GDP is a standardised metric that measures the market value of all goods and services produced within a nation during a set timeframe. It’s commonly used as a general indicator of economic health and can be compared across nations to help understand relative economic strength. It’s also used in global trade negotiations and international policy-making.
GDP consists of four components: consumption, investment, government spending and net exports. Consumption represents the value of all goods and services consumed by citizens, which includes things like retail spending and rent. Investment refers to any domestic expenditure on equipment, inventories or buildings that will provide future benefits. Government spending, meanwhile, is comprised of salaries paid to public servants and military spending. Finally, net exports is the difference between a country’s total exports and imports.
Economists use GDP to evaluate a country’s economic health, track trends and predict future growth. It’s also a popular metric for investors looking to gauge the economic potential of a country or region. Central banks, meanwhile, closely monitor GDP growth to determine interest rates and money supply. If GDP is growing too fast, they might raise interest rates to slow growth; if it’s shrinking, they might lower them to stimulate growth.
Nominal GDP provides a snapshot of a nation’s economy without accounting for inflation, while real GDP adjusts the figure to account for price changes. However, there are many other factors that can influence growth other than adjusting for price changes. For instance, if GDP rises because a company hired more workers, that might boost the figure even though it doesn’t necessarily make the country wealthier.