Gross Domestic Product

Gross Domestic Product, or GDP, is a measure used to gauge the performance of an economy. It is equal to the total amount of expenditure on goods and services in an economy per year. GDP is one variable used to determine the overall health of an economy, and tracking it can show periods when markets are growing or periods of recession. Below is a graph taken from the St. Louis Federal Reserve showing the US's GDP for the past 70 years:

The vertical gray bars on the graph indicate recessions.  The oil shocks of the 1970s, the recession in the early 1980s from contractionary monetary policy, the dot-com bubble burst in 2001, and the Great Recession of 2008 are all visible and show decreases in GDP growth. 

Economists break GDP up into four general parts: Consumption, Investment, Government Spending, and Net Exports. Adding these four categories up gives total GDP, and is normally expressed as:

GDP = C + I + G + NX

where

NX = Exports – Imports

These four variables have a positive relationship with GDP, so increasing any one of them will likewise increase GDP.  The graph below shows the distribution of Consumption, Investment, Government Spending, and Net Exports for the US from 2005 to 2012
  

Data Taken from FRED

Consumption makes up the largest part of GDP by far, while the US has been running a trade deficit since the early 1980s.  Many economists agree that US investment levels are below optimum, and that increasing them could lead to higher GDP long term.

Economists must know price levels and the quantity of goods and services sold within an economy to calculate GDP.  Nominal GDP is calculated using current price levels, which describes the economy's overall size, but cannot accurately show growth over a period of time due to fluctuations in price.  Inflation or deflation can alter GDP levels without actual value being added or removed from an economy.  To compensate, price levels are either chain weighted or taken from a chosen base year to calculate real GDP, which can accurately illustrate economic growth over an extended period.

GDP is a hugely important measurement in macroeconomics because it helps show the overall wealth or productive capabilities of a nation.  Much of the focus in macroeconomics is how to increase GDP, and thus increase people's standard of living.