GDP measures the monetary value of all final goods and services—those that are purchased by consumers, businesses, or other organizations—produced within a country in a certain period. It includes all market and nonmarket production within the country’s borders, including defense production and government-provided social services. GDP is an important measure of economic performance because it reflects the total amount of money that is being circulated in the economy, and changes to it are often a good indicator of broader economic trends.
There are several ways to calculate GDP, all of which should, in theory, give the same result. The most common is the “production method,” also known as the “value-added” approach. This approach calculates the gross domestic product at each stage of production by adding up all the values produced and subtracting the cost of materials, supplies, and services. It then multiplies that figure by the market price of each unit.
It leaves out some types of work, including household production, bartering, and unpaid volunteer work. It also fails to take into account the effect of quality improvements or the introduction of new products, as these are not reflected in prices and can be difficult to measure accurately.
GDP is calculated and reported on a quarterly basis by countries and international organizations. The release of the advance estimate—the first calculation of GDP for a quarter—is usually a big news item that moves markets. Other estimates use different methodologies, and revisions to the advance estimate can occur through a number of sources, including rescaling and incorporating new data and information.