A large GDP, or gross domestic product, is an indicator of economic growth and health. Growth of GDP is desirable to workers and businesses, especially if inflation is not an issue. If the GDP growth rate shrinks, the economy is considered to be performing poorly.
GDP gauges the monetary value of goods and services that are produced and change hands in a country within a given period of time, such as three months, six months or one year. The measure also considers nonmarket output, such as defense and education services offered by the government.
However, there are some economic activities the GDP does not depict because they’re difficult to measure, such as unpaid service at home or work by volunteers and underworld market activities. While producing bread for sale contributes to GDP, baking the same at home for personal consumption does not. The purchase of home-baking ingredients contributes to GDP, however.
There are three ways to understand GDP: the production approach, which calculates value-added on production by deducting costs of inputs from total sales of the final product; the expenditure method, which sums up the value of consumer purchases, such as food, electronics and medical services; and the income approach, which adds up income generated via production, such as employee earnings.