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 Gross Domestic Product (GDP)


Combination of Economics & Accounting

It is the broadest, most comprehensive barometer of a country's overall economic condition. Sum of all the market values of all final goods and services produced in a country (domestically) during a specific period using that country's resources, regardless of the ownership of the resources.

GDP is calculated and reported on a quarterly basis as part of the National Income and Product Accounts (NIPAs). NIPAs were developed and are maintained today by the Commerce Department’s Bureau of Economic Analysis (BEA). NIPAs are the most comprehensive set of data available regarding US national output, production, and the distribution of income. Each GDP report contains data on the following:

  • Personal income & consumption expenditures
  • Corporate profits
  • National income
  • Inflation


To calculate GDP, the BEA uses the aggregate expenditure equation:
GDP=C+I+G+(X-M)
C is personal consumption expenditures
I is gross private domestic investment
G is government consumption expenditures & gross investment
X-M is the net export value of goods and services (exports - imports)

C (Personal Consumption Expenditures)

The total market value of household purchases during the accounting term, including items such as beer, telephone service, golf clubs, CDs, gasoline, musical instruments and taxicab rides.

These fall into 3 categories; durable goods, nondurable goods, and services.

  • Durable goods have shelf lives of three or more years
  • Non durable goods are food, clothing, energy products, and items like tobacco, cosmetics, prescription drugs, and magazines.

 

(Gross Private Domestic Investment)

Spending by businesses, expenditures on residential housing and apartments, and inventories. Inventories are valued by the BEA at the prevailing market price.

G (Government Consumption Expenditures & Gross Investment)

All money laid out by federal, state and local governments for goods and services.

X-M (Net Exports of Goods & Services)

The difference between the dollar value of the goods and services sent abroad and those it takes in across its borders.

The GDP report is a mother lode of information about a nations economy. The GDP is released on a quarterly basis. One commonly used strategy is calculating the output gap of the GDP. The output gap is the difference between the economy’s actual and potential levels of production. This difference yields insight into important economic conditions, such as employment and inflation.

The economy's potential output is the amount of goods and services it would produce if it utilized all its resources. Economists estimate the rate at which the economy can expand without sparking a rise in inflation. It is not an easy calculation, and it yields as many different answers as the economists who calculate it. Luckily, a widely accepted estimate of potential output is reported relatively frequently by the Congressional Budget Office (www.cbo.gov ). This website has information about methodology, underlying assumptions in computing the trend level as well as a detailed historical data.