How is GDP calculated in the U.S.?
Provided By: Duane J. Silbernagel
GDP, or gross domestic product, is a measurement of the total value of all goods and services produced in the United States over a given time period. It is used by economists, government officials, market forecasters and others to gauge the overall health of the U.S. economy.
Although there are several ways of calculating GDP, the expenditures approach is the most common. It focuses on final goods and services purchased by four groups: consumers, businesses, governments (federal, state, and local), and foreign users.
The calculation and a description of its components follow:
Consumption (C): Also known as personal consumption, this category measures how much all individual consumers spend in the U.S.
Investment (I): Not to be confused with investments in the stock and bond markets, this is the amount businesses spend on fixed assets (e.g., machines and equipment) and inventories, as well as the amount spent on residential construction.
Government (G): This category tracks the amount the government spends on everything from bridges and highways to military equipment and office supplies. It does not include “transfer payments”–for example, Social Security and other benefit payments.
Exports (X): This is the value of goods and services produced in the U.S. and purchased in foreign countries.
Imports (M): This is the value of goods and services produced in foreign countries and purchased in the U.S.
Historically, the U.S. has run a “trade deficit,” which means imports have outpaced exports.
Once the final GDP values are calculated, the percentage change is calculated from one time frame to the next, generally quarter to quarter or annually. Reported quarterly by the Bureau of Economic Analysis, these percentages can influence both investment markets and policy decisions.
What is the most important component of GDP in the
We often hear in the media that consumer spending is crucial to the overall health of the U.S. economy, but exactly how important is it? Representing approximately two-thirds of overall GDP, consumption–the almighty consumer–is the largest driver of economic growth in the United States. Of the nearly $18 trillion in U.S. GDP
(2015), American shoppers are responsible for a piece of the pie worth about $12 trillion.
Consumption is tracked by the Bureau of Economic Analysis, and is reported as Personal Consumption Expenditures (PCE) in its monthly “Personal Income and Outlays” news release. Since the late 1960s, PCE as a percentage of overall GDP has crept up from a low of approximately 58% to nearly 70% today.
PCE is divided into goods and services. The services category typically represents the largest part of PCE, accounting for more than 65% over the past two years. Examples of services include health care, utilities, recreation, and financial services.
Goods are broken down further into durable and nondurable goods. Durable goods are those that have an average life of at least three years. Examples include cars, appliances and furniture. Nondurable goods are those with an average life span of less than three years and include such items as clothing, food, and gasoline.
Durable goods represent approximately 10% of total PCE, while nondurable goods make up about 20%.
So the next time you’re out shopping, for anything from a bottle of ketchup to a new car, consider that you’re doing your part to fuel our nation’s growth.
Sources: World Bank.org, accessed June 2016; Federal Reserve Bank of St. Louis, 2016; Bureau of Economic Analysis, 2016
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This article is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. Waddell & Reed does not provide legal or tax advice. This information is prepared by an independent third party, Broadridge Investor Communication Solutions, Inc. and is provided for informational and educational purposes only. Waddell & Reed believes the information has been obtained from sources considered to be reliable, but does not guarantee the accuracy of the information provided. This information is not meant to be a complete summary or statement of all available data necessary for making financial or investment decisions and does not constitute a recommendation. Please consult with a tax professional regarding your personal situation prior to making any financial related decisions. Also note that the information provided may include references to concepts that have legal, accounting and tax implications. It is not to be construed as legal, accounting or tax advice, and is provided as general information to you to assist in understanding the issues discussed. Neither Waddell & Reed, Inc., nor its Financial Advisors give tax, legal, or accounting advice. Nothing contained herein is intended as a solicitation or an offer to buy or sell any product or service mentioned and they may not be suitable for all investors.
Duane Silbernagel is a Financial Advisor in Lincoln City, Oregon offering securities through Waddell & Reed, Inc., Member FINRA and SIPC. He can be reached at (541) 614-1322 or via email at DSilbernagel@wradvisors.com.
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