The primary topics of macroeconomics are economic growth and business fluctuations. But when we say that “the economy” is growing, what do we mean? And precisely what is fluctuating? If we want to understand growth and fluctuations, we need some concept that defines and measures growth and fluctuations.

The concept of gross domestic product was developed to quantify the ideas of economic growth and fluctuations. GDP, the market value of all final goods and services produced within a country in a year, is an estimate of the economic output of a nation over a year. When we say that an economy is growing, we mean that GDP, or a closely related concept like GDP per capita, is growing. When we say that an economy is booming or contracting, we mean that growth in real GDP is above or below its long-run trend.

GDP can be measured and summed up in different ways, each of which casts a different light on the economy. The national spending identity, Y = C + I + G + NX, splits GDP according to different classes of income spending. The factor income approach, Y = Employee compensation + Interest + Rent + Profit, splits GDP into different classes of income receiving.

GDP per capita is a rough estimate of the standard of living in a nation. Real GDP is GDP per capita corrected for inflation by calculating GDP using the same set of prices in every year. Growth in real GDP per capita tells us roughly how the average person’s standard of living is changing over time.

GDP statistics are imperfect. GDP does not include the value of leisure or goods bought and sold in the underground economy, nor does it include the value of goods that are difficult to price, such as the value of having polar bears in Alaska. GDP and GDP per capita also do not tell us anything about how equally GDP is distributed. Economists and statisticians try to refine and improve the measurement of GDP over time. GDP measures are imperfect but they have proven they are useful in estimating the standard of living and the scope of economic activity.

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