Gross domestic product
What is Gross domestic product?
Gross domestic product, or GDP, is the market value of final goods and services produced within an economy during a stated period.
What GDP measures
GDP measures production inside a country's borders, regardless of who owns the productive assets. It counts final output to avoid repeatedly counting intermediate inputs. Statistical agencies estimate nominal GDP at current prices and real GDP after removing measured price changes. Real growth is therefore more useful for comparing the volume of activity through time, while nominal GDP describes the current-money scale of the economy.
Three ways to view it
Production, expenditure, and income approaches describe the same economy from different sides, although estimates can differ because the underlying data are incomplete. The expenditure identity adds household consumption, business and residential investment, government purchases, and net exports. Transfers are not production when paid, but spending funded by them can enter GDP. Asset-price gains and sales of existing securities are also excluded.
Reading a release
Growth rates depend on whether data are quarterly, annual, annualized, or compared with the same period a year earlier. Initial releases are revised as fuller surveys arrive, so false precision is risky. Investors should inspect contributions, inventories, trade, domestic demand, and inflation measures instead of relying only on the headline. GDP per person can provide a different picture from aggregate growth in a rapidly changing population.
Portfolio relevance
Economic growth can affect revenue, defaults, employment, tax receipts, and policy expectations, but markets price anticipated growth before official GDP appears. A weak report can accompany rising equities if it is less weak than expected or encourages easier policy. Sector and country sensitivities differ, and multinational company earnings need not track the GDP of the exchange where their shares are listed.
Limitations and practical use
GDP is not a complete measure of household welfare, distribution, environmental cost, unpaid work, financial resilience, or sustainability. Cross-country comparisons require attention to currency conversion and purchasing power. Use several indicators, including employment, income, production, spending, and surveys, and preserve the vintage of data used in any backtest. Revised history must not be treated as information investors possessed in real time.
Also known as: GDP
Sources and further reading
- Gross Domestic Product, U.S. Bureau of Economic Analysis