Gross domestic product - commonly abbreviated as G.D.P. - represents the cumulative value of all goods and services produced by a country over a specified period of time. For example, a country that reports a 2% year over year increase in GDP is indicating that the aggregate value of all goods and services within the country increased by 2% over the prior year.

The Three Ways to Calculate GDP

Physically measuring all of the products and services in a country could prove a challenge.

Economists instead estimate these values using one of three approaches - production, income or expenditure - although the latter method is preferred. The data for these calculations can be found through tax returns, payroll, and various other government sources.

Here's a more detailed look at the three ways to calculate GDP:

1. Income Approach - Economists add up labor income, rental income, interest income and profits to come up with the total value produced within an economy.
2. Expenditure Approach - Economists add up private consumption, private investment, government purchases, and net exports to come up with total value produced.
3. Production Approach - Economists calculate the value of all outputs, determine the intermediate consumption, and then subtract the two to determine net value.

Nominal GDP, Real GDP, & GNP

GDP figures can be expressed in either a nominal or real term, which essentially adjusts for the effects of inflation over time. If there's inflation over the time period, then investors may want to exclude the impact of that inflation in order to get a more accurate economic picture.

Nominal and real GDP figures help highlight these differences to provide greater insights.

Here are the differences between these two GDP readings:

• Nominal GDP - Nominal GDP is the value of all goods and services produced during the specified period in current prices (e.g. end of period prices).
• Real GDP - Real GDP is the value of all goods and services produced during the specified period, but they're priced in the prices of some base year.

The impact of inflation on the difference between these two readings can be seen in the GDP deflator economic indicator. While the consumer price index ("CPI") measures inflation relative to a base year, the GDP deflator's basket of goods is allowed to change year to year with people's consumption and investment patterns, painting a more accurate picture in some eyes.

The term gross national product - or G.N.P. for short - is largely the same as GDP, but defines a more limited (and perhaps exact) scope based on ownership. In simple terms, GDP is the sum of products and services produced within a country's borders, while GNP is the sum of products and services produced by companies owned by a country's citizens.

Interpreting Changes in GDP of Investors

International investors place a high value on GDP estimates and releases, since they impact nearly every part of a country's economy. For instance, a growing GDP is usually accompanied by wage increases, low unemployment, and expanding corporate profits, while the opposite is true for a falling GDP, which is almost always a bad sign for investors in a particular country.

In general, an economy generating 2.5% to 3.5% GDP growth is preferable over the long-term, with lower amounts under performing potential and higher amounts being unsustainable. The exception to this rule occurs when countries are coming out of a recession, where economists can look for growth rates as high as 6% to 8% and consider it "normal" or even desirable.

Despite these readings, investors should be aware of some limitations of GDP readings. For example, GDP data is usually only released quarterly, which means that poor economic performance may already be priced in to a country's equities or bonds. Revisions can also have a dramatic impact on historical figures, which can complicate some economic analyses.