An estimation of the total value of all goods and services that have been produced over a specified period, typically a quarter or a year, is the gross domestic product ( GDP). Its key usage is a point of reference: did the economy of the nation expand or contract in comparison with the previous period?

GDP can be measured by adding in a given time all the money invested by customers, companies and government.

It can also be measured by adding all the money that all economic participants earn.

In any case, the figure is a "nominal GDP" calculation.

When adjusted to reduce inflation-related impacts, "Real GDP" is disclosed.

There are two main methods of calculating GDP: by calculating expenditure or by measuring revenue.

And then there is a true GDP, an adaptation that reduces inflation's consequences so that the growth or contraction of the economy can be clearly seen.

One way to get to GDP is to count all the money invested by the various groups involved in the economy. This involve customers, corporations and public authorities. All pays for goods and services adding to the overall GDP.

Moreover, certain products and services of the nation are exported for sale in other nations. And some of the goods and services purchased are foreign imports. The GDP estimate accounts for both export and import expenditure.

Thus the total consumer expenditure (C) plus private capital (I) and government expenses (G), plus net exports is a country's GDP, which is total exports minus total imports (X – M).

The flip side of investment is sales. The calculation of GDP may therefore represent the total amount of tax paid to everyone in the country.

This estimate includes all the production factors that form an economy. It includes wages paid to work, rent on land, return on capital in the form of interest and the income of the entrepreneur. These all constitute national profits.

The need for modifications to certain products which do not always appear in the raw numbers complicates this method. These comprise:

Indirect corporate taxes such as sales and property taxes;

Depreciation, a measure of the declining value over time of commercial equipment;

Net foreign factor revenues, i.e. foreign payments made to residents of a country minus the payments made to foreigners by residents.

The GDP of a country is determined through this income method as national income plus indirect business tax, depreciation and net foreign factor income.

Since GDP calculates the production of an economy, it is inflationary. Prices usually rise over a period of time, and this is expressed in GDP.

A nation's unadjusted GDP can not tell you whether GDP has risen because of increased output and demand or increasing prices.

Real GDP is an indicator of an inflation-adjusted economy's production. Nominal GDP is the unadjusted figure.

Real GDP changes nominal GDP to represent the price levels in a reference year known as the "base year."

GDP is a significant figure showing whether an economy is rising or contracting. In the U.S., each quarter of the year, the Government publishes an annualised GDP estimate, followed by final estimates for each period1.

The monitoring of GDP over time allows a government to determine whether to boost the economy by pouring more cash into it or to cool it off by extracting capital.

Companies may use GDP as a factor to determine whether to extend, contract or pursue major projects.

Investors are monitoring GDP in order to get a feeling of the economy in the weeks ahead.

While GDP is a useful way of understanding the state of an economy, it is definitely not a perfect solution. One concern is that practises which are not part of the legalised economy have not been taken into account. Off-the-book income, some currency, drug trafficking and more are not part of GDP.

Another critique is that some useful operations are not GDP. For example, if you employ a maid to keep your house clean, a cook to cook food and a baby to take care of your children, you will pay the hired helpers, and the payments will contribute to GDP. If you do those jobs yourself, the GDP does not count your contribution.

GDP may thus provide a sense of the success of an economy over time, but does not tell the entire tale.

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