When it comes to assessing a country or state’s economy, few numbers are more important than gross domestic product (or GDP). As the primary gauge of economic health—and the #1 indicator used by investors—it’s vital that entrepreneurs understand what this number measures and how it’s calculated.

The most basic explanation of GDP is that it’s a measure of the value of all the goods and services produced in a country during a certain period of time. A country’s total GDP is calculated by adding up market goods and services like consumption, investment, government spending and net exports.

There are several different ways to calculate GDP, but the most common is through the expenditure approach. This adds up the total market value of all final products purchased in the economy, such as consumption (C), investment (I), government purchases (G) and net exports (X – M).

One issue with this calculation is that it doesn’t fully take into account quality improvements and new products. For example, a computer that’s more expensive and powerful than an older model isn’t reflected in GDP.

Additionally, GDP figures are collected at current prices, or nominal GDP. To get a better idea of the actual value of goods and services, economists use a statistical tool called a price deflator to adjust for inflation and determine real GDP. This allows us to see whether more is being produced or if prices are simply increasing faster than production.