Gross domestic product (GDP)

Gross domestic product counts output produced inside a country's borders, regardless of who owns the factories or where the workers come from. Two words in the definition do a lot of work. "Final" excludes intermediate goods — the steel sold to a carmaker is not counted separately, because its value already sits inside the price of the finished car — which prevents double counting. "Produced" excludes resale of existing assets: selling a used house or a share of stock does not add to GDP, though the broker's commission does.

The expenditure approach is the standard way to compute it: GDP = C + I + G + (X − M), where C is consumer spending, I is business investment, G is government purchases, and (X − M) is net exports. Consumer spending dominates in most developed economies. Because imports are subtracted, a country can grow output while net exports drag the total down.

The distinction between nominal and real GDP is essential. Nominal GDP is measured in current prices, so it rises when prices rise even if nothing more is produced. Real GDP adjusts for inflation using a price index, isolating actual changes in output. Growth rates are therefore quoted in real terms, and the commonly cited rule of thumb for a recession is two consecutive quarters of declining real GDP. GDP per capita — total output divided by population — is the usual proxy for living standards, since a large economy with a large population may still be poor per person.

GDP appears on both economics and securities exams. AP Macroeconomics tests it directly as the headline measure of economic performance, including the expenditure formula and the nominal-versus-real distinction. The SIE and Series 65 exams cover GDP as an economic indicator: you should know that it is a coincident (not leading) indicator, how it relates to the phases of the business cycle, and how the Federal Reserve weighs growth data when setting monetary policy.