What is gross domestic product?

Gross domestic product (GDP) is a measure of a country’s total economic output—the total value of all goods and services produced within that country—usually over the course of one year.

Why GDP is important

GDP tells us how large a country’s economy is. Statistics Canada publishes GDP results both monthly and quarterly. When we compare current and previous GDP numbers, we can see whether our economy is growing or shrinking. We can also look at the GDP of other countries to understand what is happening in the global economy and compare how our economy is performing.

How GDP is calculated

GDP can be measured in different ways. The most common is the expenditure-based method. It adds up household spending, business investment, government spending and net exports. Here’s what each of those terms means:

• Household spending is the amount people spend on goods and services, including groceries, clothing, home renovations and all kinds of other things people use in their daily lives.
• Business investment is what businesses spend on their operations and growth, including machinery, buildings and inventory.
• Government spending is what all levels of government spend on goods—such as equipment and infrastructure, and on public services such as health care.
• Net exports is a measure of how much a country exports compared with how much it imports. If a country exports more than it imports, its net exports will be a positive number. But if it imports more than it exports, its net exports will be a negative number, and its GDP will be lower as a result.

Add all four of these things up and you’ve got one measure of a country’s GDP—its total domestic production. As a mathematical formula, the expenditure-based method of calculating GDP looks like this:

GDP = household spending + business investment + government spending + (exports - imports)

What GDP doesn’t tell us

GDP is an important measure of a country’s overall economic performance, but there is a lot this measure does not tell us. GDP doesn’t account for:

• Unpaid labour—Caregiving, volunteering and household labour don’t involve money changing hands, but they all play an important role in the overall functioning of an economy.
• The underground economy—In Canada, economic activity worth tens of billions of dollars takes place in the underground economy.1 This activity isn’t included because it is hidden, illegal or informal. The underground economy includes money made through crimes such as smuggling or the drug trade, but also unreported and underreported income.2
• Quality of life—GDP reflects how much an economy is producing but doesn’t measure a country’s living conditions. It’s possible for a country to have a high GDP and poor quality of life, and vice versa. A vibrant economy plays an important role in our material well-being, but health, security and pollution levels also contribute to our quality of life.
• Sustainability—Over-exploiting natural resources such as minerals, forestry or fisheries products, or fossil fuels can lead to strong economic performance, but it’s not sustainable over the long term.

How important is GDP?

GDP plays an important role in helping us understand the economy, but it is only one of the many data sources the Bank considers when making monetary policy decisions. Canada’s GDP tells us how quickly the economy is growing and where the growth is coming from. This holds clues about what’s likely to happen next with inflation. Here’s how that works:

• When GDP is rising, it tells us the economy is growing. But an economy that’s growing more quickly than its capacity to produce can drive up inflation. So, if GDP is rising too quickly, it’s a signal that demand might be running ahead of the economy’s supply. In this case, the Bank might need to raise the policy interest rate in the future to keep inflation at or around 2 %.
• If GDP is falling or growing slowly, it tells us the economy isn’t doing so well. In a slowing economy, inflation tends to slow down too. That’s a signal that the Bank might need to lower the policy interest rate and stimulate the economy.