GDP stands for Gross Domestic Product.
GDP is the total value of the goods and services produced in a country over a specified period.
It is one of the most comprehensive and closely watched economic statistics since it is used as a gauge of our economy’s overall size and health.
When compared with prior periods, GDP tells us whether the economy is expanding by producing more goods and services, or contracting due to less output.
It also tells us how one country’s economy is performing relative to other countries’ economies around the world.
A country’s GDP takes into account all of the private and public spending and output.
It includes government spending, business and consumer consumption, investments, and net exports (calculated as total exports minus total imports). GDP is typically calculated yearly but can be for any time period.
GDP is usually reported on a quarterly basis and can have a major impact on financial markets.
The total value of goods and services produced within the borders of the United States, regardless of who owns the assets or the nationality of the labor used in producing that output.
In contrast, GNP, or Gross National Product, measures the output of the citizens of the US and the income from assets owned by US entities, regardless of where located.
The growth of output is measured in real terms, meaning increases in output due to inflation have been removed.
The first basic concept of GDP was invented at the end of the 18th century. The modern concept was developed by the American economist Simon Kuznets in 1934 and adopted as the main measure of a country’s economy at the Bretton Woods conference in 1944.
What does”Gross” stand for?
“Gross” (in “Gross Domestic Product”) indicates that products are counted regardless of their subsequent use.
A product can be used for consumption, for investment, or to replace an asset. In all cases, the product’s final “sales receipt” will be added to the total GDP figure.
In contrast, “Net” doesn’t account for products used to replace an asset (in order to offset depreciation). “Net” only shows products used for consumption or investment.
What does”Domestic” stand for? (GDP vs. GNP and GNI)
“Domestic” (in “Gross Domestic Product”) indicates that the inclusion criterion is geographical: goods and services counted are those produced within the country’s border, regardless of the nationality of the producer.
For example, the production of a Japanese-owned factory in the United States will be counted as part of the United States’ GDP.
In contrast, “National” (in “Gross National Product”) indicates that the inclusion criterion is based on citizenship (nationality): goods and services are counted when produced by a national of the country, regardless of where the production physically takes place.
In the example, the production of a Japan-owned factory in the United States will be counted as part of Japan’s GNP (Gross National Product) in addition to being counted as part of the United States’ GDP.
GNI (Gross National Income) is a metric similar to GNP, since both are based on nationality rather than geography.
The difference is that, when calculating the total value, GNI uses the income approach whereas GNP uses the production approach to calculate GDP.
Both GNP and GNI should theoretically yield the same result.
What does “Product” stand for?
“Product” (in “Gross Domestic Product“) stands for production, or economic output, of final goods and services sold on the market.
Included in GDP:
- Final goods and services sold for money. Only sales of final goods are counted because the transaction concerning a good used to make the final good. For example, the purchase of steel used to build a car is already incorporated in the final good total value (price at which the car is sold).
Not included in GDP:
- unpaid work: work performed within the family, volunteer work, etc.
- non-monetary compensated work
- goods not produced for sale in the marketplace
- bartered goods and services
- black market
- illegal activities
- transfer payments
- sales of used goods
- intermediate goods and services that are used to produce other final goods and services
Nominal (Current) GDP vs Real (Constant) GDP
Nominal GDP (or “Current GDP”) = face value of output, without any inflation adjustment
Real GDP (or “Constant GDP”) = value of output adjusted for inflation or deflation. It allows us to determine whether the value of output has changed because more is being produced or simply because prices have increased. Real GDP is used to calculate GDP growth.
Why is GDP important?
GDP is an important measurement of a country’s economic growth, health, and size, and influence the direction of the financial markets.
The pace at which our economy is growing affects business conditions and investment decisions, as well as whether workers can find jobs.
When GDP is rising, the economy is typically deemed to be doing well. Employment can be expected to increase as companies hire more workers, which means people have more money to spend. This then generates more business and keeps the cycle going.
When GDP is shrinking, the opposite occurs: businesses cut back on production and expansion, and workers are laid off.
When the GDP doesn’t grow fast enough, businesses aren’t incentivized to expand and hire more workers, which in turn feeds the stagnant or downward cycle.
Policymakers will look to GDP when contemplating decisions on interest rates, tax, and trade policies.
By monitoring trends in the overall growth rate as well as the unemployment rate and the rate of inflation, policymakers are able to assess whether the current stance of monetary policy is consistent with that primary goal.
How to Calculate GDP
GDP can be calculated in three ways: using the production, expenditure, or income approach. All methods should give the same result.
- Production approach: the sum of the “value-added” (total sales minus the value of intermediate inputs) at each stage of production.
- Expenditure approach: the sum of purchases made by final users.
- Income approach: the sum of the incomes generated by production subjects.
By far the most widely used approach is the expenditure approach where:
GDP = consumption + investment + government spending + (exports /imports)
Expenditure Components of GDP
|C is Personal Consumption Expenditures||Also known as consumer spending, or the tally of all goods and services that consumers buy—from grocery items to health care coverage.|
|I is Gross Private Investment||Includes business spending on fixed assets such as machinery, equipment, and buildings, plus inventory investment; also incorporates consumers’ home purchases.|
|G is Government Purchases||Comprises federal, state, and local government spending for the provisioning of goods and services—from schools and roads to national defense.|
|X-M is Exports minus Imports||Or, net exports: the value of exports to other countries minus the value of imports into the U.S. (The dollar value of imports is subtracted to ensur|
In currency terms, the GDP level of different countries may be compared by converting their value in national currency, either by using the current currency exchange rate, where the GDP is calculated by exchange rates prevailing on the international currency markets.
This method offers better indications of that country’s international purchasing power and relative economic strength.
Another method of comparison is using the purchasing power parity exchange rate, whereby the GDP is calculated by the PPP (purchasing power parity) of each currency relative to a selected standard, i.e. the US dollar.
This method offers a view of the actual living standards of lesser developed countries as it compensates for the weaknesses of the local currencies in world markets.
GDP is usually calculated by the national statistical agency of the country following the international standard.
In the United States, GDP is measured by the Bureau of Economic Analysis within the U.S. Commerce Department.
The international standard for measuring GDP is contained in the System of National Accounts, compiled in 1993 by the International Monetary Fund (IMF), the European Commission, the Organization for Economic Cooperation and Development (OECD), the United Nations (UN), and the World Bank.
GDP Growth Rate
The GDP growth rate measures the percentage change in real GDP (GDP adjusted for inflation) from one period to another, typically as a comparison between the most recent quarter or year and the previous one.
It can be a positive or negative number (negative growth rate, indicating economic contraction).
GDP per capita
GDP per capita is calculated by dividing nominal GDP by the total population of a country.
It expresses the average economic output (or income) per person in the country.
The population number is the average (or mid-year) population for the same year as the GDP figure.
Data is typically released during the final week of the month.
The first or advance estimate is released during the final week of the month immediately following the end of a calendar quarter.