The term GDP (or gross domestic product) is used globally as the primary measure of a country’s economic productivity. It represents the market value of all final goods and services produced within a country in a given period. The Bureau of Economic Analysis reports on GDP every quarter in the United States, and analysts look to quarterly and annual growth rates for insight into the health of the economy. Governments use the numbers when planning budgets, central banks use them when setting monetary policy, and businesses make decisions about hiring, expansion, and investments based on the trends evident in GDP data.
GDP encompasses all final goods and services—that is, those that are sold or consumed at the point of production, regardless of who owns them. For example, an engineering company that produces custom machines for a client would count as GDP, but a baker who bakes bread for his own family does not (although the ingredients purchased may do so). The calculation of GDP involves estimating market exchange rates and comparing it to Purchasing Power Parity (PPP) exchange rates when making cross-country comparisons.
The PPP methodology adjusts the market exchange rate to account for differences in price levels between countries. This makes real GDP more comparable across countries, and is sometimes reported alongside nominal GDP in order to provide a more accurate picture of the economy. Another way to understand a nation’s economy is to look at its GDP per capita, which provides insight into the level of productivity per person in the country.