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What does the GDP, gross domestic product, measure?

Gross Domestic Product measures the total amount of economic activity in a given year. The calculation of GDP is meant to measure the total amount of production and consumption of goods and services, as well as imports and exports. Although GDP is a rough guide to estimate economic activity in a given year, it is most useful for terms of comparison over discreet periods of time. Economists and policymakers are constantly revising their projections of GDP before and after the so-called "final results" are tabulated, so although GDP projections are used to guide economic policy, many policymakers prefer to use specific components of GDP, such as existing and used home sales, core inflation (CPI), payroll data, consumer spending, or surveys from the Institute of Supply Management, which measures factory orders and inventory buildup. All of these measurements, plus many, many more, are added together in order to calculate total GDP.

Therefore, GDP is most useful as a tool to chart the growth or contraction of a country's economy and the various segments of that economy over a period of time. GDP is generally measured in terms of total output in a particular currency, such as dollars in the United States, as well as in percentages of growth or contraction. During a recession, annual GDP will often be expressed as "minus" a certain percentage (for example, a contraction of 1.3 percent), while during an economic expansion, GDP is most often reported as "plus" a certain percentage, as in, "GDP grew last year at an annualized rate of 2.2 percent." Although GDP is useful for measuring total economic output, it does not does measure the economic reality facing individuals, nor does it attempt to. Rather, GDP is a macro, bird's eye view of the economy.

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