The broadest measure of the overall economy is the gross domestic product. This figure is the total value (gross) of all goods and services produced (product) in the nation (national) in a year. GDP measures final use.
For example, the leather sold to a shoe factory is not counted; its price is included in the price of the shoes sold to consumers. Therefore, adding the leather into the GDP would mean counting it twice.
In short, GDP is the sum of all individual consumer spending, all government spending (except for interest payments and “transfer payments” like pensions) and all private sector capital-forming investment (i.e., facilities needed to create jobs and products) within the country. This differs from gross national product which measures the total output of a country whether their enterprises are physically located domestically or abroad.
GDP can be expressed in current dollars, i.e., the actual amounts paid for all its constituents, or in terms of base year’s dollars, such as 1982 dollars. The latter eliminates the effects of inflation since the same yardstick is used to compare two years. The commerce department publishes its estimate of GDP once every quarter.
Analysts break the GDP figure into several components.
1. Consumption is usually the largest GDP component in a country’s economy. This consists of household final consumption expenditure in the economy which is made up of durable goods, non-durable goods and services. The purchase of homes is not included.
2. Investment is another component such as construction of a new plant the purchase of computers or the purchase of equipment to set up a factory. This is also where the purchase of housing shows up. This does not include the buying of investments such as stocks, bonds or the use of bank accounts.
3. Government spending is the total of government expenditures on final goods and services. This component contains employee compensations, capital improvements and military hardware. It doesn’t include payments made by Social Security and/or unemployment.
4. Gross exports are then counted along with imports (see below), which are subtracted. A country’s exports include manufactured goods, technology products, agricultural products and services.
5. A country’s gross imports including petroleum-based products, technology components and automobiles are totaled.
The formula for GDP looks like the following: consumption + investment + government spending + (gross exports – gross imports) = GDP. Gross exports–gross imports is essentially the trade balance, be it negative or positive.
Generally speaking, the GDP is viewed as the most complete measure of economic activity.
Quote of the week: “The essence of knowledge is, having it, to apply it; not having it, to confess your ignorance.” — Confucius
Bart Ward is the chief executive officer of Ward & Co. Ltd., an Anoka-based registered investment adviser – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.