What Is GDP, and Why Is It Important?
One of the most talked about economic indicators for the U.S. is real GDP, short for real gross domestic product. Maybe you’ve heard growth rates or projections for GDP cited in news reports or on social media. Or maybe you’ve heard references to how GDP is performing now compared with earlier periods.
But what is GDP, specifically? And why do policymakers, economists, businesses and the media watch it so closely?This post, originally published March 27, 2019, has been updated with an interactive explainer of what is included in GDP and additional information on how it is measured and why data are estimated and revised.
The short answer is, GDP serves as a gauge of the American economy’s overall size and health. The U.S. Bureau of Economic Analysis—known as the BEA—measures the total value (including depreciation, or gross value) of all final U.S. (domestic) goods and services produced (product) in a given year. If you want a key indicator for how well the economy is doing, GDP is one way to go.
What Is Included in GDP?
Formula for Gross Domestic Product Calculation
In current dollars, U.S. GDP measured about $31 trillion at the end of 2025, according to the BEA, the statistical agency charged with compiling the data. To break down this number and understand what’s included in GDP, let’s look at the textbook formula for measuring it. GDP is made up of four parts:
C + I + G + (X - M) = GDP
Expenditure Components of U.S. GDP
As St. Louis Fed Economic Education Assistant Vice President Scott Wolla explains, the typical textbook treatment of GDP is the expenditure approach, where spending is categorized into the following buckets:
- C is Personal Consumption Expenditures: Also known as consumer spending, this is the tally of all goods and services that consumers buy—from grocery items to health care coverage.
- I is Gross Private Domestic Investment: This includes business spending on fixed assets such as machinery, equipment and buildings, plus inventory investment. It also incorporates consumers’ home purchases.
- G is Government Purchases: This comprises federal, state and local government spending for the provisioning of goods and services, from schools and roads to national defense. The technical name is government consumption expenditures and gross investment.
- X-M is Exports minus Imports: Also known as “net exports of goods and services,” this is the value of exports to other countries minus the value of imports into the U.S. The dollar value of imports is subtracted to ensure that only spending on domestic goods is measured in GDP.
Keep in mind that gross means total before any subtractions are made, such as depreciation: wear and tear on machinery, buildings and other capital goods used in production.
Interactive Explainer of GDP with Examples
The interactive graphic below walks you through real-life examples of each of the four GDP factors.
Interactive Chart of GDP Components
The following chart from St. Louis Fed online database FRED shows the contribution of each component to GDP from 1947 to the presentWhen using real—or inflation adjusted—series, as shown in the chart, the components may not add up perfectly to the level of GDP. The difference is known as the GDP residual. using data from the BEA. These data are collected by government agencies and supplemented by trade associations, businesses and other sources.
What’s Not Included in GDP?
There are several transactions that take place every day but are not calculated in GDP, including:
- Sales of goods produced outside the U.S.
- Sales of intermediate goods used to produce other final goods
- Sales of used goods
- Purely financial transactions, such as buying stocks and bonds
- Transfer payments, such as Social Security, Medicare and unemployment insurance
- Volunteer services, and the value of services that stay-at-home parents provide to children
How GDP Is Reported
Expressed as a “Real” Value
Reported rates are typically based on real GDP, which simply means adjusted for inflation. In economics, the term “real” is used to distinguish from “nominal” (unadjusted for inflation) values.
This Federal Reserve Education video explains why this distinction matters: If GDP were $20 trillion at one point and then $22 trillion at a later point, you might think the economy grew by 10%. But as the video explains, there’s a good chance that prices changed over that time span. So, you need to account for changing prices to discover how much of that increase in GDP was due to higher output.
Shown as a Growth Rate
While GDP can be expressed as a dollar value, it is commonly reported as a percentage to reflect the rate of change in economic growth. The BEA computes real GDP growth rates for each quarter of the year.
Real GDP growth is commonly shown at an annual rate to make it easier to compare growth rates between quarters, as the BEA explains in its FAQs. A quarterly percent change at an annual rate shows what the percent change would be if the quarterly rate continued for four quarters. (This is computed by compounding the quarterly rate for four quarters.) In his data primer, FRED Economics Champion Diego Mendez-Carbajo notes that “a compounded annual rate of change accounts for the cumulative change in economic activity over time, allowing us to compare real GDP growth figures throughout the year.”
Seasonally Adjusted
The BEA says that, for a better comparison, GDP data are seasonally adjusted to remove the effects of yearly patterns. St. Louis Fed Economist Michael Owyang and former research associate Hannah Shell explain that predictable variations in economic data like GDP can be caused by:
- Weather, such as people going out less in colder months
- Regularly timed events, such as summer vacations and winter holidays
- The seasonal nature of production, such as agriculture
Where You Can See the Latest GDP Data
You can always find the latest gross domestic product values in FRED, the free online database from the St. Louis Fed! The short video below featuring the FRED team’s Diego Mendez-Carbajo walks you through step-by-step instructions for accessing GDP data in FRED:
- Browse Data by Releases and pick Gross Domestic Product.
- Start with Section 1, “Domestic Product and Income,” which has the headline GDP indicator.
- Click Table 1.1.1., “Percent Change from Preceding Period in Real Gross Domestic Product.”
- If you pick Quarterly, you will see the most recent GDP data.
In FRED, you can choose to view this as an interactive graph. U.S. GDP growth rates go back all the way to 1947 in FRED—pretty cool, right?
Why GDP Is Used as a Measure of Economic Performance
GDP serves as a gauge of our economy’s overall size and health. The BEA calls GDP the signature piece of its National Income and Product Accounts. It can tell us how the U.S. is performing relative to other economies around the world.
When compared with prior periods:
- GDP can tell us whether the economy is expanding by producing more goods and services.
- GDP can also indicate whether the economy is contracting due to less output.
Who Pays Attention to GDP?
St. Louis Fed economist Mark L.J. Wright notes that GDP is one of the primary measures that economists use to track the performance of the U.S. economy. Policymakers, government officials, businesses, analysts and the public alike use GDP and related statistics to help assess the economy’s well-being and to make informed decisions.
- Policymakers will look to GDP when contemplating decisions on interest rates, tax and trade policies.
- Economists study GDP and related statistics to help inform their research.
- Businesses and workers take note of GDP because the pace at which our economy is growing affects business conditions and investment decisions, as well as whether workers can find jobs.
- State and local governments rely on GDP and similar statistics to help shape policy or decide how much public spending is affordable.
Does Negative GDP Indicate a Recession?
The St. Louis Fed’s Michael Owyang and Brooke Hathhorn explain that two consecutive quarters of negative real GDP growth is a popular “rule of thumb” to define a recession; however, that’s not the official definition. The National Bureau of Economic Research (NBER) Business Cycle Dating Committee—widely recognized as the arbiter of U.S. recession dates—uses several economic data series in addition to GDP to determine business cycle turning points and to make the ultimate call on a recession.
You can see the data considered for NBER turning points on this FRED dashboard. These data series include nonfarm payroll employment, real personal consumption expenditures (consumer spending), industrial production, real GDP, and more.
Understanding Changes in GDP Data
Advance Estimates and Revisions
Why do we often hear that previously reported GDP numbers have changed? The BEA estimates GDP data for a given quarter three times: early with an “advance” estimate—using the best information available at the time—and then with a second and third estimate to improve accuracy as additional source data become available.
Additionally, annual revisions are conducted by the BEA along with comprehensive updates.
Why are there multiple GDP data revisions? St. Louis Fed economist Christian Zimmerman explains that “GDP is supposed to measure all economic activity of a country, but of course not all activity is well monitored. So one has to work with proxies and estimates based on various indicators and surveys. Those efforts take time, and GDP estimates must be corrected after they’re first released.”
And FRED Data Champion Mendez-Carbajo notes that high-quality data make for good decision-making, so the time and energy data providers spend to improve their data benefits everyone.
Want to keep track of how GDP estimates change? FRED’s data sibling, called ALFRED (short for Archival Federal Reserve Economic Data) has the details. Every time a new version, or “vintage,” of a data series is released, FRED displays the latest version, and the replaced version is archived in ALFRED. For example, this ALFRED graph compares two vintages of GDP.
Economic Forecasting
For analysts seeking to forecast economic data, revisions are a well-known factor they contend with.
St. Louis Fed economist Michael McCracken points to the trio of GDP estimates as an example of challenges forecasters face. GDP growth is hard to forecast even when the economy is performing well, he says, since measuring GDP is difficult and the horizon for accurately forecasting GDP growth isn’t very long: “If you can forecast two, maybe three, quarters ahead more accurately than just the historical mean, you’re doing well,” McCracken explains.
Other Measures of U.S. Economic Performance
Gross domestic product is the expenditure measure of domestic economic activity—the value of and demand for U.S.-produced final goods and services. A FRED Blog post adapted from The BEA Wire gave that definition.
The post also explained that although GDP is a leading statistic for measuring U.S. economic performance, it is not the only one.
- Gross domestic income (GDI) is the income measure of domestic economic activity. It reflects the income generated from producing goods and services.
- Gross value added (GVA) is the production measure of domestic economic activity. It reflects the supply of production from U.S. industries.
Just like GDP, you can find these data series in FRED!
Editor’s Notes
- This post, originally published March 27, 2019, has been updated with an interactive explainer of what is included in GDP and additional information on how it is measured and why data are estimated and revised.
- When using real—or inflation adjusted—series, as shown in the chart, the components may not add up perfectly to the level of GDP. The difference is known as the GDP residual.
This blog explains everyday economics and the Fed, while also spotlighting St. Louis Fed people and programs. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.
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