GDP measures the value of all the goods and services produced by a country in a year. It includes consumer spending, business investment, government spending, and net exports. The number is often compared from one year to the next to see if the economy is growing or shrinking. The number can be adjusted to account for inflation, which makes it easier to compare economies over time. This is called real GDP.
Economists use a process called a price deflator to adjust the numbers to take into account inflation over time. This allows us to see if the increase in GDP is because more is being produced or just because prices are rising. The numbers are also adjusted to exclude non-market activities, such as bartering and volunteer or unpaid work.
The Commerce Department’s Bureau of Economic Analysis (BEA) estimates GDP using three primary methods. Ideally, all three should yield the same figure. The advance release of GDP comes out four weeks after the quarter ends, and a final estimate is released about three months later.
In terms of methodology, GDP is calculated as the sum of all final private and government consumption, investment in machinery and buildings, and net exports. Final private consumption is the largest component of GDP, and it encompasses all purchases of goods and services by households and businesses, including the purchase of food, clothing, and haircuts. Investment is the sum of all capital goods purchased by firms, and net exports are the value of all a country’s foreign sales less the value of all its imports.