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. Usually,
GDP is expressed as a comparison to the previous quarter or year. For
example, if the year-to-year GDP is up 3%, this is thought to mean that
the economy has grown by 3% over the last year. The United States has a
GDP of $18,869.4 billion as of the fourth quarter of 2016, according to
the Bureau of Economic Analysis.
Measuring GDP is complicated (which is why we leave it to the
economists), but at its most basic, the calculation can be done in one
of two ways: either by adding up what everyone earned in a year (
income approach), or by adding up what everyone spent (
expenditure method). Logically, both measures should arrive at roughly the same total.
The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees,
gross profits for incorporated and non incorporated firms, and taxes less any
subsidies.
The expenditure method is the more common approach and is calculated by
adding total consumption, investment, government spending, and
net exports.
As one can imagine, economic production and growth – what GDP represents
– have a large impact on nearly everyone within that economy. For
example, when the economy is healthy, you will typically see low
unemployment and wage increases as businesses demand labor to meet the
growing 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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