Gross Domestic Product (GDP) Definition - Investopedia

Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific ... TableofContents Expand TableofContents GrossDomesticProduct(GDP) UnderstandingGDP TypesofGDP HowtoCalculateGDP GDPvs.GNPvs.GNI AdjustmentstoGDP HowtoUseGDPData GDPandInvesting HistoryofGDP CriticismsofGDP SourcesforGDPData TheBottomLine Economy Economics Partof GuidetoEconomics PartOf GuidetoEconomics ExploreTheGuide Overview IntroductiontoEconomics Overview EconomyDefinition HistoryofEconomics IsEconomicsaScience? UnderstandingFinancevs.Economics Macroeconomics Microeconomics EconomicConceptsandTheories Overview FourEconomicConcepts LawofSupplyandDemand Demand-SideEconomics Supply-SideEconomics MarketEconomy CommandEconomy EconomicValue KeynesianEconomics SocialEconomics EconomicIndicators Overview EconomicIndicator Top10USEconomicIndicators GrossDomesticProduct(GDP) WhatIsGDPandWhyIsItSoImportant? ConsumerSpending RetailSales JobMarket RealWorldEconomies Overview TheTop25EconomiesintheWorld ExamplesofFreeMarketEconomies IstheUSaMarketEconomyoraMixedEconomy? PrimaryDriversoftheChineseEconomy JapanInc. HowIndiaMakesItsMoney EuropeanUnion(EU) TheGermanEconomicMiracle TheEconomyoftheUnitedKingdom HowtheNorthKoreanEconomyWorks WhatIsGrossDomesticProduct(GDP)? Grossdomesticproduct(GDP)isthetotalmonetaryormarketvalueofallthefinishedgoodsandservicesproducedwithinacountry’sbordersinaspecifictimeperiod.Asabroadmeasureofoveralldomesticproduction,itfunctionsasacomprehensivescorecardofagivencountry’seconomichealth. ThoughGDPistypicallycalculatedonanannualbasis,itissometimescalculatedonaquarterlybasisaswell.IntheU.S.,forexample,thegovernmentreleasesanannualizedGDPestimateforeachfiscalquarterandalsoforthecalendaryear.Theindividualdatasetsincludedinthisreportaregiveninrealterms,sothedataisadjustedforpricechangesandis,therefore,netofinflation. KeyTakeaways Grossdomesticproduct(GDP)isthemonetaryvalueofallfinishedgoodsandservicesmadewithinacountryduringaspecificperiod.GDPprovidesaneconomicsnapshotofacountry,usedtoestimatethesizeofaneconomyandgrowthrate.GDPcanbecalculatedinthreeways,usingexpenditures,production,orincomes.Itcanbeadjustedforinflationandpopulationtoprovidedeeperinsights.Thoughithaslimitations,GDPisakeytooltoguidepolicy-makers,investors,andbusinessesinstrategicdecision-making. 1:43 WhatIsGDP? UnderstandingGrossDomesticProduct(GDP) Thecalculationofacountry’sGDPencompassesallprivateandpublicconsumption,governmentoutlays,investments,additionstoprivateinventories,paid-inconstructioncosts,andtheforeignbalanceoftrade.(Exportsareaddedtothevalueandimportsaresubtracted). 6.9% U.S.realGDPgrowthrate(annualized)duringthefourthquarterof2021,upfromthe2.3%growthinthethirdquarter.Forallof2021,realGDPgrewby5.7%,versusa3.4%declinein2020.NominalGDP(calledcurrent-dollarGDPbytheBEA)increased14.3%inthefourthquarterand10%for2021. Ofallthecomponentsthatmakeupacountry’sGDP,theforeignbalanceoftradeisespeciallyimportant.TheGDPofacountrytendstoincreasewhenthetotalvalueofgoodsandservicesthatdomesticproducersselltoforeigncountriesexceedsthetotalvalueofforeigngoodsandservicesthatdomesticconsumersbuy.Whenthissituationoccurs,acountryissaidtohaveatradesurplus. Iftheoppositesituationoccurs—iftheamountthatdomesticconsumersspendonforeignproductsisgreaterthanthetotalsumofwhatdomesticproducersareabletoselltoforeignconsumers—itiscalledatradedeficit.Inthissituation,theGDPofacountrytendstodecrease. GDPcanbecomputedonanominalbasisorarealbasis,thelatteraccountingforinflation.Overall,realGDPisabettermethodforexpressinglong-termnationaleconomicperformancesinceitusesconstantdollars. Forexample,supposethereisacountrythatintheyear2011hadanominalGDPof$100billion.By2021,thiscountry’snominalGDPhadgrownto$150billion.Overthesameperiodoftime,pricesalsoroseby100%.Inthisexample,ifyouweretolooksolelyatthenominalGDP,theeconomyappearstobeperformingwell.However,therealGDP(expressedin2011dollars)wouldonlybe$75billion,revealingthat,inactuality,anoveralldeclineinrealeconomicperformanceoccurredduringthistime. TypesofGrossDomesticProduct GDPcanbereportedinseveralways,eachofwhichprovidesslightlydifferentinformation. NominalGDP NominalGDPisanassessmentofeconomicproductioninaneconomythatincludescurrentpricesinitscalculation.Inotherwords,itdoesn’tstripoutinflationorthepaceofrisingprices,whichcaninflatethegrowthfigure. AllgoodsandservicescountedinnominalGDParevaluedatthepricesthatthosegoodsandservicesareactuallysoldforinthatyear.NominalGDP isevaluatedineitherthelocalcurrencyorU.S.dollarsatcurrencymarketexchangeratestocomparecountries’GDPsinpurelyfinancialterms. NominalGDPisusedwhencomparingdifferentquartersofoutputwithinthesameyear.WhencomparingtheGDPoftwoormoreyears,realGDPisused.Thisisbecause,ineffect,theremovaloftheinfluenceofinflationallowsthecomparisonofthedifferentyearstofocussolelyonvolume. RealGDP RealGDPisaninflation-adjustedmeasurethatreflectsthequantityofgoodsandservicesproducedbyaneconomyinagivenyear,withpricesheldconstantfromyeartoyeartoseparateouttheimpactofinflationordeflationfromthetrendinoutputovertime.SinceGDPisbasedonthemonetaryvalueofgoodsandservices,itissubjecttoinflation. Risingpriceswilltendtoincreaseacountry’sGDP,butthisdoesnotnecessarilyreflectanychangeinthequantityorqualityofgoodsandservicesproduced.Thus,bylookingjustataneconomy’snominalGDP,itcanbedifficulttotellwhetherthefigurehasrisenbecauseofarealexpansioninproductionorsimplybecausepricesrose. Economistsuseaprocessthatadjustsforinflationtoarriveataneconomy’srealGDP.Byadjustingtheoutputinanygivenyearforthepricelevelsthatprevailedinareferenceyear,calledthebaseyear, economistscanadjustforinflation’simpact. Thisway,itispossibletocompareacountry’sGDPfromoneyeartoanotherandseeifthereisanyrealgrowth. RealGDPiscalculatedusingaGDPpricedeflator,whichisthedifferenceinpricesbetweenthecurrentyearandthebaseyear.Forexample,ifpricesroseby5%sincethebaseyear,thenthedeflatorwouldbe1.05.NominalGDPisdividedbythisdeflator,yieldingrealGDP.NominalGDPisusuallyhigherthanrealGDPbecauseinflationistypicallyapositivenumber. RealGDPaccountsforchangesinmarketvalueandthusnarrowsthedifferencebetweenoutputfiguresfromyeartoyear.Ifthereisalargediscrepancybetweenanation’srealGDPandnominalGDP,thismaybeanindicatorofsignificantinflationordeflationinitseconomy. GDPPerCapita GDPpercapitaisameasurementoftheGDPperpersoninacountry’spopulation.Itindicatesthattheamountofoutputorincomeperpersoninaneconomycanindicateaverageproductivityoraveragelivingstandards.GDPpercapitacanbestatedinnominal,real(inflation-adjusted),orPPP(purchasingpowerparity)terms. Atabasicinterpretation,per-capitaGDPshowshowmucheconomicproductionvaluecanbeattributedtoeachindividualcitizen.ThisalsotranslatestoameasureofoverallnationalwealthsinceGDPmarketvalueperpersonalsoreadilyservesasaprosperitymeasure. Per-capitaGDPisoftenanalyzedalongsidemoretraditionalmeasuresofGDP.Economistsusethismetricforinsightintotheirowncountry’sdomesticproductivityandtheproductivityofothercountries.Per-capitaGDPconsidersbothacountry’sGDPanditspopulation.Therefore,itcanbeimportanttounderstandhoweachfactorcontributestotheoverallresultandisaffectingper-capitaGDPgrowth. Ifacountry’sper-capitaGDPisgrowingwithastablepopulationlevel,forexample,itcouldbetheresultoftechnologicalprogressionsthatareproducingmorewiththesamepopulationlevel.Somecountriesmayhaveahighper-capitaGDPbutasmallpopulation,whichusuallymeanstheyhavebuiltupaself-sufficienteconomybasedonanabundanceofspecialresources. GDPGrowthRate TheGDPgrowthratecomparestheyear-over-year(orquarterly)changeinacountry’seconomicoutputtomeasurehowfastaneconomyisgrowing.Usuallyexpressedasapercentagerate,thismeasureispopularforeconomicpolicy-makersbecauseGDPgrowthisthoughttobecloselyconnectedtokeypolicytargetssuchasinflationandunemploymentrates. IfGDPgrowthratesaccelerate,itmaybeasignalthattheeconomyis“overheating”andthecentralbankmayseektoraiseinterestrates.Conversely,centralbanksseeashrinking(ornegative)GDPgrowthrate(i.e.,arecession)asasignalthatratesshouldbeloweredandthatstimulusmaybenecessary. GDPPurchasingPowerParity(PPP) WhilenotdirectlyameasureofGDP,economistslookatpurchasingpowerparity(PPP)toseehowonecountry’sGDPmeasuresupin“internationaldollars”usingamethodthatadjustsfordifferencesinlocalpricesandcostsoflivingtomakecross-countrycomparisonsofrealoutput,realincome,andlivingstandards. HowtoCalculateGDP GDPcanbedeterminedviathreeprimarymethods.Allthreemethodsshouldyieldthesamefigurewhencorrectlycalculated.Thesethreeapproachesareoftentermedtheexpenditureapproach,theoutput(orproduction)approach,andtheincomeapproach. TheExpenditureApproach Theexpenditureapproach,alsoknownasthespendingapproach,calculatesspendingbythedifferentgroupsthatparticipateintheeconomy.TheU.S.GDPisprimarilymeasuredbasedontheexpenditureapproach.Thisapproachcanbecalculatedusingthefollowingformula: GDP=C+G+I+NX where C=consumption;G=governmentspending;I=investment;andNX=netexports AlloftheseactivitiescontributetotheGDPofacountry.Consumptionreferstoprivateconsumptionexpendituresorconsumerspending.Consumersspendmoneytoacquiregoodsandservices,suchasgroceriesandhaircuts.ConsumerspendingisthebiggestcomponentofGDP,accountingformorethantwo-thirdsoftheU.S.GDP. Consumerconfidence,therefore,hasaverysignificantbearingoneconomicgrowth.Ahighconfidencelevelindicatesthatconsumersarewillingtospend,whilealowconfidencelevelreflectsuncertaintyaboutthefutureandanunwillingnesstospend. Governmentspendingrepresentsgovernmentconsumptionexpenditureandgrossinvestment.Governmentsspendmoneyonequipment,infrastructure,andpayroll.Governmentspendingmaybecomemoreimportantrelativetoothercomponentsofacountry’sGDPwhenconsumerspendingandbusinessinvestmentbothdeclinesharply.(Thismayoccurinthewakeofarecession,forexample.) Investmentreferstoprivatedomesticinvestmentorcapitalexpenditures.Businessesspendmoneytoinvestintheirbusinessactivities.Forexample,abusinessmaybuymachinery.BusinessinvestmentisacriticalcomponentofGDPsinceitincreasestheproductivecapacityofaneconomyandboostsemploymentlevels. Thenetexportsformulasubtractstotalexportsfromtotalimports(NX=Exports−Imports).Thegoodsandservicesthataneconomymakesthatareexportedtoothercountries,lesstheimportsthatarepurchasedbydomesticconsumers,representacountry’snetexports.Allexpendituresbycompanieslocatedinagivencountry,eveniftheyareforeigncompanies,areincludedinthiscalculation. TheProduction(Output)Approach Theproductionapproachisessentiallythereverseoftheexpenditureapproach.Insteadofmeasuringtheinputcoststhatcontributetoeconomicactivity,theproductionapproachestimatesthetotalvalueofeconomicoutputanddeductsthecostofintermediategoods thatareconsumedintheprocess(likethoseofmaterialsandservices).Whereastheexpenditureapproachprojectsforwardfromcosts,theproductionapproachlooksbackwardfromthevantagepointofastateofcompletedeconomicactivity. TheIncomeApproach TheincomeapproachrepresentsakindofmiddlegroundbetweenthetwootherapproachestocalculatingGDP.Theincomeapproachcalculatestheincomeearnedbyallthefactorsofproductioninaneconomy,includingthewagespaidtolabor,therentearnedbyland,thereturnoncapitalintheformofinterest,andcorporateprofits.  Theincomeapproachfactorsinsomeadjustmentsforthoseitemsthatarenotconsideredpaymentsmadetofactorsofproduction.Forone,therearesometaxes—suchassalestaxesandpropertytaxes—thatareclassifiedasindirectbusinesstaxes.Inaddition,depreciation—areservethatbusinessessetasidetoaccountforthereplacementofequipmentthattendstoweardownwithuse—isalsoaddedtothenationalincome.Allofthistogetherconstitutesanation’sincome. GDPvs.GNPvs.GNI AlthoughGDPisawidelyusedmetric,thereareotherwaysofmeasuringtheeconomicgrowthofacountry.WhileGDPmeasurestheeconomicactivitywithinthephysicalbordersof acountry(whethertheproducersarenativetothatcountryorforeign-ownedentities),grossnationalproduct(GNP)isameasurementoftheoverallproductionofpeopleorcorporationsnativetoacountry,includingthosebasedabroad.GNPexcludesdomesticproductionbyforeigners. Grossnationalincome(GNI)isanothermeasureofeconomicgrowth.Itisthesumofallincomeearnedbycitizensornationalsofacountry(regardlessofwhethertheunderlyingeconomicactivitytakesplacedomesticallyorabroad).TherelationshipbetweenGNPandGNIissimilartotherelationshipbetweentheproduction(output)approachandtheincomeapproachusedtocalculateGDP. GNPusestheproductionapproach,whileGNIusestheincomeapproach.WithGNI,theincomeofacountryiscalculatedasitsdomesticincome,plusitsindirectbusinesstaxesanddepreciation(aswellasitsnetforeignfactorincome).Thefigurefornetforeignfactorincomeiscalculatedbysubtractingallpaymentsmadetoforeigncompaniesandindividualsfromallpaymentsmadetodomesticbusinesses. Inanincreasinglyglobaleconomy,GNIhasbeenputforwardasapotentiallybettermetricforoveralleconomichealththanGDP.Becausecertaincountrieshavemostoftheirincomewithdrawnabroadbyforeigncorporationsandindividuals,theirGDPfigureismuchhigherthanthefigurethatrepresentstheirGNI. Forexample,in2019,LuxembourghadasignificantdifferencebetweenitsGDPandGNI,mainlyduetolargepaymentsmadetotherestoftheworldviaforeigncorporationsthatdidbusinessinLuxembourg,attractedbythetinynation’sfavorabletaxlaws.Onthecontrary,intheU.S.,GNIandGDPdonotdiffersubstantially.In2019,U.S.GDPwas$21.7trillionwhileitsGNIwas$21.7trillionalso. AdjustmentstoGDP Anumberofadjustmentscanbemadetoacountry’sGDPtoimprovetheusefulnessofthisfigure.Foreconomists,acountry’sGDPrevealsthesizeoftheeconomybutprovideslittleinformationaboutthestandardoflivinginthatcountry.Partofthereasonforthisisthatpopulationsizeandcostoflivingarenotconsistentaroundtheworld. Forexample,comparingthenominalGDPofChinatothenominalGDPofIrelandwouldnotprovidemuchmeaningfulinformationabouttherealitiesoflivinginthosecountriesbecauseChinahasapproximately300timesthepopulationofIreland. Tohelpsolvethisproblem,statisticianssometimescompareGDPpercapitabetweencountries.GDPpercapitaiscalculatedbydividingacountry’stotalGDPbyitspopulation,andthisfigureisfrequentlycitedtoassessthenation’sstandardofliving.Evenso,themeasureisstillimperfect. SupposeChinahasaGDPpercapitaof$1,500,whileIrelandhasaGDPpercapitaof$15,000.Thisdoesn’tnecessarilymeanthattheaverageIrishpersonis10timesbetteroffthantheaverageChineseperson.GDPpercapitadoesn’taccountforhowexpensiveitistoliveinacountry. Purchasingpowerparity(PPP)attemptstosolvethisproblembycomparinghowmanygoodsandservicesanexchange-rate-adjustedunitofmoneycanpurchaseindifferentcountries—comparingthepriceofanitem,orbasketofitems,intwocountriesafteradjustingfortheexchangeratebetweenthetwo,ineffect. Realper-capitaGDP,adjustedforpurchasingpowerparity,isaheavilyrefinedstatistictomeasuretrueincome,whichisanimportantelementofwell-being.AnindividualinIrelandmightmake$100,000ayear,whileanindividualinChinamightmake$50,000ayear.Innominalterms,theworkerinIrelandisbetteroff.Butifayear’sworthoffood,clothing,andotheritemscoststhreetimesasmuchinIrelandthaninChina,however,thentheworkerinChinahasahigherrealincome. HowtoUseGDPData MostnationsreleaseGDPdataeverymonthandquarter.IntheU.S.,theBureauofEconomicAnalysis(BEA)publishesanadvancereleaseofquarterlyGDPfourweeksafterthequarterends,andafinalreleasethreemonthsafterthequarterends.TheBEAreleasesareexhaustiveandcontainawealthofdetail,enablingeconomistsandinvestorstoobtaininformationandinsightsonvariousaspectsoftheeconomy. GDP’smarketimpactisgenerallylimited,sinceitis“backward-looking,”andasubstantialamountoftimehasalreadyelapsedbetweenthequarter-endandGDPdatarelease.However,GDPdatacanhaveanimpactonmarketsiftheactualnumbersdifferconsiderablyfromexpectations. BecauseGDPprovidesadirectindicationofthehealthandgrowthoftheeconomy,businessescanuseGDPasaguidetotheirbusinessstrategy.Governmententities,suchastheFedintheU.S.,usethegrowthrateandotherGDPstatsaspartoftheirdecisionprocessindeterminingwhattypeofmonetarypoliciestoimplement. Ifthegrowthrateisslowing,theymightimplementanexpansionarymonetarypolicytotrytoboosttheeconomy.Ifthegrowthrateisrobust,theymightusemonetarypolicytoslowthingsdowntotrytowardoffinflation. RealGDPistheindicatorthatsaysthemostaboutthehealthoftheeconomy.Itiswidelyfollowedanddiscussedbyeconomists,analysts,investors,andpolicy-makers.Theadvancereleaseofthelatestdatawillalmostalwaysmovemarkets,althoughthatimpactcanbelimited,asnotedabove. GDPandInvesting InvestorswatchGDPsinceitprovidesaframeworkfordecision-making.The“corporateprofits”and“inventory”dataintheGDPreportareagreatresourceforequityinvestors,asbothcategoriesshowtotalgrowthduringtheperiod;corporateprofitsdataalsodisplayspre-taxprofits,operatingcashflows,andbreakdownsforallmajorsectorsoftheeconomy. ComparingtheGDPgrowthratesofdifferentcountriescanplayapartinassetallocation,aidingdecisionsaboutwhethertoinvestinfast-growingeconomiesabroad—andifso,whichones. OneinterestingmetricthatinvestorscanusetogetsomesenseofthevaluationofanequitymarketistheratiooftotalmarketcapitalizationtoGDP,expressedasapercentage.Theclosestequivalenttothisintermsofstockvaluationisacompany’smarketcaptototalsales(orrevenues),whichinper-sharetermsisthewell-knownprice-to-salesratio. Justasstocksindifferentsectorstradeatwidelydivergentprice-to-salesratios,differentnationstradeatmarket-cap-to-GDPratiosthatareliterallyalloverthemap.Forexample,accordingtotheWorldBank,theU.S.hadamarket-cap-to-GDPratioof195%for2020,whileChinahadaratioofjustover83%andHongKonghadaratioof1,769%. However,theutilityofthisratioliesincomparingittohistoricalnormsforaparticularnation.Asanexample,theU.S.hadamarket-cap-to-GDPratioof142%attheendof2006,whichdroppedto79%bytheendof2008.Inretrospect,theserepresentedzonesofsubstantialovervaluationandundervaluation,respectively,forU.S.equities. Thebiggestdownsideofthisdataisitslackoftimeliness;investorsonlygetoneupdateperquarter,andrevisionscanbelargeenoughtosignificantlyalterthepercentagechangeinGDP. HistoryofGDP TheconceptofGDPwasfirstproposedin1937inareporttotheU.S.CongressinresponsetotheGreatDepression,conceivedofandpresentedbyaneconomistattheNationalBureauofEconomicResearch,SimonKuznets. Atthetime,thepreeminentsystemofmeasurementwasGNP.AftertheBrettonWoodsconferencein1944,GDPwaswidelyadoptedasthestandardmeansformeasuringnationaleconomies,althoughironically,theU.S.continuedtouseGNPasitsofficialmeasureofeconomicwelfareuntil1991,afterwhichitswitchedtoGDP. Beginninginthe1950s,however,someeconomistsandpolicy-makersbegantoquestionGDP.Someobserved,forexample,atendencytoacceptGDPasanabsoluteindicatorofanation’sfailureorsuccess,despiteitsfailuretoaccountforhealth,happiness,(in)equality,andotherconstituentfactorsofpublicwelfare.Inotherwords,thesecriticsdrewattentiontoadistinctionbetweeneconomicprogressandsocialprogress. However,mostauthorities,likeArthurOkun,aneconomistforPresidentJohnF.Kennedy’sCouncilofEconomicAdvisers,heldfirmtothebeliefthatGDPisanabsoluteindicatorofeconomicsuccess,claimingthatforeveryincreaseinGDP,therewouldbeacorrespondingdropinunemployment. CriticismsofGDP Thereare,ofcourse,drawbackstousingGDPasanindicator.Inadditiontothelackoftimeliness,somecriticismsofGDPasameasureare: Itignoresthevalueofinformalorunrecordedeconomicactivity:GDPreliesonrecordedtransactionsandofficialdata,soitdoesnottakeintoaccounttheextentofinformaleconomicactivity.GDPfailstoaccountforthevalueofunder-the-tableemployment,undergroundmarketactivity,orunremuneratedvolunteerwork,whichcanallbesignificantinsomenationsandcannotaccountforthevalueofleisuretimeorhouseholdproduction,whichareubiquitousconditionsofhumanlifeinallsocieties. Itisgeographicallylimitedinagloballyopeneconomy: GDPdoesnottakeintoaccountprofitsearnedinanationbyoverseascompaniesthatareremittedbacktoforeigninvestors.Thiscanoverstateacountry’sactualeconomicoutput.Forexample,IrelandhadaGDPof$426billionandGNIof$324billionin2020,thedifferenceofapproximately$100billion(orover20%ofGDP)largelybeingduetoprofitrepatriationbyforeigncompaniesbasedinIreland. Itemphasizesmaterialoutputwithoutconsideringoverallwell-being:GDPgrowthalonecannotmeasureanation’sdevelopmentoritscitizens’well-being,asnotedabove.Forinstance,anationmaybeexperiencingrapidGDPgrowth,butthismayimposeasignificantcosttosocietyintermsofenvironmentalimpactandanincreaseinincomedisparity. Itignoresbusiness-to-businessactivity:GDPconsidersonlyfinalgoodsproductionandnewcapitalinvestmentanddeliberatelynetsoutintermediatespendingandtransactionsbetweenbusinesses.Bydoingso,GDPoverstatestheimportanceofconsumptionrelativetoproductionintheeconomyandislesssensitiveasanindicatorofeconomicfluctuationscomparedtometricsthatincludebusiness-to-businessactivity. Itcountscostsandwasteaseconomicbenefits:GDPcountsallfinalprivateandgovernmentspendingasadditionstoincomeandoutputforsociety,regardlessofwhethertheyareactuallyproductiveorprofitable.ThismeansthatobviouslyunproductiveorevendestructiveactivitiesareroutinelycountedaseconomicoutputandcontributetogrowthinGDP.Forexample,thisincludesspendingdirectedtowardextractingortransferringwealthbetweenmembersofsocietyratherthanproducingwealth(suchastheadministrativecostsoftaxationormoneyspentonlobbyingandrent-seeking);spendingoninvestmentprojectsforwhichthenecessarycomplementarygoodsandlaborarenotavailableorforwhichactualconsumerdemanddoesnotexist(suchastheconstructionofemptyghostcitiesorbridgestonowhere,unconnectedtoanyroadnetwork);andspendingongoodsandservicesthatareeitherthemselvesdestructiveoronlynecessarytooffsetotherdestructiveactivities,ratherthantocreatenewwealth(suchastheproductionofweaponsofwarorspendingonpolicingandanti-crimemeasures). SourcesforGDPData TheWorldBankhostsoneofthemostreliableweb-baseddatabases.IthasoneofthebestandmostcomprehensivelistsofcountriesforwhichittracksGDPdata.TheInternationalMoneyFund(IMF)alsoprovidesGDPdatathroughitsmultipledatabases,suchasWorldEconomicOutlookandInternationalFinancialStatistics. AnotherhighlyreliablesourceofGDPdataistheOrganizationforEconomicCooperationandDevelopment(OECD).TheOECDnotonlyprovideshistoricaldatabutalsoforecastsGDPgrowth.ThedisadvantageofusingtheOECDdatabaseisthatittracksonlyOECDmembercountriesandafewnonmembercountries. IntheU.S.,theFedcollectsdatafrommultiplesources,includingacountry’sstatisticalagenciesandTheWorldBank.TheonlydrawbacktousingaFeddatabaseisalackofupdatinginGDPdataandanabsenceofdataforcertaincountries. TheBureauofEconomicAnalysis(BEA)adivisionoftheU.S.DepartmentofCommerce,issuesitsownanalysisdocumentwitheachGDPrelease,whichisagreatinvestortoolforanalyzingfiguresandtrendsandreadinghighlightsoftheverylengthyfullrelease. WhatIsaSimpleDefinitionofGDP? Grossdomesticproduct(GDP)isameasurementthatseekstocaptureacountry’seconomicoutput.CountrieswithlargerGDPswillhaveagreateramountofgoodsandservicesgeneratedwithinthem,andwillgenerallyhaveahigherstandardofliving.Forthisreason,manycitizensandpoliticalleadersseeGDPgrowthasanimportantmeasureofnationalsuccess,oftenreferringto“GDPgrowth”and“economicgrowth”interchangeably.Duetovariouslimitations,however,manyeconomistshavearguedthatGDPshouldnotbeusedasaproxyforoveralleconomicsuccess,muchlessthesuccessofasocietymoregenerally. WhichCountryHastheHighestGDP? ThecountrieswiththetwohighestGDPsintheworldaretheUnitedStatesandChina.However,theirrankingdiffersdependingonhowyoumeasureGDP.UsingnominalGDP,theUnitedStatescomesinfirstwithaGDPof$20.89trillionasof2020,comparedto$14.7trillionforChina.Manyeconomists,however,arguethatitismoreaccuratetousepurchasingpowerparity(PPP)GDPasameasurefornationalwealth.Bythismetric,Chinaisactuallytheworldleaderwitha2020PPPGDPof$24.3trillion,followedby$20.9trillionfortheUnitedStates. IsaHighGDPGood? MostpeopleperceiveahigherGDPtobeagoodthingbecauseitisassociatedwithgreatereconomicopportunitiesandanimprovedstandardofmaterialwell-being.Itispossible,however,foracountrytohaveahighGDPandstillbeanunattractiveplacetolive,soitisimportanttoalsoconsiderothermeasurements.Forexample,acountrycouldhaveahighGDPandalowper-capitaGDP,suggestingthatsignificantwealthexistsbutisconcentratedinthehandsofveryfewpeople.OnewaytoaddressthisistolookatGDPalongsideanothermeasureofeconomicdevelopment,suchastheHumanDevelopmentIndex(HDI). TheBottomLine IntheirseminaltextbookEconomics, PaulSamuelsonandWilliam NordhausneatlysumuptheimportanceofthenationalaccountsandGDP.TheylikentheabilityofGDPtogiveanoverallpictureofthestateoftheeconomytothatofasatelliteinspacethatcansurveytheweatheracrossanentirecontinent. GDPenablespolicy-makersandcentralbankstojudgewhethertheeconomyiscontractingorexpanding,whetheritneedsaboostorrestraint,andifathreatsuchasarecessionorinflationloomsonthehorizon.Likeanymeasure,GDPhasitsimperfections.Inrecentdecades,governmentshavecreatedvariousnuancedmodificationsinattemptstoincreaseGDPaccuracyandspecificity.MeansofcalculatingGDPhavealsoevolvedcontinuallysinceitsconceptiontokeepupwithevolvingmeasurementsofindustryactivityandthegenerationandconsumptionofnew,emergingformsofintangibleassets. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. U.S.BureauofEconomicAnalysis."GrossDomesticProduct."AccessedJan.28,2022. U.S.BureauofEconomicAnalysis.“GrossDomesticProduct,FourthQuarterandYear2021(AdvanceEstimate).”AssessedJan.28,2022. FederalReserveBankofSt.Louis."SharesofGrossDomesticProduct:PersonalConsumptionExpenditures."AccessedJan.28,2022. OrganisationforEconomicCo-OperationandDevelopment."OECDEconomicSurveys-Luxembourg,"Page37.AccessedJan.28,2022. FederalReserveBankofSt.Louis."GrossDomesticProduct."AccessedJan.28,2022. FederalReserveBankofSt.Louis."GrossNationalIncomeforUnitedStates."AccessedJan.28,2022. TheWorldBank."MarketCapitalizationofListedDomesticCompanies-UnitedStates,HongKongSAR,China,China."AccessedJan.28,2022. U.S.BureauofEconomicAnalysis."GDP:OneoftheGreatInventionsofthe20thCentury."AccessedJan.28,2022. BoardofGovernorsoftheFederalReserveSystem."Speech:RecentDevelopmentsintheLaborMarket."AccessedJan.28,2022. TheWorldBank."GDP(CurrentUS$)—Ireland."Jan.28,2022. TheWorldBank."GNI(CurrentUS$)—Ireland."Jan.28,2022. TheWorldBank.“GDP(CurrentUS$)China.”AccessedJan.28,2022. TheWorldBank.“GDP(CurrentUS$)UnitedStates.”AccessedJan.28,2022. TheWorldBank.“GDP,PPP(CurrentInternational$)China.”AccessedJan.28,2022. TheWorldBank.“GDP,PPP(CurrentInternational$)UnitedStates.”AccessedJan.28,2022. CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. 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Grossdomesticincome(GDI)isameasureofanation'seconomicactivitythatisbasedonallincomeearnedwhileproducinggoodsandservices. more PartnerLinks RelatedArticles Economics WhatIsGDPandWhyIsItSoImportanttoEconomistsandInvestors? Economics WhatAretheBestMeasurementsofEconomicGrowth? Macroeconomics WhatIsPurchasingPowerParity(PPP)? Economy TheTop25EconomiesintheWorld Economy Top25DevelopedandDevelopingCountries GovernmentSpending WhattheNationalDebtMeanstoYou