Few numbers are more important to business leaders, investors, and policymakers than gross domestic product (GDP), the monetary measure of a nation’s economic output. A nation’s GDP shows how large its economy is and, compared with past data, whether it is growing or shrinking. The White House and Congress rely on GDP to make budget decisions, and the Federal Reserve uses it when planning monetary policy. State and local governments use GDP to plan spending and tax policies, and businesses use it to decide where they might expand or invest their money.
While GDP is a useful metric, it doesn’t tell us everything we need to know about a country’s economic health. For example, rapid GDP growth can impose social costs such as increased environmental damage or income disparity. GDP also doesn’t account for the value of underground or unrecorded economic activity such as black market transactions, under-the-table employment, or volunteer work.
The United Nations computes a Human Development Index that ranks countries not just on material production but also on factors such as life expectancy and literacy. The World Bank also publishes a Global Development Index that takes into account both the distribution of wealth and the environmental impact of a nation’s economy.
Governments collect GDP data from a variety of sources, including surveys of households and companies, reports of retailers and manufacturers, and trade flows. Most governments follow an international standard contained in the System of National Accounts published by the International Monetary Fund, the European Commission, and the Organization for Economic Cooperation and Development. GDP can be calculated using the expenditure, income, or value-added approaches.