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| Gross Domestic Product (GDP) |
Gross Domestic Product (GDP) is the broadest quantitative measure of a nation's total economic activity. More specifically, GDP represents the monetary value of all goods and services produced within a nation's geographic borders over a specified period of time. The Department of Commerce releases GDP data for the U.S. economy on a quarterly basis at 8:30 am EST on the last business day of the next quarter.
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The components used to calculate GDP include:
Personal Consumption:
-- Durable goods (items expected to last more than three years)
-- Nondurable goods (food and clothing)
-- Services
Government Expenditures:
-- Defense
-- Roads
-- Schools
Investment Spending:
-- Nonresidential (spending on plants and equipment), Residential (single-family
and multi-family homes)
-- Business inventories
Net Exports:
-- Exports are added to GDP
-- Imports are deducted from GDP
A common equation used to calculate GDP
is as follows:
GDP = Consumption + Government Expenditures + Investment +Exports - Imports
-- The implicit price deflator measures changes in prices and spending patterns.
-- The fixed-weight price deflator measures price changes for a fixed basket of
over 5,000 goods and services.
When GDP declines for two consecutive quarters or more, by definition the economy is in a recession. Meanwhile, when GDP grows too quickly, and fears of inflation arise, the Federal Reserve often attempts to stimulate the economy by raising interest rates.
Current Dollars vs. Constant Dollars
GDP is calculated both in current dollars and in constant dollars. Current
Dollar GDP involves calculating economic activity in present-day dollars. This,
however, makes time period comparisons difficult due to the effects of
inflation. By comparison, Constant Dollar GDP factors out the impact of
inflation and allows for easy comparisons by converting the value of the dollar
in other time periods to present-day dollars.
GNP vs. GDP
Investors need to be mindful of the difference between Gross National Product
(GNP) and Gross Domestic Product (GDP).
GNP:
Gross National Product measures the total amount of goods and services that a
country's citizens produce regardless of where they produce them. As a
result, GNP includes such items as corporate profits that multinational firms
earn in overseas markets. For example, if an American firm operates a plant in
Brazil, then the profits that the firm earns would contribute to U.S. GNP.
GDP:
By contrast, GDP measures the total amount of goods and services that are
produced within a country's geographic borders. Therefore, for GDP
purposes, an American company with a plant in Brazil will actually contribute to
Brazilian GDP.
To obtain GDP figures for this year,
you can access the U.S. Department of Commerce's Bureau of Economic Analysis
website at:
http://www.bea.doc.gov/bea/dn/home/gdp.htm
In addition, we also provide GDP and
other economic data information in each issue of our free Investor Update
publication. Please visit
this link to learn more about this complimentary email newsletter.
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