Gross Domestic Product or GDP is a measure of the size of the economy, the total economic activity in a country. It is the most important indicator of how a country is doing financially for several reasons.
GDP is a very comprehensive indicator of economic health. While things like industrial output, wages and consumer spending are all important, these measures are partial, while GDP attempts to measure the entire economy.
There are three different ways of calculating GDP but they all lead to the same result. First, we can measure the value of goods and services produced in an economy. Second, we can measure the income received from producing goods and services. Third, we can measure how much is spent on goods and services. These three methods are explored in more detail in How GDP is Measured. Measuring any one of these ways would be a good way of getting an idea of what is going on in the economy, measuring three ways, and coming up with the same results, is proof that GDP is a very comprehensive and robust indicator of economic activity.
GDP is the internationally acknowledged indicator of how much a country is producing in a given year. While people may want to pick their own economic measure when they want to show how positively or negatively the economy is performing, GDP is well-defined, long-standing and generally accepted everywhere as an economic indicator for international comparison purposes.
It is calculated in the same way around the world and so allows comparison of the size of different countries' economies.
The definition is always the same from year to year (and quarter to quarter) so as GDP goes up or down, it indicates whether the economy is growing or shrinking, whether we are producing more or less, over time.
GDP is the best single indicator of how countries are doing economically. However, there are important things it does not measure.
Firstly, GDP is only an economic measurement. GDP does not tell us about the happiness, well-being or health of a country. It only measures activity that is paid for, all the voluntary activity in homes and communities is not taken into account.
Secondly, GDP does not take account of all the costs of economic growth, like environmental degradation or climate change.
Thirdly, GDP is a total for the country, it does not tell us about how the income from economic activity is distributed. So when GDP goes up the country as a whole might be better off, but the increased income may be shared by a few, leaving many the same as before, or perhaps worse off than before.
Fourthly, and this is particularly relevant for Ireland, the income from GDP may not stay in the economy at all: if an investor from abroad makes profit here, it is counted in our GDP, but then the money may leave the country and go to that investor abroad (see Globalisation and GNI).
So if you stop at GDP, you are missing a lot of important information, but if you want to summarise an economy in one figure, it is the best choice.
