Trade The Journey

Trade The Journey

GDP

“Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. Though GDP is usually calculated on an annual basis, it can be calculated on a quarterly basis as well (in the United States, for example, the government releases an annualized GDP estimate for each quarter and also for an entire year).

GDP includes all private and public consumption, government outlays, investments, private inventories, paid-in construction costs and the foreign balance of trade (exports are added, imports are subtracted). Put simply, GDP is a broad measurement of a nation’s overall economic activity. ” Investopedia

Growth Domestic Product. For many years, I heard the term and saw it on the news but failed to connect the GDP to my personal finances or investments. At most, I had a vague understanding of what it stood for and represented. After reading the same articles on investopedia over and over again, I can now say that I have upgraded to a foggy understanding.

The GDP is an important indicator but from what I have gathered, a lagging indicator meaning that it reflects what has already happened. The GDP is presented in four quarter estimates and we are currently in the second quarter, it is also presented yearly.  Here you can find the next release date for the GDP as well as find the GDP for the previous quarters. The GDP is continuously revised  as new information enters.

“The purpose of the GDP is to measure the current production of final goods.”

 

 GDP = C + I + G + (X – M)

 

This is the equation they use to produce the percentage that the economy has grown. If you were to look back at the GDP from over 50 years ago you would see that the  US economy has continued to grow at a stable pace compared to growing emerging countries/markets who have begun to increase their ability to produce more efficiently and effective. One exercise could be to compare what each country produces in relation to another countries size and growth pace. A countries ability to reinvest in itself and grow through technology and education becomes a determining factor in the GDP of that country.

If we break down the equation we will see that it is made up of:

C: Consumption. The total amount spent on consumer goods both durable and non durable goods. To show you how large or how big consumption plays in the United States, Personal Consumption Expenditures accounts for 70% of the GDP.  We have become a nation full of consumers heavily reliant on credit.

I: Gross Private Domestic Investment. This is the spending led by businesses. It is very sensitive to the economic cycle. There are investments in capital goods,  Fixed investments, and investments in inventory.

G: Government Spending. Federal/State/Local Government spending for goods and services. Interesting enough, social security and Medicare is accounted for Consumption expenditures.

(X-M) Exports minus Imports. Currently the United States operates at a negative in this column which mean we are importing more than we are producing.

As you research the GDP you’ll find that it is not quite as clear cut as the equation presents. For example,  where does corn appear in the GDP? Is it calculated once the farmer produces it? Once the grocery store sells it? Is it included in the salad that is made? The corn is counted once and mostly counted as a part of the final product, think salad.  Illegal industries are also not included the GDP.

Earlier it was mentioned that the GDP was a lagging indicator and hopefully you can see the reason. It takes awhile to compile all the information needed to gauge how much the economy truly produced.  As you progress, one indicator is never good enough and no amount of indicators can present you a crystal clear vision of the future.

But with enough information, you can make an educated guess. This is by no means meant to be an educational course of the GDP but a primer for learning more about the GDP and the different sections within each part of the equation.

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