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What GDP is and why it matters?

todayApril 28, 2023

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(NEW YORK) –The threat of a looming recession has heightened interest in the most commonly used measure of economic health: Gross domestic product, or GDP.

The metric commands attention as an all-in-one report card that signals whether the economy is awash in prosperity, mired in disaster or shuffling forward somewhere between the two.

While imperfect, GDP carries implications for real-world outcomes of everyday people, such as their risk of unemployment or dream of buying a first home, experts said.

Here’s what GDP is, why it matters and what critics says about it, according to experts:

What is GDP?

GDP is a measure of all the goods and services produced in a given economy, ranging from cars built in an auto factory to musicals staged on Broadway.

“It’s the sum of everything the country makes,” Luke Tilley, chief economist at investment firm Wilmington Trust, told ABC News.

“It’s everything from retail goods to services provided, like legal services, haircuts and movies,” he added.

As such, economists often invoke GDP as an indicator of the size and health of an economy, since large, bustling economies deliver greater output than smaller, idle ones.

Similarly, the change in GDP over time provides crucial information about whether an economy is growing or shrinking.

A positive change in GDP indicates that an economy expanded over a particular period, while a drop off in GDP shows that an economy shrank.

For instance, if the GDP for the first three months, or quarter, of the year is larger than the GDP over the ensuing quarter, then growth slowed.

Many observers define a recession through the shorthand metric of two consecutive quarters of decline in a nation’s inflation-adjusted GDP.

“You can tell if the economy is improving or not,” Tilley said. “GDP going up means there’s more likely to be job growth and improved wellbeing.”

Why does GDP matter?

GDP is significant because it offers insight into the bedrock activity level upon which all economic outcomes depend, Mark Zandi, chief economist at Moody’s Analytics, told ABC News.

“GDP is the value of all of the things that go into driving incomes and stock prices and home values,” Zandi said. “It’s the fountain of economic growth.”

The presence of such output in turn enables a given material quality of life, said Tilley, of Wilmington Trust.

“It means that there’s more stuff out there for people to avail themselves of,” Tilley said.

“All other things being equal, a country that has a higher GDP is thought to have a better standard of living,” he added.

The trend in GDP also helps workers and consumers gauge the health of the economy, informing decisions about their savings, job prospects and other major life choices, experts said.

“It’s the bottom line for the economy,” Zandi said.

What do critics of GDP say?

Critics of GDP often say that the measure is either too comprehensive to accurately reflect the inner workings of the economy, or not comprehensive enough to account for aspects of life that exist beyond economic output.

Inevitably imprecise, GDP tries to assess value across vast and diverse economic offerings, Zandi said.

“It covers everyone from the person cutting your lawn to the investment banker merging your companies to the automaker making your car,” he said. “It gets pretty complicated, pretty fast.”

“It’s our best attempt at measuring something that’s very difficult to measure,” he added.

On the other hand, some critics point out that the ostensibly comprehensive metric excludes a host of relevant activities.

GDP fails to measure unpaid work such as housework or care for a family member, Nancy Folbre, a professor emerita of economics at the University of Massachusetts Amherst, told ABC News.

On top of that, the data point omits the harmful effects of some economic output, such as environmental degradation, she added.

“Everybody likes a simple scorecard,” Folbre said. “A simple scorecard is misleading.”

Copyright © 2023, ABC Audio. All rights reserved.


Written by: ABC News

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