The US Commerce Department has called its tracking of the gross domestic product, or GDP, its greatest statistical achievement of the 20th century.
Many economists, while they may not heap such high praise on the GDP project, tend to rank it among the most influential measures they track. Why? GDP is intended to encapsulate everything a nation's economy produces within its own borders in a given year into a single dollar value.
In the case of the United States, this turns out to be a titanic dollar value. The world's perennial leader in total GDP produced an estimated $13.2 trillion in goods and services within its borders in 2006, more than three times its closest competitor, Japan.
How is such a huge number compiled? On the face, it's pretty simple.
Elements of GDP
An arm of the Commerce Department, the Bureau of Economic Analysis, calculates the nation's total economic production by adding consumption, investment, government purchases and net exports to get the total GDP.
What do those terms mean?
Consumption, which is perennially the largest and most stable segment of the economy, includes all consumer purchases of durable and nondurable goods, along with expenditures on services.
Investment accounts for dollars spent by businesses and households to buy fixed assets-such as plants, machinery and equipment - or to increase their inventories.
Government purchases include everything the government buys, excluding welfare, unemployment payouts and other transfer payments (because those dollars are presumably spent or saved by the people who receive them).
Net exports equal the value of the nation's total exports minus the value of its total imports - a calculation that is intended to limit the overall GDP to only the value of goods produced within the country's borders.
That last distinction highlights the point where gross national product, or GNP, differs from GDP. GNP, which was used as the nation's main measure of total activity until 1991, also includes income earned by Americans from work or investments abroad. Another way to think of it is that GDP is a measure of the total economic activity within the country's borders, while GNP is a measure of the total economic activity of the country's citizens.
Putting It Together
Gathering all of that information, of course, is complex, involving teams of government economists and statisticians who glean data from tax collections, industry reports and a host of other sources to come up with their quarterly GDP totals. The end result may be nothing more than an estimate. For instance, the total value of new autos sold in most years is calculated by multiplying unit sales by the average list price per auto, adjusted for average option prices, transportation charges, sales taxes, dealer discounts and rebates.
Still, it's the best estimate we have of overall economic activity in any given year. Thanks to international conventions adopted in 1993 for gathering and calculating the data, it's possible to compare gross domestic products among most of the world's nations with a fair degree of confidence that the same activities are being measured.
So what does it all mean?
Gross domestic product, adjusted for inflation, also known as "real GDP", can tell economists whether the American economy is growing or contracting from year to year or from quarter to quarter, a key determinant in deciphering whether the economy is expanding or in a recession.
Internationally, gross domestic product adjusted for some benchmark, usually the US dollar, is a good indication of whether a nation's economic output is increasing or shrinking relative to other nations of the world.
An adjusted calculation of any country's real GDP divided by its population, known as "real per capita GDP", is one of the best, if crude, methods of measuring whether the economic standard of living is rising or falling for that country's people over any given time.
