Мустафина Дарья Викторовна, Финансовый университет при Правительстве РФ
This article contains a basic information about one of the most important indicators of macroeconomics named GDP. The size of an economy can be measured by this indicator that is why it is so significant. This article also includes an information about the main components of gross domestic product. In addition, there is an explanation of the significance of this index for ordinary people, economists and investors.
Key words: GDP, gross domestic product, macroeconomics, economics, economy.
To understand macroeconomics, we first have to measure the economy. But how do we do that?
The size of a nation’s overall economy is typically measured by its gross domestic product, or GDP, which is the value of all final goods and services produced within a country in a given year. Measuring GDP involves counting up the production of millions of different goods and services.
The four components of gross domestic product are personal consumption, business investment, government spending and net exports. That tells you what a country is good at producing. That's because GDP is the country's total economic output for each year. It's equivalent to what is being spent in that economy.
1. Personal Consumption Expenditures
Almost 70 percent of what the United States produces is for consumer spending. In 2016, that was $12.82 trillion.
Goods are further sub-divided into two even smaller components. The first is durable goods, such as autos and furniture. These are items that have a useful life of three years or more. The second is non-durable goods, such as fuel, food and clothing.
Services are almost half of U.S. GDP. These include commodities that cannot be stored and are usually consumed when purchased.
2. Business Investment
Business investment includes purchases that companies make to produce consumer goods.
In 2016, business investments were 16 percent of U.S. GDP.
The BEA divides business investment into two sub-components: Fixed Investment and Change in Private Inventory.
Most of Fixed Investment is non-residential investment. That consists primarily of business equipment, such as software, capital goods and manufacturing equipment.
Change in Private Inventory is how much companies add to the inventories of the goods they plan to sell. When orders for inventories increase, it means companies receive orders for goods they don't have in stock. They order more to have enough on hand. It's important for companies to have enough inventory so they don't disappoint and turn away potential customers. Therefore, an increase in private inventories contributes to GDP.
3. Government Spending
Government spending was 18 percent of total GDP.
4. Net Exports of Goods and Services
Imports and exports have opposite effects on GDP. Exports add to GDP and imports subtract. The United States imports more than it exports, creating a trade deficit. That's because America still imports a lot of petroleum, despite gains in domestic shale oil production. The U.S. economy is based on services, which are difficult to export.
In 2016, imports subtracted $2.74 trillion, while exports added $2.21 trillion.
What It Tells You About the Economy
The different measures of GDP are great tools for comparing the economies of other countries or how an economy changes over time. When economists talk about the “size” of an economy, they are referring to GDP. The gross domestic product (GDP) is one of the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period; you can think of it as the size of the economy.
For example, we can see the economic growth in the US in the bar graph “U.S. GDP, 1995-2016”.
The GDP impacts personal finance, investments and job growth.
Investors look at the growth rate to decide if they should adjust their asset allocation. They also compare country growth rates to decide where the best opportunities are. Most investors like to purchase shares of companies that are in rapidly growing countries.
The Federal Reserve uses the growth rate to decide whether to implement expansionary monetary policy to ward off recession or contractionary monetary policy to prevent inflation. For more, see The Federal Funds Rate and How It Works.
You could use the GDP to look at which sectors of the economy are growing and which are declining. You can apply for jobs in growing sectors. This report also helps you determine whether you should invest in.
According to the presented information, it can be said that economic production and growth – what GDP represents – have a large impact on nearly everyone within the economy. A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It's not hard to understand why; a bad economy usually means lower earnings for companies, which translates into lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.
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