Gross domestic product (GDP)

Gross domestic product or GDP is central to how economists monitor and compare economies. GDP measures the total monetary value of all finished goods and services produced within a nation's borders over a specific period, typically a year. Any production within the country, whether from a local startup or a multinational, adds to GDP. This makes GDP vital for understanding economic size and output, enabling comparisons across countries and over time. However, GDP captures only market transactions and production, not every aspect of societal well being. To calculate GDP, economists use three main methods, each offering unique insights, but in principle, yielding the same result. The expenditure approach total spending by households, businesses, governments, and foreigners. These categories are consumption, investment, government spending, and net exports. The income approach sums all income from production, wages, profits, rent, and interest. The output approach measures value added at each production stage. These methods are standardized internationally, making GDP the gold standard for evaluating national economies. Understanding growth over time requires us to distinguish between nominal GDP and real GDP. Nominal GDP values output at current prices, so it reflects both changes in production and price levels. Real GDP, on the other hand, adjusts for inflation by holding prices constant over time, which enables more accurate comparisons