GDP measures the monetary value of all final goods and services—that is, market goods—produced within a country in a given period, such as a quarter or year. It includes all market and nonmarket production, such as government spending on defense or education. An alternative measure, gross national product (GNP), includes all production by residents of a country, whether or not it is produced for sale in the market.
One advantage of GDP is that it is a widely used, easily understandable statistic. It enables economists, business leaders and the general public to track economic health, assess whether an economy needs a boost or is on solid ground, and spot potential threats, such as recession or inflation. In his seminal textbook “Economics,” Paul Samuelson likened its ability to survey the economy to that of a satellite in space, which can provide an overview of weather across a continent.
It also provides information on a country’s wealth and standard of living. Adjusted for population, it is known as per-capita GDP and is a key measure of economic well-being.
However, it is important to note that GDP is only a partial measurement of economic activity. Its focus on market transactions neglects activities such as household production, bartering and volunteer or unpaid work. It also does not capture phenomena that have an impact on citizens’ quality of life, such as traffic jams or air pollution. For these reasons, many economists have sought to develop alternative measures.
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