Gross domestic product (GDP) is the total monetary value of all finished goods and services produced within a country in a given period. It is often used as a broad measure of economic health and may be adjusted for inflation to produce “real” GDP.
It is comprised of consumption, investment, government expenditures and net exports. Consumption, which includes everything from retail purchases to rent, is the largest component of GDP and grows as people spend more money. Investment, which is a type of private spending, is the second biggest component of GDP and grows when businesses invest in things like equipment or inventory. Government expenditures are the third biggest component of GDP and include items like military spending, salaries for public servants and construction projects. The final item of GDP is net exports, which are the difference between gross exports and gross imports.
While GDP is an important indicator, it is not without limitations. For one, it does not measure the quality of the goods and services being produced. For example, if a company spends more money on pollution control equipment, it will boost GDP, but this does not necessarily mean that the environment is cleaner or that people are healthier.
Another limitation is that GDP is based on recorded data and does not take into account the size of informal or unrecorded economic activity. This excludes the value of under-the-table transactions, black market activities and unremunerated volunteer work. It also does not take into account the depletion of natural resources or the cost of environmental damage.