Let’s say I buy a coffee here in London for £3.
Let’s say I buy a coffee here in London for £3.

Those £3 are factored into the United Kingdom’s GDP.
Those £3 are factored into the United Kingdom’s GDP.

And so is this barista’s salary.
And so is this barista’s salary.

And this espresso machine.
And this espresso machine.

In fact, most of what’s around you is part of GDP.
In fact, most of what’s around you is part of GDP.

GDP is an important gauge of the overall health of an economy. It stands for:
GDP is an important gauge of the overall health of an economy. It stands for:

Simply put, GDP measures the total value of all goods and services in a country.
Simply put, GDP measures the total value of all goods and services in a country.

That means it measures a lot of stuff worth a lot of money.
That means it measures a lot of stuff worth a lot of money.

Here in the U.K., GDP is around two-and-a-half trillion dollars per year.
Here in the U.K., GDP is around two-and-a-half trillion dollars per year.

In the United States, the world’s biggest economy, it's around $19 trillion every year.
In the United States, the world’s biggest economy, it's around $19 trillion every year.

How do you get to these numbers?
How do you get to these numbers?

Well, you can calculate GDP in a few different ways, but the most commonly used equation goes like this:
Well, you can calculate GDP in a few different ways, but the most commonly used equation goes like this:

consumption plus investment plus government spending plus net exports equals GDP.
consumption plus investment plus government spending plus net exports equals GDP.

Let’s break that down.
Let’s break that down.

Consumption is another way of saying consumer spending.
Consumption is another way of saying consumer spending.

It’s the money you or I spend on physical goods, like coffee, and on services, like a haircut.
It’s the money you or I spend on physical goods, like coffee, and on services, like a haircut.

In many developed economies like the U.K. or the U.S.,
In many developed economies like the U.K. or the U.S.,

consumer spending makes up more than half of a country’s GDP.
consumer spending makes up more than half of a country’s GDP.

The second part of the GDP equation is investment.
The second part of the GDP equation is investment.

This measures how much businesses spend on things like buildings, land and equipment.
This measures how much businesses spend on things like buildings, land and equipment.

It also includes a major consumer investment - buying a home.
It also includes a major consumer investment - buying a home.

Investment can take a hit when the economy is suffering.
Investment can take a hit when the economy is suffering.

You can see that in this chart domestic business investment
You can see that in this chart domestic business investment

plummeted in the U.S. during the financial crisis.
plummeted in the U.S. during the financial crisis.

That’s because companies were trying to save money instead of
That’s because companies were trying to save money instead of

putting it toward things like factories, machinery and equipment.
putting it toward things like factories, machinery and equipment.

Okay, now we get to government spending.
Okay, now we get to government spending.

This is the money local, state and national governments spend on things like roads, schools and defense.
This is the money local, state and national governments spend on things like roads, schools and defense.

Government spending varies a lot depending on each country’s approach to public goods and services.
Government spending varies a lot depending on each country’s approach to public goods and services.

Take for example France, where government spending amounts to roughly 56% of GDP.
Take for example France, where government spending amounts to roughly 56% of GDP.

That’s compared to 41% in the U.K. and 38% in the U.S.
That’s compared to 41% in the U.K. and 38% in the U.S.

That brings us to the final part of the GDP calculation: net exports, or exports minus imports.
That brings us to the final part of the GDP calculation: net exports, or exports minus imports.

A lot of countries have negative net exports, meaning they bring in more products than they send out.
A lot of countries have negative net exports, meaning they bring in more products than they send out.

For example, the U.K. imports around $1 billion worth of coffee every year
For example, the U.K. imports around $1 billion worth of coffee every year

but only exports around $315 million, meaning its net exports of coffee are negative.
but only exports around $315 million, meaning its net exports of coffee are negative.

Countries around the world collect data on consumption, investment, government spending and net exports.
Countries around the world collect data on consumption, investment, government spending and net exports.

This makes GDP a universal measurement and a way for countries to stack up against one another.
This makes GDP a universal measurement and a way for countries to stack up against one another.

But it’s not just the sum of the equation people look at.
But it’s not just the sum of the equation people look at.

You'll often hear about the GDP growth rate, or the percentage change in GDP over time.
You'll often hear about the GDP growth rate, or the percentage change in GDP over time.

Generally, if an economy is healthy, GDP growth expands.
Generally, if an economy is healthy, GDP growth expands.

If an economy is in bad shape, GDP growth contracts.
If an economy is in bad shape, GDP growth contracts.

Two consecutive quarters of negative GDP growth are referred to as a recession.
Two consecutive quarters of negative GDP growth are referred to as a recession.

But GDP doesn’t always give a full picture of the economy.
But GDP doesn’t always give a full picture of the economy.

Critics say the equation puts too much weight on production and manufacturing,
Critics say the equation puts too much weight on production and manufacturing,

and not enough on services and the digital economy.
and not enough on services and the digital economy.

Just think of Spotify. For $10 a month you can listen to unlimited music from a huge range of artists.
Just think of Spotify. For $10 a month you can listen to unlimited music from a huge range of artists.

In the past, you would have had to buy all of those albums separately, with each one contributing to GDP.
In the past, you would have had to buy all of those albums separately, with each one contributing to GDP.

It’s hard to factor a digital service like Spotify into the GDP equation
It’s hard to factor a digital service like Spotify into the GDP equation

which is used to measuring physical goods.
which is used to measuring physical goods.

GDP also doesn’t measure economic equality and well-being.
GDP also doesn’t measure economic equality and well-being.

So even if a country is really rich according to GDP, wealth may be spread unevenly.
So even if a country is really rich according to GDP, wealth may be spread unevenly.

Plus, GDP excludes unpaid work like volunteering for charity or child care.
Plus, GDP excludes unpaid work like volunteering for charity or child care.

And it doesn't factor in costs like pollution or illegal activity.
And it doesn't factor in costs like pollution or illegal activity.

Some experts have come up with alternative measures to GDP
Some experts have come up with alternative measures to GDP

that measure overall happiness and quality of life.
that measure overall happiness and quality of life.

But so far, none of these have stuck.
But so far, none of these have stuck.

Maybe it’s just too hard to put an economic value on that first sip of morning joe.
Maybe it’s just too hard to put an economic value on that first sip of morning joe.

Hey everyone, Elizabeth here. Thanks so much for watching our video.
Hey everyone, Elizabeth here. Thanks so much for watching our video.

Be sure to check out more of your CNBC Explains over here.
Be sure to check out more of your CNBC Explains over here.

And leave us any other ideas in the comments section.
And leave us any other ideas in the comments section.

Talk to you later!
Talk to you later!