The Advantages of Using GDP as a Measure

The term "gross domestic product" (GDP) refers to the total value of a nation's goods and services produced within a year -- in other words, the total size of a nation's economy. GDP comprises consumer and government purchases, domestic investments and net exports of goods and services. Because GDP takes the whole of the economy into consideration and is used in the same manner around the world, economists use it as a key measure of financial activity.

You can use GDP to examine all economies of the world, from the United States to Somalia. No matter if a country is churning out fishing equipment or cars, all of its products have a certain monetary value, which added up gives a universally recognized measure. This measure is especially helpful if you consider how different economies around the world are in terms of the goods and services they produce, and the way they reinvest their income -- pay back debts or invest in industry sectors.

If you divide GDP by the country's population, then you get GDP per capita -- the approximate portion of a country's total output for every resident -- which is a way to compare different economies, while considering the size of their work force and available resources. These variables can be misleading; for example, Norway's economy seems tiny compared to the United States, but Norway's 2011 GDP per capita is $96,810, nearly double that of the U.S., according to the International Monetary Fund.

GDP is dynamic: it changes constantly based on new figures on productivity, consumption and investments. Therefore, economists and decision makers can use GDP to measure an economy's growth or decline. However, they can only do that provided they have an established and accurate mechanism to measure GDP value regularly; without that, they don't have any data to compare whether present activity is worth more or less than in the past.

Most criticisms regarding GDP concentrate on its focus on economic data and not on people's prosperity. However, even economist Simon Kuznets, who introduced the term in the "National Income, 1929-32" congressional report, mentioned explicitly that the "welfare of a nation can scarcely be inferred from a measurement of national income." The GDP index has an economic focus: production, consumption and investment; therefore, it is not affected by variables hard to measure, such as voluntary labor and real unemployment.