Skip to main content
Learn (Economics)

Part 1 · Getting to know the economy · Lesson 4

GDP is the report card of a nation's economy

GDP is the sum of what a country newly produces in a year. Read its growth rate and its makeup, and you can see the big ocean that corporate earnings come from.

14 min readLesson 4 / 43Data as of full-year 2025 and Q2 2026 · checked 2026-10-05✓ Read

QToday's question

The news says 'the Korean economy grew 1.1%.' But what exactly grew 1.1%? And what does it have to do with my stocks?

GDP and the growth rate are the numbers that appear most often in economic news. But if someone asks what exactly is being added up, or why prices are taken out of the calculation, it is easy to get stuck. In this lesson we peel back GDP one layer at a time and find where corporate earnings come from inside it.

MAPLearning map for this lesson

We build it up in three steps. At the end of each step, a 'Quick check' lets you test your understanding before moving on.

Before you start

In Lesson 1 you learned that the stock price is earnings (EPS) × multiple (PER). In Lesson 2 you saw that money circulates among households, firms, the government, and the rest of the world, and in Lesson 3 that prices are set by supply and demand. This lesson is about how to measure that whole circulation of money with a single number. If you don't remember the previous lessons, it's fine to go back and read Lesson 2 first.

  1. STEP 1 · Basic conceptsWhat does GDP add up?

    You will know that is 'the sum of newly produced final goods and services,' and be able to tell what is included and what is left out.

  2. STEP 2 · Understanding the principleNominal vs. real, and the four pieces of GDP

    You can read the growth rate from the difference between nominal and , and compare the makeup of consumption, investment, government, and net exports in Korea and the US.

  3. STEP 3 · Real-world applicationReading GDP releases through stocks

    You can tell the difference between quarter-on-quarter and annualized rates, and explain which piece of GDP connects to the earnings of which sector.

Build knowledge20 concepts built so far · 6 added in this lesson

Stock priceMarket capitalizationEPS (earnings per share)PER (price-earnings ratio)A taste of the discount rateEarnings knob and multiple knobThe 4 economic agentsCircular flow of moneySpending = incomeExport shareSupply and demandEquilibrium pricePrice cycleCyclical sectorsGDPNEWValue addedNEWNominal and real GDPNEWEconomic growth rateNEWGDP components (consumption, investment, government, net exports)NEWQuarter-on-quarter and annualized ratesNEW

STEP 1What does GDP add up?

Recall the circular flow of money from Lesson 2. If you add up everything newly produced within that flow over one year, you get GDP.

A nation's one-year report card

is the sum of the market value of all final goods and services newly produced within a country over a given period. Cars made in factories, coffee sold at cafes, medical care at hospitals, and classes at tutoring academies: all production that is priced in the market is included. Korea's GDP in 2025 was about KRW 2,677 trillion. That is the value of what Korean people and companies newly produced in one year.

The word 'Domestic' is important here. GDP counts by where something was made, not by who made it. Batteries a Korean company makes at a US factory count in US GDP, and products a foreign company makes at a Korean factory count in Korean GDP.

Why only 'final' products are counted

Let's follow the path a loaf of bread takes to reach the dinner table. If you add up sales at every stage, the same wheat is counted several times. So GDP counts only the value of final products sold to consumers at the end, or, in other words, adds up only the value newly added at each stage ().

Wheat farmGrows wheat and sells it to the flour mill for KRW 1 million.Value newly added: KRW 1 million
Flour millGrinds the wheat into flour and sells it to the bakery for KRW 1.5 million.Value newly added: KRW 500,000
BakeryBakes bread from the flour and sells KRW 2.5 million worth to customers.Value newly added: KRW 1 million

This is a hypothetical example. Adding up the sales at every stage gives KRW 5 million, but the value that goes into GDP is the final sales of KRW 2.5 million (= sum of value added 100 + 50 + 100, in units of KRW 10,000).

An easy analogy · a whole class's one-year report card

Imagine the 'class total' you get by adding up every student's test score. A big total means the class studied a lot, and if it grew from last year, the class improved. GDP is the nation's total production score. But you can't just look at the size like a class total; to read it properly you also have to see how much it grew from last year (the growth rate) and who pulled the score up (the makeup). STEP 2 and STEP 3 of this lesson cover exactly those two points.

What is included and what is left out

Included in GDP

  • Cars, semiconductors, and apartments newly made this year
  • Services such as hair salons, hospitals, and banks
  • Education and defense services provided by the government
  • Brokerage fees for helping with a used car deal

Left out of GDP

  • The used car or secondhand goods trade itself (already produced)
  • Money spent buying and selling stocks and real estate (only the owner changes)
  • Unpriced work such as housework and volunteering
  • Pensions and support payments the government hands out (transfers, not production)

It is interesting that money used to buy and sell stocks is not included in GDP. A stock trade only changes the owner of an existing piece of a company; nothing new is made. Instead, the trading commissions brokerages receive are production of a service and so are included in GDP.

Quick checkDoes a 5-year-old used car bought this year for KRW 30 million add KRW 30 million to this year's GDP?
No, it does not. That car was made 5 years ago and was already counted in GDP that year. All that is newly created this year is a service such as the brokerage fee the used car dealership received, and only that amount goes into this year's GDP.

STEP 2Nominal vs. real, and the four pieces of GDP

Now that you know how big GDP is, it's time to look at 'how much it grew' and 'what it is made of.'

GDP grows when prices rise too: nominal and real

GDP is calculated by multiplying output by price. So even if not one more loaf of bread is baked, GDP gets bigger when bread prices rise. The value calculated at that year's prices is , and the value that holds prices at a base year and looks only at changes in output is . As you learned in Lesson 3, prices are always moving with supply and demand, so to see whether the economy has 'really produced more,' you need to look at real GDP. The mentioned in the news is how many percent real GDP grew compared with a year earlier.

Try it with a small country that makes only bread

Nominal GDP growth rateat that year's prices
+5.1%
Real GDP growth rate= economic growth rate
+2.0%

This is a hypothetical country that makes only one thing, bread. Nominal growth rate = (1 + change in output) × (1 + change in price) − 1. 'Like Korea in 2025' uses Korea's actual 2025 real growth rate of 1.1% and a price factor of about 3.3%, backed out from the 4.4% nominal growth rate.

Use the sliders to create 'a year when only prices rose.' Nominal GDP grows but real GDP shrinks. In fact, Korea's nominal GDP in 2025 grew 4.4%, but the real growth rate after removing the price effect was 1.1%. The economy-wide price index that creates the difference between the two is called the .

Twenty years of Korean economic growth

Korea's real GDP growth rate (annual, %)

Source: Bank of Korea Economic Statistics System (ECOS) 200Y101 Gross Domestic Product (real growth rate), retrieved 2026-10-05. 2009 global financial crisis 0.8%, 2020 COVID-19 −0.7%.

The bars are uneven. In the 2009 global financial crisis it dropped sharply to 0.8%, in 2020 during COVID-19 it slipped backward to −0.7% and then jumped to 4.7% in 2021. You can also see growth that was around 3% in the early 2010s coming down to the 1–2% range recently. The waves that the growth rate makes as it rises and falls are the business cycle you'll learn about in the next lesson.

GDP is split into four pieces

What is made has to be bought by someone. So GDP can be split by 'who bought it.' The four economic agents from Lesson 2 appear again just as they were.

GDP = Consumption (C) + Investment (I) + Government spending (G) + Net exports (X − M)The sum of what households buy, firms invest, the government spends, and the rest of the world buys
Consumption · households

. Money households spend on things like clothing, food, telecommunications, and travel. It is the biggest piece in most countries.

Investment · firms

. Money spent for future production, such as factories and equipment, buildings and roads, and software and R&D. It swings the most with the business cycle.

Government spending · government

Government consumption such as civil servant salaries, defense, education, and health care, plus public investment such as roads and ports.

Net exports · rest of the world

= exports − imports. What the rest of the world bought from us is added, and what we bought from abroad is subtracted.

KoreaKRW 2,677 trillion

    Sources: Bank of Korea ECOS 200Y109 Expenditure on Gross Domestic Product (original series, nominal, annual); US BEA national income accounts (FRED: GDP, PCEC, GPDI, GCE, NETEXP, 2025 annual average), retrieved 2026-10-05. Korea's investment is gross capital formation (including inventories), shares are on a nominal basis, and because of statistical discrepancies they may not add up to exactly 100%.

    The two countries look quite different. The US is a 'nation of consumption' where consumption makes up about 68% of GDP, and net exports are −3%, meaning imports exceed exports. Korea has a lower consumption share of about 48% but a large investment share of about 29%, and net exports are +5.5%. The more important numbers are the totals hiding behind net exports. Korea's exports in 2025 were about 46% of GDP and imports about 41%. Even if the net exports piece looks small, it means that when the global economy wobbles, a chunk close to half of GDP wobbles with it.

    Common misconceptions

    'If nominal GDP grew, the economy got better?'
    Not necessarily. Nominal GDP grows even if only prices rise and output stays the same. To check whether the economy has actually grown, use the real growth rate.
    'Korea's net exports are only 5%, so exports matter less?'
    No. Net exports are just the 'difference' of exports minus imports. Exports themselves are about 46% of GDP, and the earnings of representative sectors such as semiconductors, autos, and shipbuilding come from there.
    'Stocks in countries with higher growth rise more?'
    In many cases that is not so. As you learned in Lesson 1, the stock price is earnings times multiple, and high growth expectations may already be reflected in the stock price through a high multiple. GDP is only the 'big ocean' of earnings; it is not the same as an individual company's earnings.
    Quick checkIf nominal GDP grew 6% in a certain year and the price factor was 4%, roughly what was the real growth rate?
    About 2%. You can approximate the real growth rate by subtracting the price factor from the nominal growth rate (exactly, 1.06 ÷ 1.04 − 1 ≈ 1.9%). Of the 6% growth, 4% is the effect of higher prices, and the amount truly produced more is about 2%.

    STEP 3Reading GDP releases through stocks

    Now let's read an actual GDP release and connect those numbers to the 'earnings knob' from Lesson 1.

    Same growth rate, different calculations: quarter-on-quarter and annualized

    GDP is released every quarter. The Bank of Korea publishes its first estimate (the advance estimate) about a month after the quarter ends, and the US Department of Commerce's Bureau of Economic Analysis (BEA) also publishes its first estimate around the same time. However, the two countries display the growth rate differently.

    How it is displayedMeaningMain use
    Quarter-on-quarterHow many percent it grew from the immediately preceding quarterBank of Korea quarterly release
    AnnualizedWhat the growth would be in percent if this quarter's pace continued for a whole yearUS BEA quarterly release
    Year-on-yearHow many percent it grew from the same quarter a year earlierBoth countries also publish this

    For example, Korea's real GDP in Q2 2026 grew 0.6% quarter-on-quarter. If four quarters continue at this pace, 1.006⁴ − 1 ≈ 2.4%, so in the US-style annualized rate it is about 2.4%. This is why you should not read headlines like 'US grows 3%, Korea grows 0.6%' as Korea being 5 times slower. You have to line up the basis before comparing.

    Korea's real GDP growth rate (quarter-on-quarter, seasonally adjusted, %)

    Source: Bank of Korea ECOS 200Y102 Gross Domestic Product (real, seasonally adjusted, quarter-on-quarter), retrieved 2026-10-05. The latest quarter may be revised when the preliminary estimate is released.

    Quarterly growth rates swing much more than annual ones. A single quarter can come out negative, as in Q2 2024 and Q1 2025, or jump sharply to 1.8%, as in Q1 2026. So rather than being startled by one quarter's number, you need to get in the habit of looking at the trend over two or three quarters together with the year-on-year rate. Also remember that first releases are often revised later.

    For stocks, like this: which piece moved?

    In Lesson 1 we said that business conditions, consumption, and exports mainly move the 'earnings knob.' The four pieces of GDP are a map showing in which sectors that earnings knob is moving. That is why the breakdown matters more than the single growth number.

    GDP pieceSectors whose earnings tend to grow when it expandsHow to read it
    Private consumptionRetail, food and beverage, cosmetics, travel and leisureWhen household income and sentiment improve, domestic-demand sectors see revenue grow.
    Capital expenditureSemiconductor equipment, machinery, industrialsA sign that companies are expanding factories. It swings widely along with the semiconductor cycle.
    Construction investmentConstruction, cement, steelSensitive to interest rates and the real estate cycle. Interest rates are covered in detail in Part 3.
    Government spendingInfrastructure, defense, health careMoves with the budget and policy direction.
    ExportsSemiconductors, autos, shipbuilding, EV batteriesAbout 46% of Korea's GDP. Heavily influenced by the global economy and the exchange rate (Part 5).

    For example, if a release says 'growth was weak at 0.5%, but exports grew 3%,' earnings expectations for export sectors may improve more than for domestic-demand sectors. Conversely, if it says 'exports fell, but private consumption rebounded,' domestic-demand sectors may get relatively more attention. However, the market reacts to the gap from expectations rather than to the released number itself. You'll learn this principle in Lesson 20. You can check which sectors current interest rates, exports, and exchange rates favor on the Macro Map.

    It is not always so. Stock prices often move several months ahead of the economy (Lesson 34), so on a day when a poor growth rate is released, stocks may even rise on the view that 'the worst is over.' Remember that GDP is the report card of a quarter that has already passed.

    Quick checkUS GDP was released as 'grew at an annualized 2.0%.' Roughly what is that as a Korean-style quarter-on-quarter rate?
    About 0.5%. The annualized rate stretches a quarter's pace out to a year, so you reverse it by taking the fourth root. The fourth root of 1.02 − 1 ≈ 0.5%. A rough estimate of 'annualized rate ÷ 4' is similar.

    ✓What we learned today

    • GDP = the sum of the market value of final goods and services newly produced within a country over a given period. Intermediate goods are excluded, and things that are not newly produced, such as used goods trades and stock trading, are not included.
    • Nominal GDP is measured at that year's prices and real GDP at base-year prices. The economic growth rate is calculated from real GDP, so it shows the 'amount truly produced more' with the price effect removed. In 2025, Korea was +4.4% nominal and +1.1% real.
    • GDP = consumption + investment + government spending + net exports. In 2025 the private consumption share was about 48% in Korea and about 68% in the US, and Korea is sensitive to the outside economy, with exports reaching about 46% of GDP.
    • Korea reports its growth rate quarter-on-quarter and the US reports it annualized. A 0.6% quarter-on-quarter rate is about 2.4% annualized, so when comparing numbers you have to line up the basis first.
    • Each piece of GDP connects to sector earnings. Consumption goes to retail and food and beverage, investment to construction and equipment, and exports to semiconductors, autos, and shipbuilding. When you read the news, ask 'which piece moved?'
    Continued in the next lesson · Lesson 5The economy has four seasons too

    GDP is the ruler that measures the size of the economy. In the next lesson, we follow the big wave that this GDP draws as it rises and falls, the four seasons of the business cycle that turns through recovery, expansion, slowdown, and recession.

    Quiz5-question quiz

    Pick an answer and it's graded right away with an explanation.

    Q1. A wheat farm sold wheat for KRW 1 million, the flour mill sold flour for KRW 1.5 million, and the bakery sold bread for KRW 2.5 million. How much does this whole process add to GDP?

    Q2. Which of the following is not included in this year's GDP?

    Q3. In a certain year nominal GDP grew 5% but real GDP stayed at 0%. What happened?

    Q4. Which of the following statements comparing the GDP makeup of Korea and the US in 2025 is correct?

    Q5. The Bank of Korea announced 'Q2 growth of 0.6% (quarter-on-quarter).' Roughly what is that as a US-style annualized rate?

    NextTerms · Next lesson · Related tools

    GDPGross Domestic Product

    The total value of the goods and services newly produced within a country over a given period.

    Real GDPReal GDP

    GDP with the effect of rising prices removed. It is used to see how much the economy has actually grown.

    Nominal GDPNominal GDP

    GDP calculated at that year's market prices. It gets bigger when prices rise even if output stays the same, so to check whether the economy has actually grown, use real GDP.

    Economic growth rateEconomic growth rate

    The percentage by which real GDP has grown compared with the reference period. Korea mainly reports quarterly growth quarter over quarter, and the US reports it annualized.

    GDP deflatorGDP deflator

    Nominal GDP divided by real GDP, showing the price level of the whole national economy. It covers a broader range of prices than consumer prices (CPI).

    Private consumptionPrivate consumption

    Money spent by households (and nonprofit institutions serving households) on goods and services. It makes up about 48% of Korea's GDP and about 68% of US GDP in 2025.

    Investment (gross capital formation)Investment, Gross capital formation

    One of the components of GDP: the money companies and the government spend for future production on equipment, buildings, software, R&D, and so on, plus changes in inventories. It is a different meaning from investing in stocks.

    Net exportsNet exports

    Exports minus imports. What overseas buyers take of our output is added to GDP, and what we buy from abroad is subtracted.

    EarningsEarnings

    The money a company has left after subtracting cost of sales, expenses, interest and taxes from revenue (net income). It is the most basic factor that determines the stock price.

    SectorSector

    A group of companies in similar businesses, divided into categories such as semiconductors, banks and autos.

    Put what you learned to use right away

    Macro Map→Return and CAGR Calculator→

    This is educational material and not investment solicitation. There is no guarantee that past relationships will repeat in the future.