What is gross domestic product, or GDP?

Gross domestic product (GDP) is used to estimate the size of an economy. It is calculated as the value of all goods and services produced in that economy. In the second quarter of 2024, US GDP rose 3.0% to $28.65 trillion.

How does GDP work?

The amount something contributes to GDP equals the difference between the value of the materials used in its production and the value of the final product. In other words, GDP is the amount of value added in the production process.

Imagine a simplified production process for a loaf of bread: Producing a loaf of bread requires the farmer who grows the wheat; the miller who turns it into flour, and the baker who transforms the flour bread. Counting the value of the wheat, flour, and bread separately overcounts the output of the activity, which is one loaf of bread. GDP calculations only measure the value of the final good or service and not the value of the intermediate steps to create a more accurate picture of what’s added to the economy.

Why does the US government track GDP?

The size of a nation’s GDP indicates its economic heft, and GDP growth or decline can be used as a measure of an economy’s health. GDP changes impact jobs, businesses, and investments. A growing GDP tends to indicate a productive economy, while a declining one is a common flag for economic recession. Measuring GDP across geographies and industries can be a useful tool for analyzing shifts in the economy, like the GDP growth in information technology during the rise of the internet in the 1990s.

Tracking GDP movement allows policy makers, journalists, and researchers to understand how quickly the economy is growing or shrinking. It’s used by government entities for planning taxes and spending, hiring, investing, interest rates, and trade policy.

When did the US begin measuring GDP?

American economists first identified a need for national measures of economic health and production during the Great Depression. Economist Simon Kuznets of the National Bureau of Economic Research (NBER) led the team that developed the first versions of this calculation.

In the US, GDP is calculated by the Bureau of Economic Analysis using data collected by both governmental and private sources, including the Census Bureau, Department of the Treasury, Federal Reserve, and Bureau of Labor Statistics, among others.

What drives GDP growth?

Four components contribute to GDP: Consumer spending on goods (products, like laptops and vegetables) and services (such as plumbers and hairdressers), business investments (like a farmer buying a tractor), government spending (on things like infrastructure or the military), and trade (net exports).

The largest component is consumer spending on both goods and services (68% of GDP), followed by investments (18%) and government spending (18%). Recently, trade has negatively impacted the national GDP because the US has imported more than it’s exported; imports are larger than exports by a margin of -3% of GDP.