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What Is GDP, and Why Is It Important?


Wednesday, March 27, 2019

Updated Sept. 1, 2020

By Doreen Fagan, Public Affairs Staff

U.S. real GDP (gross domestic product) makes a lot of news. But what is GDP, specifically? And why do policymakers, economists and businesses alike watch it so closely? 

GDP as a Measure of Economic Well-Being

GDP serves as a gauge of our economy’s overall size and health. GDP measures the total market value (gross) of all U.S. (domestic) goods and services produced (product) in a given year.

When compared with prior periods, GDP tells us whether the economy is expanding by producing more goods and services, or contracting due to less output. It also tells us how the U.S. is performing relative to other economies around the world.

Economic growth rates are monitored closely, which is why GDP is often reported as a percentage. Reported rates are typically based on “real GDP,” which is adjusted to eliminate the effects of inflation.

Textbook Definition of GDP

In current dollars, U.S. GDP now measures about $21 trillion (PDF)—a tidy sum. But what’s included in GDP? To help break down the number, we can look at the textbook formula for measuring it, where: C + I + G + (X-M) = GDP

Expenditure Components of U.S. GDP
C is Personal Consumption Expenditures Also known as consumer spending, or the tally of all goods and services that consumers buy—from grocery items to health care coverage.
I is Gross Private Investment Includes business spending on fixed assets such as machinery, equipment and buildings, plus inventory investment; also incorporates consumers’ home purchases.
G is Government Purchases Comprises federal, state and local government spending for the provisioning of goods and services—from schools and roads to national defense.
X-M is Exports minus Imports Or, net exports: 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.)
Federal Reserve Bank of St. Louis

This chart shows the contribution of each component to GDP going back to 1947. The U.S. Bureau of Economic Analysis (BEA) is the statistical agency charged with compiling the data used by FRED. These data are collected by government agencies and supplemented by trade associations, businesses and other sources.

FRED® is the St. Louis Fed’s signature economic database. It houses more than a half-million data series and is free for use worldwide.


What’s Not Included in GDP?

There are several transactions that take place every day but aren’t 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

Why GDP Matters

Policymakers, government officials, businesses, economists and the public alike rely on 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.

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.

Economists study GDP and related statistics to help inform their research.

For more details, you can read the BEA’s primer on GDP (PDF).


Additional Resources

ABOUT THE AUTHOR
Doreen Fagan 

Doreen Fagan is a senior content editor with St. Louis Fed Public Affairs.

Tagged doreen fagangdpgross domestic productmacroeconomicsimportsexportsfredwhy gdp matters