Beginner1 min read

GDP: the most quoted and most misunderstood measure

The value of everything a country produces, and why growth matters more than the level.

What it includes

GDP adds up four things: what households spend, what businesses invest, what the government spends, and exports minus imports.

Consumption is usually the biggest — around two thirds in developed economies. That is why consumer confidence is followed so closely.

Only new production counts. The sale of an existing house does not go in; the agent's commission does, because that is a new service.

Nominal GDP grows even when the same quantity is produced but prices are higher. That is nearly useless.

Real GDP strips out inflation and shows whether more things were actually produced. That is the figure that gets reported and that matters.

When you read "the economy grew 2%", it is almost always real GDP, compared with the previous quarter or year.

GDP counts activity, not wellbeing. An earthquake that destroys a city raises GDP the following year, because rebuilding is new production.

It does not capture unpaid work at home, does not measure inequality, and does not subtract damage to the environment.

So it is a good measure of the size of an economy and a poor measure of how well people live.

GDP: Gross domestic product — the value of everything produced inside a country.
Real GDP: GDP after stripping out inflation — whether more things were actually produced.
Consumer spending: Household spending, the largest part of GDP in developed economies.

Prices rose by 5% and physical output stayed the same. What happens to real GDP?

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