The Short Form: What Is GDP and Why Should I Care About It?

Taxes
This is part of our educational blog series, “The Short Form,” to simplify tax issues and explore the world through the lens of tax policy. Learn more about taxes with TaxEDU.

Economists typically frame the impact of fiscal, monetary, and tax policies by talking about three main economic indicators: GDP, jobs, and wages.

It’s easy to understand why jobs and wages are important if you have a job and earn income: fewer jobs could put yours at risk or make a job search more difficult, and reduced wages mean less money in your wallet.

But GDP? That metric is more abstract.

What Is GDP?

GDP stands for gross domestic product and is a measure of how well a country’s economy is doing—a health check of sorts. It represents all the goods and services produced within a country, usually over one year.

GDP is calculated by measuring a country’s total consumption (buying of goods and services), government spending, investments, and net exports (the difference between the money a country earns selling to other countries and the money it spends buying from other countries). This measure also takes into account the size of the economy, population, and even inflation.

On the surface, this may seem irrelevant to you, the consumer and taxpayer, as you make purchases, save money, earn money, and make investments. But the state of gross domestic product can actually impact you directly.

Why Does GDP Matter?

When economists and lawmakers talk about a policy’s effect on GDP, it’s easy to ignore it as a political talking point. In reality, they are trying to convey the real-world effects of proposed or existing legislation.

At the most basic level, GDP, GDP per capita, and change in GDP (typically expressed as GDP growth) are ways to estimate the standard of living in a country. If GDP is growing steadily, that likely means that wages are growing, more jobs are available, and things are becoming more affordable.

Gross domestic product is not a perfect measure of living standards or the overall economy. Since a lot goes into the measurement of GDP, an increase does not always mean that the financial circumstances of everyone in the economy are improving. Nonetheless, it is the most effective metric available to gauge the status of the economy.

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