GDP measures the monetary value of all the final goods and services produced within a country in a given period (usually a quarter or a year). It includes market-based production and some nonmarket production, such as government spending on defense or education. However, it does not include any transactions in the black/grey market or unrecorded volunteer work, such as donating time to a charitable or sports/youth organization. GDP also ignores the value of imported goods and services, which must be subtracted since they are not part of domestic production.
C (consumption) represents private expenditures on goods and services, such as buying food, paying rent, or going to the movies. It also includes personal consumption of services, such as health care or hairdressing. Consumption is the largest component of GDP, and it tends to have a strong correlation with consumer confidence.
I (investment) is money spent by businesses on capital equipment, such as machinery. It can also be money spent on business improvements, such as expanding offices or upgrading computers. Business investment is a key driver of economic growth, and it often leads to higher productivity in the long run.
G (government spending) is the money a government spends on public goods and services, such as salaries for police officers and teachers, or military purchases. It does not include any transfer payments, such as unemployment benefits or social security.
Most countries release GDP data every month or quarter, and the Bureau of Economic Analysis in the U.S. releases a detailed analysis document with each quarterly GDP release. Economists use GDP to assess the overall health of a nation’s economy, understand economic cycles, and predict future growth. Policymakers, such as members of a country’s parliament or its central bank, use GDP to make decisions about spending, taxation, and interest rates. Businesses and investors also watch GDP to see if the economy is growing fast enough to create jobs or if it’s slowing down.