Gross Domestic Product: A Primer

The economic indicator known as Gross Domestic Product (GDP) represents the dollar value of all purchased goods and services over one year. It is comprised of purchases from all private and public consumption, including for-profit, nonprofit, and government sectors. Four components are added to calculate the GDP:

Consumer spending
Government spending
Investment spending (this includes business, inventory, residential construction, and public investment), net exports, meaning the value of goods exported minus the cost of goods imported

The government calculates and publishes the GDP rate quarterly and for the entire year.

Primer to Gross Domestic Product — The economic indicator known as Gross Domestic Product GDP represents the dollar value of all purchased goods and services over one year

What Affects GDP?

There are different ways GDP is measured. For example, nominal GDP refers to a straight calculation of raw data, while real GDP adjusts the analysis to include the impact of inflation.

When inflation increases, the GDP tends to rise; when prices drop, so does the GDP. Be aware that this adjustment can happen even when there is no change in the quantity of goods and services produced in the United States during that time frame.

A vital component of the GDP calculation is net exports. This number rises when the country sells more goods and services to foreign nations than it buys. A trade surplus means the United States sells more than it purchases, which is a vital contributor to GDP. When the United States buys more foreign goods than it sells, this creates a trade deficit, a negative weight in the GDP calculation.

GDP also reflects demand. The dollar output of specific sectors and industries rises and falls based on their popularity and products and services. For example, when a new product is well received, then those sales increase that sector’s contribution to the GDP. This is a useful measure because it enables companies to make better research and development decisions based on recent success. The same is true when a new product, or even an upgrade to a new product, does not increase sales.

What Does GDP Indicate?

The GDP is the most common, broad-based measure used to monitor the country’s economic progress. When it is on the rise, the economy is considered to be growing. When the GDP rate drops – even if it remains in positive territory – the economy is viewed as contracting. Suppose it continues to slip quarter after quarter. In that case, it is an indicator that the economy might be in trouble, and the Federal Reserve or Congress could consider altering monetary (interest rates) or fiscal (taxes and government spending) policy to inject cash into the nation’s financial system.

Technically, economists define a recession as a prolonged period of economic decline, often precipitated by two consecutive quarters of negative GDP growth.

This economic yardstick also is used to indicate a country’s general standard of living. The better a country can produce the goods and services that its residents and businesses use, the more capital is infused back into the country. Therefore, higher GDP levels indicate a more prosperous nation and a relatively higher standard of living among its residents.

The GDP doesn’t just gauge domestic economic health. It serves as a comparison measure to other countries. This is particularly important during periods of growth and decline when the United States can track how well it responds to global economic factors relative to other countries.

Current Trendline

According to the Bureau of Economic Analysis, first-quarter real GDP closed at 3.1 percent. In the second quarter, real GDP fell to 2.0 percent. The advanced assessment for the third quarter of 2019 is 1.9 percent.