What Is GDP, and Why Is It Important?

March 23, 2022

This post was originally published March 27, 2019. This update includes an interactive explainer of what is included in GDP.

One of the most talked about economic indicators for the U.S. is real GDP (gross domestic product). Maybe you’ve heard growth rates or projections for real GDP cited in the news. Or maybe you’ve heard references to the level of real GDP now compared with earlier periods (like before a recession).

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

So, what’s included in GDP? Click through this interactive graphic to explore.

WHAT’S INCLUDED IN
GDP?
 
GROSS
DOMESTIC
PRODUCT

GDP measures the total market value of all U.S. goods and services produced in a given year.

It’s made of four parts.

PERSONAL CONSUMPTION
EXPENDITURES

The total amount of consumer spending for things like groceries, haircuts, bicycles and doctor visits.

GROSS PRIVATE
INVESTMENT

Business spending on things like machinery, equipment and buildings; also includes consumers’ home purchases.

GOVERNMENT
PURCHASES

Federal, state and local spending on goods and services—from schools and roads to national defense.

EXPORTS MINUS
IMPORTS

The value of exports of goods and services to other countries … minus the value of imports to the U.S.

WHY DOES GDP MATTER?

Policymakers, government officials, businesses, economists and the public alike rely on GDP and related statistics to help gauge how the economy is doing and to make informed decisions.

LET’S EXPLORE…
SWIPE FOR MORE
GDP
C
I
G
X-M

In current dollars, U.S. GDP measured about $23 trillion in 2021 (PDF)—a tidy sum. To help break down this number, we can take a closer look at the textbook formula for measuring U.S. GDP shown in the graphic above: 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.)

The following chart shows the contribution of each component to GDP from 1947 to the end of 2021.Editor's note: 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. 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 800,000 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).

1 Editor's note: 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.

About the Author
Doreen Fagan
Doreen Fagan

Doreen Fagan works in External Engagement and Corporate Communications at the St. Louis Fed.

Doreen Fagan
Doreen Fagan

Doreen Fagan works in External Engagement and Corporate Communications at the St. Louis Fed.

This blog explains everyday economics, explores consumer topics and answers Fed FAQs. It also spotlights the people and programs that make the St. Louis Fed central to America’s economy. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.


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