Gross domestic product, or GDP, represents the total dollar value of all goods and services produced in a country in a given period. GDP is often used to track the growth of a country’s economy. Officials associate the number with prosperity when it is high. GDP helps to identify a society’s standard of living and income; it is an accepted measure of productivity in a society. In the most general sense, GDP is an indication of the size of a country’s economy.

GDP can be measured via the expenditure approach or the income approach. Both ways identify the value of the output of all goods and services produced within a country. By using either approach, a country can understand the entirety of what is purchased and the final output of goods and services. Both numbers will be roughly the same.

The income approach uses the national income to identify GDP. It calculates GDP by collecting data on all income from all factors of production in an economy (wages paid to labor, rent from land, the return on capital from interest, entrepreneurs’ profits, and so on).

In the expenditure approach, the following formula can be used to calculate GDP:

C + G + I + (X – M) = GDP

In this formula, C represents private consumption or consumer spending, G represents government spending, I represents the sum of all the country’s investments, X represents a nation’s exports, and M its imports. GDP increases when a country has a positive trade balance or surplus. However, GDP decreases when a country spends more money importing goods and products than it makes exporting goods and products, which leads to a trade deficit.

There have been conflicting studies on whether or not GDP actually measures economic success. Factors such as double counting and inflation (which is subtracted when measuring “real GDP”), along with the difficulty of obtaining accurate measures of all goods and services, highlight the problems with this method. Gathering all the statistics to properly measure GDP becomes challenging and does not account for other aspects of an economy, such as the standard of living, or the degree of wealth and material comfort available to a person or community. Therefore, when using GDP to measure success, countries must be aware of its limitations.

GDP can be one way to calculate the economic success or growth of a country, but it should be used in conjunction with other measures in order to get the complete picture of a society’s economy.