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GDP. It's another one of those financial acronyms that shows up in the news every so often. It makes the headlines and moves the stock market — so it must be important. It can also be a benchmark for a recession, with two quarterly declines signaling an economic decline.
But what is GDP, really?
Read more: 7 ways to recession-proof your savings
In this article:
What is GDP?
GDP stands for “gross domestic product.” It's the total market value of goods produced and services delivered within a given time frame, such as one calendar quarter or a year.
Goods are objects sold, such as food, drinks, cars, trucks, clothing, furniture, electronics — all sorts of merchandise delivered for a price from a supplier to a business or consumer.
Services are intangible. They are not physical products but work, activities, experiences, or expertise provided for a price. It can be an Uber ride, a CPA doing your taxes, or medical care.
GDP also includes two other components:
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GDP encompasses business investments and capital spending. That's the money companies spend on things like improvements, property, equipment, and inventory.
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And GDP represents the money local, state, and federal governments spend.
So, GDP is the total market value of consumer consumption, business investments, and government spending.
Everything sold in a nation, including exports, but minus imports.
Why is GDP important?
GDP is a crucial measure of a nation's financial health. It's measured in trillions of dollars but expressed as a percentage.
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A positive percentage in GDP growth, say 2%, means the U.S. economy is growing.
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A negative percentage in GDP, such as -0.5%, means the economy is slowing.
A nuance to know: "Real" GDP (rather than "nominal") is the gross domestic product adjusted for inflation.
The National Bureau of Economic Research declares a recession after "a few months" of a significant economic decline. Two consecutive quarters of falling GDP can factor into the NBER's decision to call the beginning of a recession.
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The latest GDP report
The Bureau of Economic Analysis released the GDP report for the first quarter of 2025 on April 30, 2025.
It said the real GDP decreased at an annual rate of 0.3% for the first three months of the year.
The BEA said this decline was due to an increase in imports. That's likely due to the concern regarding tariffs. Businesses may have been ordering products from overseas in an attempt to get inventory in stock before additional tariffs were levied. Remember, the market value of imports is subtracted from GDP.
Government spending was also lower, the BEA said.
It's the first decline in GDP since Q1 of 2022.
What is GDP? FAQs
Which country has the largest GDP?
The United States has the biggest economy in the world, so it has the largest gross domestic product. It is followed by China, Japan, and Germany.
Why is the U.S. GDP so high?
The United States accounts for more than 20% of the world's total income. Consumer spending is a significant driver of GDP.
What is the ideal GDP percentage?
To represent ongoing financial health, well-established economies like the United States target 2% to 3% annual GDP growth. China has an aggressive economic growth target of 5% annually.
Laura Grace Tarpley edited this article.
