quarter, and each estimate incorporates additional source data that wasn’t available the previous month. BEA also calculates a figure called real GDP, which strips out inflation to measure true economic growth.
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