gross domestic product | Definition & Formula

Gross domestic product (GDP), total market value of the goods and services produced by a country’s economy during a specified period of time. It includes all final goods and services—that is, those that are produced by the economic agents located in that country regardless of their ownership and that are not resold in any form. It is used throughout the world as the main measure of output and economic activity.

In economics, the final users of goods and services are divided into three main groups: households, businesses, and the government. One way gross domestic product (GDP) is calculated—known as the expenditure approach—is by adding the expenditures made by those three groups of users. Accordingly, GDP is defined by the following formula: GDP = Consumption + Investment + Government Spending + Net Exports or more succinctly as GDP = C + I + G + NX where consumption (C) represents private-consumption expenditures by households and nonprofit organizations, investment (I) refers to business expenditures by businesses and home purchases by households, government spending (G) denotes expenditures on goods and services by the government, and net exports (NX) represents a nation’s exports minus its imports.

The expenditure approach is so called because all three variables on the right-hand side of the equation denote expenditures by different groups in the economy. The idea behind the expenditure approach is that the output that is produced in an economy has to be consumed by final users, which are either households, businesses, or the government. Therefore, the sum of all the expenditures by these different groups should equal total output—i.e., GDP.

Each country prepares and publishes its own GDP data regularly. In addition, international organizations such as the World Bank and the International Monetary Fund (IMF) periodically publish and maintain historical GDP data for many countries. In the United States, GDP data are published quarterly by the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce. GDP and its components are part of the National Income and Product Accounts data set that the BEA updates on a regular basis.

When an economy experiences several consecutive quarters of positive GDP growth, it is considered to be in an expansion (also called economic boom). Conversely, when it experiences two or more consecutive quarters of negative GDP growth, the economy is generally considered to be in a recession (also called economic bust). In the United States, the Business Cycle Dating Committee of the National Bureau of Economic Research is the authority that announces and keeps track of official expansions and recessions, also known as the business cycle. A separate field within economics called the economics of growth (see economics: Growth and development) specializes in the study of the characteristics and causes of business cycles and long-term growth patterns. Growth economists doing research in that field try to develop models that explain the fluctuations in economic activity, as measured primarily by changes in GDP.

GDP per capita (also called GDP per person) is used as a measure of a country’s standard of living. A country with a higher level of GDP per capita is considered to be better off in economic terms than a country with a lower level.

GDP differs from gross national product (GNP), which includes all final goods and services produced by resources owned by that country’s residents, whether located in the country or elsewhere. In 1991 the United States substituted GDP for GNP as its main measure of economic output.