Gross Domestic Product (GDP): Definition, Types and Alternatives (2024)

Kelly Manley, PhDAssociate Professor of Economics at the University of North Georgia

Gross domestic product (GDP) gives us a picture or sense of the overall economy. GDP measures our economic output, typically over a specific period of time, like a month, quarter or year. When you see information about “real GDP,” know that in economics, the word “real” means “adjusted for inflation.” Therefore, real GDP is our growth for that period, with inflation factored out. That’s an important distinction because, just by using raw numbers, it could look like we’ve had growth when the numbers are actually higher just because the overall price level went up. The standard definition of a recession is two consecutive quarters of negative economic growth adjusted for inflation. While the government uses this data to determine fiscal and monetary policy actions, information about GDP can be useful to consumers, too. First, consumers who vote can use GDP data to help evaluate the economic plans of candidates running for public office. Second, being aware of GDP data can help consumers plan their finances. GDP data helps us see where we are in the business cycle and the natural ebb and flow of the economy. Having a macro sense of our economic performance can especially help with long-term planning and decisions such as buying a house, starting a business or selling and buying stock.

Typically, during economic downturns, businesses will pull back on things like expansion plans and lenders may tighten lending standards. These things can impact not only businesses but also consumers, particularly those who work in industries that are sensitive to downturns and recessions, like new home builders and others in real estate-related industries, luxury industries, travel and entertainment. Consumers who work in these industries should think about these historical ups and downs to have a sense of when they should be particularly attentive to secure financial planning habits like having adequate emergency savings and not carrying too much debt. With some financial planning (and some luck), consumers can time large purchases like automobiles and homes for times when deals may be more readily available and interest rates are lower. Practicing good credit habits to maximize credit scores can really pay off when lending standards tighten. Older workers should start planning for retirement decades ahead in terms of saving, but as they get closer to the typical retirement age, they begin to think about their ability to hold off on Social Security payments to maximize monthly benefits. Timing the start of Social Security payments to maximize benefits may not seem like a big difference when times are good. Still, the difference in payment amount can be critical when there is an economic downturn.

Abir MandalAssistant Professor of Economics at the University of Mount Olive

Absolutely. While GDP is a tool that economists use to measure the health of the economy, knowing its components and movements is important for consumers. Understanding GDP trends can help consumers anticipate economic shifts and adjust their spending habits accordingly. GDP growth also affects inflation, which is the general rise in economy-wide prices. When the economy expands rapidly, inflation can rise. Consumers who understand this connection can make informed decisions — for instance, adjusting their budget to account for rising prices. A growing economy often leads to job creation. Consumers benefit from a healthy job market with more employment options, higher wages, and job security. Many consumers are also small business owners. Understanding the business cycle may help them plan out capital investment decisions better. Last, the Federal Reserve uses GDP data to set interest rates. When the economy is overheating (high GDP growth), it may raise rates to prevent inflation. Conversely, they may lower rates during a slowdown to stimulate borrowing and spending. These rate changes impact mortgage, credit card and other borrowing costs, directly affecting consumers.

Raymond Sfeir, Ph.D.Director of the A. Gary Anderson Center for Economic Research and Anderson Chair of Economic Analysis at Chapman University

An average person would most likely feel helpless when a recession occurs, even if they knew about GDP. A laid-off employee cannot do much other than wait to be called back to work. Those who have some economic knowledge would realize that unemployment will increase during a recession, the stock market will most likely go down, housing prices might decline, and getting a loan to buy a car or a house becomes more difficult. So, those with some knowledge of the economy may navigate the circ*mstances a little better than others.

Unemployed people will have to use their savings to replace their salaries, and many will have to tighten their belts. A decrease in GDP means lower output. Businesses will produce less, and some will have to shut down. The profits of mom-and-pop stores will decline. Selling one’s house will take longer. Although inflation will moderate, it is not a consolation for those who lose their jobs.

Eric YoungSenior Instructor at the Department of Economics at Loyola Marymount University

Yes, while GDP can seem abstract and has obvious limits as a metric, every American citizen must understand the metric and how it is determined. Having a basic knowledge of GDP and what it does and doesn’t include can help the average citizen see the broader economy’s trends in relation to their own specific impressions and experiences. Understanding GDP also helps citizens judge if government policies are effective or harmful, trace the relative size of the consumer, business and government sectors as a proportion of overall American economic activity, and be better equipped to judge and consume financial media.An informed citizenry is a powerful citizenry.

GDP, as a proxy for the nation's economic health, relates to several factors that affect consumers' personal finances, including the size of labor markets (and, in turn, the potential for rising incomes), the price of homes, the value of investments and the potential direction of interest rates.

Dr. Maria Edlin KingDirector of the Tennessee Council on Economic and Free Enterprise Education at the Middle Tenessee State University

Having a basic understanding of the ways we measure the health of our economy matters! That understanding helps you to listen to the political rhetoric at all levels of government to determine if you are just being given a political party line to favor your vote or if you are hearing the "real" story of what is happening in the US economy. We sometimes calculate inflation using GDP data, so understanding how inflation, either country-wide or regionally, impacts your cost of living and investment growth allows you to adjust your spending patterns to grow wealth in good times and protect your wealth in times of economic downturn.

Understanding whether the GDP is up (or down) signals businesses when it's time to invest in more physical capital (expanding operations, buying equipment, etc.). For the average consumer, a great economic upswing (increasing GDP) means time to grow their wealth. At the same time, if the upswing in GDP leads to inflation, middle-income consumers often see some of their savings and ability to save eroded because of things like sticky wages (where wages are slow to react to changing economic conditions).

William Davis, Ph.D.Professor of Economics at the University of Tennessee at Martin

Nominal Gross Domestic Product (GDP) is the broadest measure of economic activity in an economy and is widely considered by economists to be the best overall measure of macroeconomic health. However, over time, nominal GDP must be indexed to the economy’s price level in order to measure changes in its purchasing power. The indexation converts nominal GDP to real GDP, which is considered a much better indicator over time of how much an economy has truly grown. Thus, when economists speak of economic growth, they are talking about the real GDP growth rate over some period, typically a year. The average person probably does not know much about GDP. An important thing for the average person to know is the difference between nominal GDP and real GDP. While the former can increase over time, the latter may, at the same time, decline because of the impact of higher prices. A growth rate of 2-3 percent per year in real GDP is a good sign the economy is performing well, meaning it is likely producing the goods and services people most prefer to buy and creating lots of good-paying jobs that yield a nice standard of living for the greatest number of people.

Changes in real GDP affect both businesses and consumers by helping them know what is happening currently in the economy and by allowing them to form expectations about what may happen in the future. In turn, these expectations help businesses make better decisions about investments for the future and help consumers make more informed decisions about future plans regarding major expenditures such as buying a house and/or a new car. Economic literacy of GDP and its implications is quite valuable for businessmen and women and for consumers to make better economic decisions throughout their lives.

Derek Stimel, PhDAssociate Professor of Teaching Economics at the University of California, Davis

Understanding GDP is important for the average consumer. GDP is a broad measure of economic activity, and many key things in the economy, such as labor market activity, average prices and policy responses that affect interest rates can be expected to change when GDP changes. When GDP is increasing, it will likely indicate that the labor market is improving, incomes are rising and spending or the ability of the average consumer to consume, will rise with it. Some negatives may occur, such as faster-rising average prices and possibly higher interest rates from monetary policy to go with it. That could mean increased credit card interest rates and overall increases in borrowing costs, affecting the ability to buy durable goods such as cars or home appliances. Still, the average consumer’s financial position should improve when GDP rises, despite any headwinds. Of course, the opposite will be true if GDP is falling.

Increases in GDP are associated with increases in wealth, such as financial wealth, such as the stock market or tangible wealth, such as home values. These improvements in consumers' personal finances would allow them to consume more. Businesses would likely see improvements in their profitability as well and have more resources for investment activities to expand their operations. Monetary policymakers may respond to increases in GDP by increasing interest rates, which may alleviate some of those wealth gains and improve the returns on saving generally. Falls in GDP would be associated with the deterioration of all the conditions mentioned above and lead to decreased interest rates as monetary policymakers seek to loosen credit conditions. It is also the case that labor market conditions are associated with changes in GDP, though often with a lag. If GDP is rising, we may expect jobs to be plentiful, along with opportunities to switch positions and improvements in compensation. Labor compensation is central to many consumers' financial situations. If GDP falls, then some consumers may find their labor market circ*mstances more tenuous and perhaps even lose their jobs. This will potentially cause a dramatic worsening of their financial positions.

Winnie Lee, Ph.D.Department Head and Director of Doctor of Economic Development (DED) Program, Department of Economics, Applied Statistics, and International Business and Professor of Economics at New Mexico State University

In plain English, Gross Domestic Product (GDP) is defined as an aggregated monetary sum of the market values of all final products (goods and services) produced in the domestic land of a country during a specific time period (e.g., a year). It is a macroeconomic concept illustrating an economy's status with respect to its employment level, how established its overall industries are in production and distribution and the functioning and climate of its overall business and investment environment. Unfortunately, the understanding and knowledge of the GDP concept and its components are often unequal among American consumers, as they may vary depending on where they are from or work across different sectors. In many cases, consumers with some business knowledge, training or practices may seem to understand the concept better. In contrast, others from another background may sometimes have challenges knowing what GDP is or what it does to a country. From a micro-level, an average consumer not understanding GDP may seem 'uncritical' or 'unharmful' as they just focus on the individual's or household's consumption, earnings and spending. However, it is essential to collectively have a good understanding of GDP from citizens of a broad base, which is believed to promote overall literacy of how an economy works so everyone produces and consumes in coordination to generate economic welfare to benefit all. As said in slang, 'One learning is harder for all betterment, while all learning is most certainly for all betterment!'

In theory, a high GDP creates high production, consumption, business growth and investment, which promotes economic growth, while economic growth increases (further) higher GDP. It is mutual causality — a two-way street! When business and economic growth occur, companies are rewarded with higher profits and are willing to pay higher wages to their employees, who then take more money home while increasing or improving their personal or household finances by spending more as consumers.

Kislaya Prasad, Ph.D.Research Professor at the Robert H. Smith School of Business, University of Maryland

A commonly used barometer of an economy's performance is the Gross Domestic Product or GDP. When the GDP grows quickly, an economy is generally thought to be doing well. When GDP growth slows down or declines, it is thought to be doing badly. Governments like to point to healthy growth rates and take credit, whereas parties in the opposition pounce upon GDP decline as evidence of the government's ineptitude. Of course, while government policies matter, the health of any economy depends upon a complex set of factors, many of which are beyond a government's control. So, what is GDP, and why does it matter to you?GDP measures the monetary value of final goods and services produced in a country over some time (typically a year). The value of intermediate goods and services is excluded so as to avoid double-counting. Thus, if a manufacturer of laptop screens sells them to another company that assembles and sells laptops to consumers for final use, the sale to the laptop manufacturer is not counted in GDP. However, the sale of a screen to a consumer (e.g., as a replacement for a broken screen) would be counted towards. So, GDP is a measure of the value of a country's final output. When the output is valued at prevailing, or current, prices at the time of sale, the value of the output is called the nominal GDP. Note that nominal GDP increases arise from an increase in output and an increase in prices. To make useful comparisons across time, one typically adjusts for price changes to arrive at what is called real GDP. This is the most commonly used barometer of an economy's aggregate performance.

Typically, when real GDP is growing fast, wages and incomes grow, and unemployment tends to be low. If the forecast shows fast growth, the business outlook tends to be good, with healthy sales forecasts. Businesses then invest in plants and equipment and increase hiring. The reverse is true when the forecast points to slow growth or a contraction in GDP. When an economy falls into a recession, GDP typically declines. A common misconception is that in the US, a recession is defined by a decline in real GDP for two consecutive quarters or more. In fact, the National Bureau of Economic Research’s Business Cycle Dating Committee determines whether the U.S. economy is in recession using broader indicators. Slow GDP growth is generally reflected in consumer sentiment, as people see a worsening outlook for wage increases and maybe even begin to fear layoffs. It makes sense in such a situation for households to reduce consumption and debt, increase savings and generally be prudent about finances. Paradoxically, this can make things worse for the economy as a whole. For households, as well as for businesses, the rate of growth of real GDP is a good guide for where the economy is headed.From an international perspective, investors will often look at a country's GDP growth rate when deciding where to invest. For instance, it could make sense for Ford to invest in a car factory in India if they forecast that real GDP will be growing fast. That typically translates into higher incomes for people living in the country and greater automobile demand. Clearly, other variables will also matter, such as regulations, rules on repatriation of profits, the quality of the workforce, etc. However, a country's real GDP growth rates will typically be an important consideration. There are some limitations to real GDP to keep in mind. First, it measures aggregate performance. So, China has a much larger real GDP than Denmark. To understand how it translates into standards, living economists will typically consider real GDP per capita (i.e., divided by the population). By this criterion, Denmark has a per capita real GDP that is more than three times that of China. The per capita real GDP is also imperfect as a measure of the welfare of a society because it disregards how the benefits of growth are distributed. For instance, if you looked at a <a href=" https://en.wikipedia.org/wiki/File:US_GDP_per_capita_vs_median_household_income.png" target="_blank">graph</a> showing the growth of per household real GDP in the US vs. one showing median household income, you would see a divergence, with median household income growing much more slowly. This reflects the growing inequality in the US. The real GDP also disregards a number of things that contribute to our happiness. All non-market activities are excluded (such as caring for children and older adults within families). Increases in GDP can also come at the expense of the degradation of the environment. Some of the most polluted cities in the world today lie in some of the fastest-growing economies, and the impact on health is a genuine concern. Real GDP is also imperfect for long-term comparisons because we are forever inventing new goods and services that improve life. However, so long as we keep its limitations in mind, real GDP is a useful barometer of the health of an economy.

Ernest Boffy-Ramirez, PhDSenior Researcher at The University of Denver's Colorado Evaluation and Action Lab

While no single measure can sum up the economy, understanding GDP and its workings can indeed benefit the average American consumer, even if the direct impact might not be immediately obvious in daily life. Along with other macro measures of employment, prices and interest rates, GDP is vital in reducing the cognitive load needed to understand a complex economic system. Simple mental shortcuts help us make informed financial decisions when we are faced with so many moving parts. For example, during periods of strong GDP growth, consumers may consider making major purchases or investments. They may also consider new job opportunities and take risks as businesses expand. Relatedly, consumers will also better understand fluctuations in local and state budgets that may or may not impact them.Perhaps more importantly, though, by knowing what factors drive GDP growth, consumers can also know what GDP does not tell us. For example, it does not provide insight into distributional concerns. A prudent consumer making financial decisions or planning for the future should care about what is driving growth, not just the growth rate — notably, is it consumption or investment? For example, by diving into the components of GDP, a consumer will better understand how global supply chain disruptions impact them personally.

Raphael Schoenle, Ph.D.Associate Professor of Economics at Brandeis University

Understanding GDP, its components, and its dynamics can be useful for understanding the health of the US economy and where it is going. Ultimately, aggregate economic performance (measured by GDP) is correlated with individual living conditions, not least through the level of prices or interest rates that consumers face, the performance of the stock market and the housing market or the provision of public goods. Given this information, consumers can make more informed decisions, for example, based on understanding how these factors are connected. Is it a good time to buy a house? Well, it depends on the economy and where it is going. Also, the information in GDP can be useful in other dimensions. For example, changes in GDP (which one has to be aware of) are related to changes in the labor market. However, the labor market usually moves with a lag. So, it is good for consumers to be aware of the state of the economy and possibly large changes that might affect them.

GDP is one indicator of the health of an economy. It complies with most other key economic variables that factor into business and personal finances and decisions by firms and consumers.

Dr. Linda LoubertAssociate Professor of Economics at Morgan State University

Most Americans are unconcerned with the Gross Domestic Product and probably don't even know what it is. It is not that they are illiterate; they have more practical things to be concerned with. Most Americans are too concerned with feeding their families and getting paid more to improve their standard of living. They have no connection to the idea that, as they buy, they support businesses that will make money to employ them. GDP is at the macro level, and most Americans live at the micro level of existence. Seeing beyond their daily needs is hard to do. Americans must be at a certain level of existence to look at the macro level to understand the interconnectedness of a society that grows (or shrinks) in all of its productions.

Craig SeidelsonAssociate Professor of Operations and Supply Chain Management at the School of Business, University of Indianapolis

Gross domestic product (GDP) is a measure of the total value of goods and services produced in a country. Policymakers use GDP data to gauge the effectiveness of tax cuts, stimulus spending, interest rates and trade policies. While GDP is clearly a key macroeconomic indicator, it also has relevance for companies and the average consumer. For instance, GDP growth may coincide with increased employment opportunities and higher wages, both of which can lead to more disposable income for companies and individual consumers to spend on goods and services. On the other hand, when GDP is declining, employment opportunities may be harder to come by. Wages may become stagnant or even fall, leading to less spending by companies and individuals. Therefore, GDP is an effective leading indicator for macro and microeconomic activity.

Tenpao LeeProfessor Emeritus of Economics at Niagara University

GDP is a macroeconomic concept that reflects aggregate consumer behaviors, while the average American consumer is a microeconomic concept that may not be consistent with the movements of GDP. GDP is calculated based on all consumers, but the average American consumer is only a very small portion of GDP. It may not feel a significant role in shaping GDP and may not feel positive about the movements of GDP.

Higher GDP means business is booming, and personal income is generally higher. By the same token, lower GDP means business is slow and lower personal income generally. However, not all sectors would move in the same direction simultaneously. Even with a higher GDP, some sectors may actually decline.

Amanda S. KingProfessor of Economics at Georgia Southern University

Yes, the average American consumer does benefit from the same knowledge. GDP measures the value of the output that is being produced in the economy. Therefore, it is also the value of total income in the economy. It is one of several measures of how well the economy is functioning and, as such, is often discussed in the media. Having an understanding of GDP and what it is measuring will help the average American understand how their economic opportunities may change and will aid them in making more informed decisions when it comes to voting and about the types of policy actions they may want to encourage their elected officials to consider.On a day-to-day basis, as production changes, the jobs available in the economy change, pay will change and the average American will be impacted. Understanding how this works is useful in understanding one’s own situation.

GDP measures the market value of output produced in the economy, and this translates to the overall level of income in the economy. As the economy grows (as measured by an increase in GDP), there should be more economic opportunities (better jobs, more hours of work available, better pay) available to consumers, and the opposite occurs as the economy shrinks (and GDP falls).

Vlad Dolgopolov, PhDAdjunct Lecturer of Finance, iMBA Program at the University of Illinois at Urbana-Champaign

Knowing how well the country is performing in a macroeconomic situation (for example, knowing that the GDP is growing at a relatively high or relatively slow rate) helps an average American consumer make better financial decisions. For example, if the GDP is growing at an anemic rate or even contracting, then an average consumer can make an educated guess that interest rates are likely to remain low. This, in turn, allows one to make better decisions about saving or borrowing money.If you know that the industry where you work is typically affected heavily by GDP increases or contractions, then you can make better decisions about your spending and making major purchases, especially if you rely on performance bonuses as a part of your compensation. Perhaps you might even decide to pursue a more stable government job if you expect another recession to come!Understanding the economy's overall macroeconomic performance can help consumers make better investment decisions. For example, if you expect an economic downturn, you might shift more of your savings from stock investments to cash investments, such as savings accounts and certificates of deposit (CDs).

Many industries' and businesses' performance metrics are heavily correlated with GDP — in some cases, positively, and in others, negatively. Understanding such correlations can help businesses plan better for both recessions and periods of fast economic growth in making decisions about hiring and letting go of employees, investing in research and development projects and borrowing and lending money. In turn, the businesses' performance cascades down to their employee compensation and the consumers' decisions about saving, spending and investing.

Malcolm Robinson, PhDProfessor of Economics at Thomas More University

I do think the average consumer would benefit from understanding GDP. First, many Americans think the stock market is the economy. Understanding how GFDP is constructed makes it clear that the stock market moves in mysterious ways and can often feel disconnected from the ups and downs of the economy. Secondly, GDP is both production and income; the more we produce, the more national income we have. Perhaps more importantly, it is necessary to know that when consumption is measured, it includes both domestically produced goods and imported goods. Imports are subtracted to leave domestic consumption alone to get a measure of domestic production and income. Some politicians have argued that, since imports get subtracted from GDP, we can raise GDP by reducing imports. If Americans understood how GDP is constructed, they would know this claim is nonsense.

A key idea in macroeconomics is that my spending becomes your income, and your income becomes my spending. So, the faster GDP grows, the faster incomes grow and the more likely it is that Americans will have jobs. Americans can then spend more and borrow less as the economy grows over time; a growing economy allows Americans to reduce their overall debt burden and save for the future. It is no wonder that, as the economy grows, Americans have tended to become more optimistic about the future. As Stevenson and Wolfers (2008) have demonstrated, a higher GDP per person leads to a happier economy. Perhaps part of this is the improvement in consumer personal finances that accompanies a growing economy.

Paul J. McCarthy IIIPresident at Kisco Capital

Consumer spending is a large part of GDP, so the average American participates daily. The strength of the economy is something they experience in their jobs and personal lives. So, consumers may not know the definition of GDP, but in essence, their spending patterns dictate its strength.

GDP reflects the strength of the economy, so it directly affects the revenues of companies and the salaries of workers.

Belinda RománAssistant Professor of Economics at St. Mary's University

A basic understanding of macroeconomics as economists see it and how it is used in policy decisions helps individuals better understand what all the data means. There are so many versions of the macro data in terms of how it is reported and discussed that knowing a little about the basic measures will help the American consumer better understand how important changes in interest are or how inflation hurts.

GDP is an aggregate measure, so it reveals aggregate trends. By this, I mean the group dynamic. However, since businesses are individuals and we (people) are individuals, we should all be aware that our own cases are different from the aggregate.

Brian JenkinsAssociate Teaching Professor and Director of Undergraduate Studies in the Department of Economics at the University of California, Irvine

Even though it might be slightly less intuitive, the average consumer is probably better off focusing on the growth rate of GDP rather than the level of GDP. That’s because quarterly variation in the GDP growth rate roughly indicates whether the economy has been under or over-performing. GDP growth has averaged about three percent annually since the end of World War II (though average growth appears to have slowed a bit in recent decades). So if, for example, GDP growth is observed to average about 1 percent over six months, then consumers could infer that the economy has been underperforming and may either be in or entering a recession period.

GDP is a reflection of the new goods and services that workers, and therefore consumers, have produced over a period of time. Rising GDP growth means rising household income growth and presumably more sound personal finances. To the extent that consumers can forecast future GDP growth, that forecast could give insight into the future state of consumers’ financial strength and may aid in financial planning. But forecasting GDP growth is hard, even for professionals.

Jay Walker, PhDAssociate Professor of Economics at Old Dominion University

Well, a lot of time and effort is spent trying to measure GDP and, after the fact, to influence it and keep it growing. It's a concept that receives a lot of attention in terms of policymakers and resources, and as such, it likely deserves some attention from the average citizen.

Typically speaking, as GDP (per person) increases, so do living standards and life expectancies. The way it is measured does omit some important things; virtually all economists will admit that. A great visualization of this is the video by Hans Rosling titled 200 Countries, 200 Years, available on <a href=" https://www.youtube.com/watch?v=jbkSRLYSojo" target="_blank">YouTube</a>.

John Levendis, PhDProfessor of Business Analytics and Economics at Loyola University New Orleans - College of Business

GDP is a measurement of how much value is being produced in a country over a period of time. The average person doesn't really need to know the details of what things are or are not included in the calculations. Its value comes from providing a snapshot of how healthy an economy is, how it compares to earlier periods, and how it has been trending.

GDP itself is a measure of something, not the thing itself. In the same way, a temperature reading on a thermometer isn't the same thing as the actual temperature. Temperature itself is important; the reading on a particular thermometer may not be important at all. The same applies to GDP. It is a temperature reading for the economy. GDP measures how much has been produced in a country over a period of time. When more is being produced, it usually means profits are up, more people are employed, incomes are increasing, etc. So increases in GDP are, in general, thought of as a "good sign" that the economy is improving.

Sebastián Leguizamón, PhDDirector, Centre for Applied Economics, and Associate Professor, Economics at Western Kentucky University

As an educator, I believe that everyone would benefit from understanding GDP, maybe not in terms of one's day-to-day life, but in terms of understanding the economy. GDP is not the same as income, although they are correlated. GDP is the sum of all goods and services produced in an economy. This is a good indicator of how the economy is doing and what we can expect in the near future.When GDP grows, businesses produce and sell more goods and services, which means that the economy is growing, and at some point, that will benefit consumers. On the other hand, even if a person's salary hasn't decreased, when GDP decreases, the economy is slowing down, which may affect that person's future employment outcomes. As such, it may be a good time to evaluate their personal finances.

As mentioned before, it is a matter of managing expectations and future risks. It gives us some information on what we can expect from our economy, with the understanding that it may not necessarily affect us or the industry in which we operate.

Bryan Cutsinger, PhDAssistant Professor Free Market Institute Assistant Director at Angelo State University

What the average American should know about GDP is that it is a measure of national income. In general, most people think a higher income is preferable to a lower one, and, in my opinion, the same is true for GDP. As GDP increases, our incomes tend to increase, unemployment tends to fall, and our living standards rise. GDP is not a perfect measure by any means, but as it increases, it brings with it more of what most people care about, e.g., higher levels of education, lower infant mortality, fewer working hours, etc. One of the factors affecting the growth rate of a nation’s GDP is the political, market, and civic institutions that shape people’s behavior through the incentives they create. Understanding how these institutions affect GDP is critical for citizens of a self-governing republic like the U.S. Thus, while GDP is an important concept economists use to measure economic performance, it is also important that the average American understand what it is and the factors that affect it.

GDP is a measure of national income. As GDP rises, so will the average incomes of businesses and consumers. As consumers’ incomes rise, so will their demand for the goods and services produced by businesses, resulting in higher revenues. As a result, the incomes of the people who work for those businesses will rise, increasing their demand for the goods and services produced by other businesses, and so on. The reverse is also true. Business and personal income will fall as GDP falls, reducing demand for the goods and services sold.

Steven Carnovale, PhDAssociate Professor of Supply Chain Management at Florida Atlantic University

Gross domestic product refers to all the accumulated value of the final (i.e., finished, non-intermediary) products and services produced within a country’s borders.

This one is a bit hard to disentangle, as the relationship between GDP and personal finance has a significant lag and not necessarily a 1:1 causality to it. So, for conversation’s sake, let’s assume we fall into a recession (2 straight quarters of GDP decline). This usually means other macroeconomic factors are tightening, which can cause stress on personal finances (interest rates increasing, causing non-fixed-rate personal debt to become more expensive).As an example (not a current one, to be sure), when the labor market shifts and there is a surplus in the supply of labor relative to the demand for labor, unemployment rates rise, which can have other significant negative externalities (i.e., mortgage defaults, car note defaults, etc.). So, while there is certainly an impact of such things on the personal finances of a person, attributing a direct 1:1 causal impact is difficult as there are likely more direct factors responsible that are only impacted indirectly by GDP.

Yao (Henry) Jin, PhDAssociate Professor of Management at Farmer School of Business, Miami University

There are some basics about GDP that the average American consumer may benefit from knowing. First and foremost, consumers should know that GDP is generated any time money changes hands in exchange for a product or service. A growing GDP is generally a good thing because it indicates economic expansion: more jobs, more income, and so forth. The rest of GDP’s impact on a consumer’s daily life will depend on the extent to which they understand supply chain management.First, much of the American economy is driven by private consumption—68.3%, to be exact. However, what we choose to buy has every bit as much impact on our GDP as how much we spend. That is because not all consumption choices carry the same “net” GDP impact. For instance, when we buy something made in Mexico or China, this means that whatever the retailer pays to its supplier located in Mexico or China contributes directly to their respective economic growth. On the other hand, buying something that is made in the USA confers benefits to the American economy rather than foreign ones.To put it in perspective, a simplified supply chain can be described as the raw materials supplier selling to the manufacturer, who in turn sells to the wholesaler or distributor, who in turn sells to the retailer. Each time goods change hands, GDP is recorded because of one company’s finished goods. Imagine if a consumer bought something that was made in the USA from the raw materials stage; it would have added to the GDP four times! In contrast, buying a Made in Mexico product would stop the GDP contribution at the retailer stage.Of course, we simply don’t have enough material and labor to fully support all sectors of the economy. That’s why a global supply chain exists, so that we may outsource low-value-added sectors and focus on the most advanced and valuable economic sectors. Nonetheless, by understanding how GDP works, consumers may choose to buy things made in America not only out of patriotism but also increase our economic growth!

While GDP is mostly the outcome of business and personal consumption choices, the extent to which it grows (or shrinks) will in turn affect their finances as well. When GDP grows, employment tends to be more secure, and wages tend to trend up as well. Businesses spend more to expand, which in turn results in more money in the hands of consumers, who in turn spend more, resulting in the need for businesses to expand more in a harmonious cycle.On the other hand, when GDP shrinks, a recession takes place and businesses cut spending, including labor. As a result of diminished sales, wages tend to stagnate and jobs are cut, which in turn results in less money for consumers to spend, which in turn results in potentially further businesses spending cuts, in a vicious cycle.Of course, there are many policy levers the Federal Reserve and policymakers can pull to get us out of a recession through monetary and fiscal stimulus, respectively. In short, monetary policies can make it cheaper for businesses to borrow money and encourage them to spend through lower interest rates. Fiscal policies can directly encourage businesses and consumers to spend by offering financial incentives such as tax cuts, credits and rebates. In some rare instances, the government can step in and spend directly to provide a boost to the economy. For most consumers, stimulus policies can encourage them to make long-term purchases such as houses, cars, home improvement projects, and more. For those consumers in debt, lower interest rates can also allow them to catch up on paying down debt that has variable interest rates.Unfortunately, as demand and supply are intertwined, too much demand without adequate supply results in inflation. If inflation dramatically exceeds GDP growth, then the economy can be said to be “overheating,” which is what we have been facing since 2022. That means that too much demand (i.e., dollars) is chasing around too little supply. This is why the Federal Reserve has been raising interest rates to discourage businesses from spending more in hopes of draining some excess demand while waiting for supply to catch up. For consumers, the reverse is now true: higher interest rates also discourage them from making large purchases and make their existing debt with variable rates more costly to carry.

Chintamani Jog, PhDAssociate Professor of Economics at University of Central Oklahoma

GDP refers to the numerical ($) value of domestically produced goods and services during a given time frame. It is designed to give a glimpse of economic activity over time. It is a broadly defined or aggregated statistic. Like any descriptive statistic, we simply cannot read more than what it stands for. For example, think about the resting heart rate captured by one of the ordinary fitness trackers (not a high-end one!). The resting heart rate number is not a 100% accurate measure of one’s health, but it is a reasonable first pass. The average American consumer can read GDP numbers in a similar fashion. It is a reasonable first pass to keep track of the economy’s health, but it is far from a perfect measure.

Businesses and consumers take a cue from GDP numbers to assess their own course and plan. To continue the analogy above, suppose that the average resting heart rate this week shows a big increase over the previous week. In this case, one can plan for more downtime, destress, or continue recovering from something that affected them during the week (like an infection).

Tufan Ekici, PhDVisiting Assistant Professor of Economics at Ramapo College of New Jersey

Gross Domestic Product (GDP) is defined as the value of all the final goods and services produced in a country over a given time period. The higher the GDP, the higher aggregate production and aggregate income in a nation; thus, policymakers and media outlets usually consider higher GDP numbers good news. There are, however, several issues with the interpretation of this aggregate measure, especially from the point of view of the average consumer.Increased aggregate production could very well have positive effects on average American consumers, at least in theory. More production means higher demand for employees and, thus, more employment opportunities. It also means more tax collection from the companies by the central and local governments, which could translate into more spending on public goods such as infrastructure, education and health. More profits for the firms could also mean more donations or investment in research and development, ultimately benefiting the average consumer. However, all of these could take time or just not happen at all.Thus, an average consumer will not want to wait for a government or a private firm to see if they will use their additional revenues to do something that may or may not benefit them. Consumers do care about things that benefit them directly. There are two other issues with the overall GDP numbers. First of all, it does not say anything about the distribution (inequality) of production/income measured by GDP. Economists have used per capita GDP, which is the total GDP divided by the total population of the USA; however, even that is not a good measure of distribution. Unfortunately, when GDP does, in fact, increase, it will benefit the people at the high end of the income distribution more than the rest of us. For example, in 2020, the lower half of the US population (the lowest 50% of income distribution) will have received a total of 25% of disposable income. In contrast, the top 10% of the population will have received 31.5% of the $17,596 trillion in personal disposable <a href=" https://www.bea.gov/data/special-topics/distribution-of-personal-income" target="_blank">income</a>. So, if GDP goes up, it might increase personal income for everyone, but the increase for many Americans might not be meaningful.The second, and I believe a more serious, issue is that GDP does not measure well-being. Economists have long used the per capita real GDP number as a measure of a country’s economic well-being. There is still a lot of ongoing research analyzing the relationship between GDP and happiness and well-being measures. Still, it is widely accepted that this one aggregate measure cannot and should not be used to measure an individual household’s economic well-being. In the post-pandemic world, we are seeing increasingly more employees asking for more flexible work schedules and willing to take pay cuts to get them.

When GDP increases (and even if that trickles down to an average consumer, that does not necessarily make the average hours per week compared to 45 hours) and they end up paying more for daily expenses (or having less time to spend with their loved ones), that person might consider themselves ‘poorer.’ Higher GDP numbers also don’t talk about access to education, healthcare or other psychological well-being measures. An average person cares about things that affect them and their families directly, so they will probably not care too much about an aggregate number such as GDP.There is also the misconception that a better aggregate economy (measured by a higher GDP) is going to improve the conditions for many businesses, which will translate positively for average consumers. For example, if businesses are able to obtain loans at low costs, they may expand their businesses, hire more people and offer better products. A car dealer might offer good financing options, and thus, an average consumer might be inclined to take up their offer. During good economic times, households will start spending money on buying durable goods (furniture, cars, TVs, etc.). Still, they will do so usually by borrowing money from financial institutions, thinking they will be able to pay it off since they now have a good job (thanks to better aggregate economic conditions). Unfortunately, these borrowings could get out of hand really quickly. If things start going bad and people lose their jobs, then accumulated debts could be an even bigger problem for households.It is also mostly the case that higher GDP will translate into a lower unemployment rate, but it will also mean higher aggregate prices. However, these ‘aggregate’ measures may not have the same individual-level or microeconomic effects on households. The average consumer cares about the things they buy and their own employment situation. The offices that calculate these GDP numbers go through a lot of effort and energy and use the best scientific methods available to get a good indicator of an aggregate economy. I sincerely applaud their efforts and believe that aggregate measures should be used cautiously to understand a nation's economic developments. Thus, I believe that understanding how GDP works is essential for the average American consumer so that they don’t behave irrationally and overly optimistically based on good news about the aggregate economy.

Kortney Ziegler, PhDFounder and CEO at WellMoney.com

GDP stands for Gross Domestic Product, which adds up all the goods and services our country produces. It's a macroeconomic snapshot that articulates how well a country's economy is doing.

GDP indirectly influences everyone in the country because when GDP goes up, it often means more jobs, higher wages and better living standards. It's like a tide that lifts many boats because a growing economy means more opportunities, which can translate to stronger economies.

Gary Quinlivan, PhDProfessor of Economics at Saint Vincent College

There are two tautological definitions of GDP: One is the sum of domestic expenditures by consumers, the government, businesses and foreigners on final goods and services produced in the U.S. during a specified time period. Two is the income measurement, which equates to what individuals do with the income generated from the sales of final goods and services in the U.S. We spend it (consumer expenditures), save some of the income (savings) and pay taxes. There are some complications in getting the average citizen to understand how some expenditures are added to GDP and why others are not. The impact of a change in net exports on GDP is difficult for students to understand when studying macroeconomic principles. For example, GDP = C + I + G + X - Z. Where Z is imported, the reason why Z has a negative in front of it is because consumers (C), businesses (I) and the government (G) all buy imports. We know what the U.S. spends in aggregate on imports, but it would be expensive to collect data on the exact breakdown of what is spent by consumers, businesses and the government. The simple thing to do is to just subtract Z. Note that if Z rises, GDP does not fall because C, I, and G rise as more imports are purchased. This seems difficult for economics students to remember; try explaining that to the general public. Finally, the calculation of GDP across nations differs. For example, Russia includes the value of household services when calculating GDP. The U.S. does not. How do you put a number on the value of cleaning a home or home cooking? We consider the number to be too much guesswork.The average American should have a basic understanding of GDP and what moves it up and down. Invariably, their standard of living will improve when the GDP is rising. Some Americans mistakenly believe that GDP growth causes pollution and hurts the environment. Plenty of growth has taken place since 1776. Pollution in major cities was probably at its peak in the 1950s and 1970s. But look at Pittsburgh and Buffalo today. The air quality has vastly improved. I am originally from Buffalo, and there was a time in the 1950s, due to pollution, when swimming was prohibited in Lake Erie. On some days of the week when the co*ke ovens of Bethlehem Steel (located at that time in Lackawanna) were running, children were not allowed outside of their homes.

If real GDP rises, more jobs are created, and personal incomes rise. Thus, consumers have more to spend and save. As a consequence, stock buyers will typically see PE ratios dropping and improvements in the stock markets. Although we would observe feedback effects as individuals invest according to what they expect GDP to do, capital gains will be realized if expectations are realized.

Don Uy-BarretaProfessor of Economics

GDP stands for Gross Domestic Product, and it's a measurement of what the economy is producing given a certain time frame, say annually. I would say that yes and no, the average American consumer benefits from this knowledge. The yes part shows how the economy is performing, and perhaps if one sees GDP growing, then there's comfort in knowing that we are productive, using our time and resources well, and maybe even translating to a better livelihood. We use GDP for things like comparing how well we are doing compared to the past and, more often, comparing how our economy is moving along compared to other countries.For example, let’s say that the U.S. economy has been and is predicted to grow at a 3% annualized rate, but if we measure the actual GDP, then it might be above or below that growth trend. When actual GDP is above or below 3%, it could signal to policymakers that they should intervene to stabilize the economy closer to our 3% growth trend. When intervention policy occurs, the average American consumer may see their credit card interest rate start to change, the amount of taxes they are getting from their employer also change or when they receive a stimulus check in the mail.The no part is more complicated because, realistically, not everything can be included in the calculation of GDP. We have the formal economy, and we also have the underground economy, sometimes referred to as the black market. There are many reasons for the underground economy to exist. The first one that comes to mind is to avoid taxes. A person selling lemonade on the corner street without a permit to sell and collecting cash most likely isn’t part of GDP, even though it involves a market transaction. Some European countries have illicit activities that are not part of their GDP. In fact, there was a proposal some time ago that they would include these illicit activities because 1) now they can track and tax them, and 2) the activities are large enough that they will raise their GDP.

When GDP is increasing, it should, on average, benefit businesses. However, we must be mindful that in some countries, their GDP is tied to a certain sector, and if that sector isn’t growing, it could really distort how GDP is viewed. Let’s say the U.S. is composed of manufacturing computer chips, bananas, and hotel tourism. If we simply look at whether GDP grew, we could say that the economy is doing well. However, it could be the case that the manufacturing of computer chips and bananas is growing strongly, while the hotel tourism sector may be underperforming. So, for personal finance purposes, we may be investing in all those sectors, whereas we should be investing in the computer chips and bananas sectors only. If the correct investment, however, is made, then this would boost the personal finances of those individuals, making them richer, who in turn would probably spend their fortune on businesses again, and the cycle would continue.

Beverly Mendoza, PhDAssistant Professor of Economics and Finance at Stephen F. Austin State University

The Gross Domestic Product (GDP) refers to the value of the total output that a country has produced within its borders. It is comprised of consumer spending, investments, government expenditures, and net exports (the value of exports minus the value of imports). Understanding GDP is essential to better comprehending financial and economic news. However, knowing only GDP without a basic understanding of other macroeconomic concepts and theories, such as inflation and full employment, may not be that useful.

Instead of looking at GDP, it might be better to focus on either the changes to GDP or inflation. Generally, a long-term increase in GDP results in inflation. It is crucial to understand that inflation only means the rate at which prices change, which is not necessarily bad. In fact, inflation implies that there is economic growth. Only when inflation is high, meaning that prices are increasing at a rapid rate, does it call for some worry. The central bank will impose a contractionary monetary policy (higher interest rates) when inflation rates are high. Higher interest rates lower the consumer’s purchasing power since the cost of borrowing money or obtaining loans increases, but they instead incentivize savings and investments. With consumers spending less and saving more, economic output and production slow down, and prices begin to stabilize.

Dr. Subhadra GanguliAssistant professor of Business at the Lehigh Valley campus of Penn State University

GDP is the value of income produced in the economy within a specified time (a month, a year, a quarter, etc.), which means it is the current value of everything produced within the geographic boundaries of the economy and sold within the market mechanism. GDP per capita is a powerful number and gives a better understanding of the average income of the typical person within a country.An average American can figure out how far behind they are in terms of this average number and understand how unequal the income distribution is. In some ways, the per capita real GDP is a decent measure of the standard of living in the country. However, Americans must also realize that GDP by itself does not tell us anything about how more or less polluting the economy is, how happy or sad Americans are, how equal or unequal the income distribution is, how corrupted the economy is, what the level of satisfaction of an average American at their job is and much more.GDP values do not give anyone an idea of the black market, illegal activities, homemakers’ unpaid hard work, unrecorded incomes through cash transactions, etc. Macroeconomics involves consumers and producers, apart from the government and the rest of the world. Though GDP, by itself, does not give away much information, in the absence of anything better as a concept, it is still a very important idea for all Americans and economists.Americans must be mindful of the fact that GDP by itself is meaningless unless they know what the real GDP per capita is. The latter is a reasonably good benchmark (within its limitations) for a country in terms of how its people are faring compared to the rest of the world in maintaining a decent standard of living.

Instead of GDP, I would like to think of real GDP per capita as more relevant information. A higher real GDP per capita is a healthy sign for the economy, as it means a higher standard of living on average and hence the possibility of higher economic growth over time. A higher per capita real GDP is a sign of an overall increase in people’s standard of living, indicating better quality products and innovation in the business field.Higher incomes per capita always lead to higher savings and investments in overall productive capacity, more research, and greater development efforts. All these lead to higher economic growth through increased per capita real GDP in the future through higher worker productivity accompanied by higher incomes. Higher real GDP per capita is the key to future growth as it helps in generating savings, which then get channeled to higher investments and capital formation for further economic growth. The savings of consumers are the key to personal financial well-being. Capital formation includes the accumulation of machines, equipment and technology in the form of physical capital as well as human capital through education (elementary, secondary and tertiary) plus training and skill formation for twenty-first-century jobs. Higher GDP per capita leads to higher reinvestment of savings in projects for the future, which leads to higher growth and income for higher savings and personal financial gain.Personal finance is both a habit and information gained through education. It is an engine for growth when savings lead to capital formation through higher investment. Hence, a higher GDP per capita is essential for personal financing and higher economic growth in the future.

Ryan LeeAssistant Professor of Economics at the University of La Verne

The average American should be familiar with Gross Domestic Product (GDP), how it is calculated and what goes into it. People often make a few mistakes when thinking about the economy. One of the more common errors is that GDP is commonly written as Consumer Spending + Investment Spending + Government Spending + Net Exports (GDP = C+I+G+NX). Yet Net Exports are frequently negative (the US imports more goods than it exports). People believe that imports decrease GDP, and so by decreasing imports, GDP will then increase. Yet this line of thinking is wrong. Think of assembling a car in the United States; some parts are made in Mexico, others in Canada. Those parts are imports. Yet if we did not import those parts, we might be unable to build a complete car. Those imports help increase GDP as they mean we've produced more cars. Not knowing about GDP can lead to poor outcomes for society. The trading example is only one of many misconceptions people have about GDP.

When GDP is falling (or not growing fast), it is most likely that consumers will have a harder time getting a loan. When the economy is doing poorly, people might lose their jobs and therefore have a harder time paying back a loan. Thus, banks become less willing to make loans, especially those with poor credit scores. Similarly, given the increased risk of losing a job (or working fewer hours), consumers may wish to be safer with their money, holding off on major purchases, for example.

Alan GreenAssociate Professor of Economics at Stetson University

GDP is how we measure the economy, so knowing what it is benefits people in the same way that knowing what degrees Fahrenheit and Celsius are for understanding temperature. Once you understand the measurement and the scale, you can understand how things are changing and be an informed citizen and consumer.

When GDP is growing, people should generally expect businesses to do well and possibly expand, and they should feel confident investing in homes, education and businesses that look sound. When GDP is shrinking, consumers should be more cautious about spending and carefully plan their finances.

James ButkiewiczProfessor of Economics at the University of Delaware

GDP is an imperfect measure of living standards. On average, countries with the highest GDP have longer life expectancies, better health care, better access to education, etc. Rich nations can do more to alleviate poverty, reduce pollution, etc. Individuals should know that a higher GDP benefits society as a whole. However, consumers are obviously most interested in their own incomes and well-being.

In a growing economy, increases in GDP cause businesses that are growing to increase their investment and employment, creating more jobs to meet the demands of their customers. Individuals will find increased job opportunities and incomes. However, like inflation, growth does not affect every business or individual equally. While most industries and workers enjoy increased prosperity from growth, some industries decline, and some workers find that their incomes are not growing or even that they lose jobs and find few employment opportunities in their communities. We see this in many regions where the loss of a major employer leaves the community stagnant. Increases in GDP make most businesses and workers/consumers better off, but not every business or individual.

Shaun MartinOwner & CEO of Denver Home Buyer

Having GDP knowledge benefits the average consumer so that now, one can understand the health of his/her country and plan and make financial decisions accordingly. Understanding the economy’s position helps the average person take knowledge-based steps about whether it's the right time to spend or not, borrow or not and invest or not. It can extremely help one in money management. Without this knowledge, one might invest when the market is down and lose all his/her money. The consequences of not having basic knowledge about the health of one’s country, measured through GDP, could worsen in some situations.

If GDP is high, the economy is going up. The average consumer's personal finances affect how one can invest his/her money safely because businesses are making good profits. If GDP is bad, people tend to hold their money and not invest it because the risk is higher. Similarly, consumers and businesses tend to borrow more in a healthy economy because interests aren’t high, income is increasing and they can easily manage their debts.

Bruce MohrSenior Investment Advisor and Credit Consultant at CreditSage

For the average everyday American, it's nice to know what GDP is and how it impacts the broader economy, but you don't get any benefit from it — unless and until you're an investor, an economist or a policymaker. On a microeconomic level, there's little you (the average American) can care about if the GDP growth rate declines compared to the previous years or the real inflation-adjusted GDP growth rate. These metrics and figures are important for the people in charge because they act as guidance tools to understand where the economy is headed and what the right course of action should be.

In behavioral finance, people look at certain statistics that lead to self-fulfilling prophecies. For example, we all know that a decline in GDP for two consecutive quarters is referred to as a recession. In my opinion, because of the recession label, people freak out and act in ways that lead to a recession. In layman's terms, GDP indicates how fast money flows through the economy from buyer to distributor to the producer. If GDP declines consecutively, you have to brace for impact as a business because people have already reduced their spending and jobs are being cut down with production declining. If a recession is looming, I recommend not investing in the stock market for an average consumer's personal finances, as it would be a bear market you'd be playing in. Unless and until you have some insider information (which is illegal), the chances of you making a return are extremely low.

David LewisOwner of Monegenix and Financial Expert

Understanding the country's GDP and how it works will allow consumers to make better financial decisions. If you know how the economy is doing and can follow the nuances and see how to avoid pitfalls, then making smarter choices with your money is an easier task. This is especially true for anyone looking to buy or sell investments.

GDP affects personal finances by reflecting the state of the economy. When the economy is good, prices are lower and the cost of living is more affordable. Consumers can save up for a house or go on dream vacations. But when the economy is low, it's time to tighten the budget. Keeping track of how well the GDP is doing will help consumers know what to plan for in their budget.