Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Gross Domestic Product (GDP)

What it is:

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.

How it works (Example):

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.

The equation used to calculate GDP is as follows:

GDP = Consumption + Government Expenditures + Investment + Exports - Imports

The components used to calculate GDP include:

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

The GDP report also includes information regarding inflation:
-- 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.

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.

Why it Matters:

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.

 

Related Terms View All
  • Natural Capital
    Let's say Company XYZ is a paper manufacturer. It owns 50,000 acres of forestland in...
  • Junior Issue
    For example, if Company XYZ issues preferred stock, those shares are senior to Company...
  • Taking the Street
    Let's say John Doe has a Gordon Gekko complex and wants to make some money by...
  • Qualified Mortgage Insurance Premium
    Let’s say John and Jane Doe buy a house. They obtain a mortgage to buy the home, but...
  • Pale Recession
    Former Federal Reserve Chairman Alan Greenspan coined this term in a 2008 television...