What is the GDP?

GDP refers to Gross Domestic Product and it is one of the tools that measures the economic health of the nation. There are two approaches to calculating GDP, the income approach and the more common expenditure approach.

The income approach involves adding up:

1. total wages, salaries, and supplementary income plus

2. corporate profits

3. interest and miscellaneous investment income

4. farmers’ income

5. income from non-farm unincorporated businesses

6. indirect taxes minus subsidies and

7. depreciation.

The expenditure approach involves adding up:

1. consumption - private spending on durable and non-durable goods and services

2. investment - business spending on equipment and household spending on new housing

3. government spending - on final goods, public servant salaries and military spending and

4. net exports - total exports minus total imports.

 

 

GDP can also be thought in terms of production. It is the total value of everything produced by all people and companies within the country. The Bureau of Economic Analysis (BEA) reports on Real GDP (GDP adjusted for inflation). Last year, GDP was $15.3 trillion.

Why is GDP important? Economic growth or contraction is measured by the change in GDP from quarter to quarter. This makes GDP important to everyone since it impacts employment and stock prices. Negative growth in GDP is one of the leading indicators for whether the economy is in a recession. The Federal Reserve makes monetary policy decisions surrounding GDP. Following GDP statistics can help prepare consumers for future layoffs if the growth rate is negative or for higher interest rates if the growth rate is increasing.

Joan Villazon

CFO

Consumer Debt Solutions, Inc.
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