GDP is an extremely important economic indicator that tells us a lot about a country’s economy. The White House, Congress, state governments and local municipalities use GDP numbers when planning budgets, taxes and investments. The Federal Reserve uses them when setting monetary policy. Businesses rely on GDP stats to guide decisions about expansion, hiring and investment. And investors, analysts and economists study GDP growth trends to see whether a nation’s economy is growing fast enough or needs a boost.
GDP includes all final private and public spending on goods and services within a given period of time. This excludes intermediate spending, such as buying auto parts for a car manufacturer to produce finished cars that are then sold to consumers. It also excludes some work that is produced for the benefit of a household, such as gardening, cooking or making clothes or furniture. It also doesn’t adjust for quality improvements or new products, which can significantly increase the standard of living.
GDP relies on recorded transactions and official data, so it cannot fully capture the value of informal or unrecorded economic activity. This can include things like under-the-table cash payments, black market activities or unreported volunteer work done for charitable, sporting or youth organisations. It also can’t measure the value of leisure time or household production, which are ubiquitous in every culture around the world. However, efforts are being made to improve the accuracy of GDP measurements by adjusting for these factors and by using other metrics to assess a country’s economic health and development.