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Financial Education for Everyone

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Once every three months the economic news will be dominated by the Gross Domestic Product (GDP). That's because the last day of the quarter is when the U. S. Department of Commerce's Bureau of Economic Analysis releases the GDP report - for the previous quarter. The GDP is so difficult to calculate that it takes an entire government bureau a full three months just to come up with their initial estimate, and then over the next quarter the numbers are revised at least twice more as new information comes in.

What is GDP? It is the sum total of the market price of all the final goods and services produced within a country's borders during a given period of time – in the U. S. we measure it in quarters of a year, and then we extrapolate those numbers into annual figures.

The government uses the following method to calculate the GDP: They add all the consumer and government spending to the total business investments, and then also add in the country's net exports (actual exports minus actual imports). The term "gross" means that when considering business investments, any loss due to decreases in the company's stock price is not considered. And when we talk about final goods and services, we mean goods and services that will not be sold again as part of another good or service. The profit from the sale of the egg to the restaurant doesn't count by itself, but the profit from the sale of the omelet it goes into does. That way we are counting everything only once - the last time it is sold.

What this means is that every person who gets up each day, goes to work and produces goods or services that can be sold, is a part of the Gross Domestic Product – the measure of the value of what we all produce together in our country. When the government comes out and says the GDP is up, it generally means that we produced more overall than we did the previous quarter, relative to how much we imported. When they say that the economy has grown, the GDP is what they are talking about.

What happens when we produce more? We get to buy more. The whole country worked harder, and now we all get to play harder, buy more things and live a better life. And this is where it gets interesting, because just like you personally cannot spend more than you earn, neither can the country as a whole. If we don't produce as much as a country, then we are all going to have to consume less. Of course, in the same way that individuals can artificially maintain the same lifestyle by spending on credit when times are tight, the country can also borrow money. But eventually we have to get our GDP back up, or our credit will run out.

The GDP is also a really good indicator of how healthy our economy is overall. GDP growth means that lots of work is getting done, unemployment is down because everybody is working so hard, companies are making a lot of profit, and people have extra money to spend on more goods and services for themselves. This consumer spending tends to pump money back into the economy, demand for goods and services go up, our production goes up to meet that demand, and the GDP goes up even more. Lack of GDP growth means just the opposite.


This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.