Definition, examples and economic use

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<p class = "web-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Gross domestic product (GDP) measures the market value L goods and services that a country produces in a given period of time is used to measure the economic growth and standard of living of its population, as well as the investment decisions and economic policies that affect everyone. article explains the GDP, its operation and why it is important. Financial Advisor can also help you understand the GDP to make better investment decisions. "data-reactid =" 31 "> Gross domestic product (GDP) measures the market value of all goods and services produced by a country over a period of time, the country's economic growth and the standard of living of its population. GDP also guides investment decisions and economic policy that concerns everyone.This article explains GDP, how it works, and its importance.A financial advisor can also help you understand GDP to make better business decisions. 39, investment.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "How do you calculate GDP?"data-reactid =" 33 ">How do you calculate GDP?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Car GDP represents the total economic output of a country, it has several moving parts. Below, we explain each of these parts, as well as the letter that each of them represents in the GDP formula: "data-reactid =" 34 "> The GDP representing the total economic output of one country, it has several moving parts, explain each of these parts as well as the letter that each represents in the formula for GDP:

  • Personal consumption expenditure: the total amount that citizens spend on goods and services (C)
  • Government Expenditures (G)
  • Business investment (I)
  • Net exports: Exports less imports (NX)
  • So when you combine the GDP elements, you get the formula: GDP = C + G + I + NX.

    In 2017, these components of GDP in the United States reached $ 19,485 billion.

    Personal consumption expenditure accounts for about 70% of the nation's GDP. In general, high GDP represents a growing economy where people earn more and spend more.

    But there are many ways to analyze GDP. A closer look can tell us more about the economy of a country and the state of its working class.

    <p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Different examples of GDP"data-reactid =" 44 ">Different examples of GDP

    <p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "The formula above represents what economists call the Nominal GDP C is the GDP that does not count inflation. "data-reactid =" 45 "> The above formula represents what economists call nominal GDP, which is a GDP that does not take into account inflation.

    <p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "So, if the nominal GDP increased by one year after year, it may seem that the country produces more goods and services. inflation has increased Dramatically at the same time, it could mean that the country was producing the same amount but prices were increasing significantly. Do not forget that GDP also represents the total amount that citizens of the country spend on goods and services. "Data-reactid =" 46 "> So, if the nominal GDP increases from one year to the next, it may seem that the country produces more goods But if inflation increased dramatically at the same time time, the country could produce the same amount but prices increase significantly.Not forget that the GDP also represents the total sum that the country's citizens spend in goods and services.

    What is known as "real GDP" is therefore a more accurate representation of economic growth. It consists of eliminating the effect of inflation.

    In the United States, the Bureau of Economic Analysis (BEA) calculates real GDP from year to year taking into account a price deflator. This indicates how much prices have fluctuated from a base year to the current year.

    Real GDP is equal to nominal GDP multiplied by the deflator. We will explain.

    Let's say prices have gone up 5% from the base year to the current year. The deflator is then 1.05. Nominal GDP is therefore multiplied by this deflator to obtain real GDP. This gives you the value of goods and services produced while eliminating the effects of inflation.

    As inflation tends to increase over time, nominal GDP is generally higher than GDP. In 2017, nominal GDP in the United States stood at $ 19,485 billion and real GDP at $ 18,051 billion. Most countries use real GDP to report their growth rate or the pace at which the economy fluctuates from one quarter to the next.

    In the third quarter of 2018, US real GDP increased by 3.8%.

    In addition, the BEA makes some additional adjustments to obtain real GDP. It does not take into account income generated by US companies and people outside the country. In doing so, it also removes the effect of exchange rates and government policies on trade.

    The BEA also takes into account the total value of products produced in calculating GDP. Take a can of soda, for example. The cost of the sugar and other ingredients, as well as the aluminum used to make the box, was used to make this product. But GDP only takes into account the total cost of the final product: your delicious Coca-Cola can.

    <p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Why is GDP important?"data-reactid =" 55 ">Why is GDP important?

    US economic policy is strongly influenced by the GDP growth rate. If it is too low, the country could sink into a recession or depression in the worst case. The Federal Reserve, the country's central bank, would act to prevent that. And his decisions could have a direct impact on your personal finances.

    To counter a recession, for example, the Fed can deploy an expansionist policy. This means that the government is printing more money and lowering interest rates to stimulate economic growth.

    The story continues

    In this scenario, underwriting student loans, car loans, business loans and mortgages becomes cheaper. Interest rates on credit cards have also dropped

    But GDP growth can also reach a point where it can trigger higher than usual inflation rates. In this case, the Fed may adopt a contraction policy and raise interest rates. So if you had a variable rate mortgage, you can expect it to increase. And you can expect the same for your credit card.

    <p class = "web-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "GDP growth is also closely monitored by investors in particular For example, if the GDP of some countries is in free fall, an investor may want to reorganize his asset allocation. "data-reactid =" 84 "> GDP growth is also closely watched by investors, especially those who are heavily involved in equities, for example, if the GDP of some countries is in free fall, an investor may want to reorganize its asset allocation.

    Investors also pay particular attention to reports on corporate earnings from GDP, which provide data on entire economic sectors.

    <p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "GDP limits"data-reactid =" 86 ">GDP limits

    GDP attempts to measure the economic strength of a country as well as the general standard of living of its population. Thus, high GDP or rapid growth rates would indicate a positive effect for both factors.

    However, some argue that GDP does not take into account other factors that may affect the standard of living, such as the environmental impact of a growing economy. People in this school of thought suggest that the cost of producing a material like plastic does not take into account the environmental cost.

    In addition, GDP integrates economic activity into official registers. So, that does not account for the amount of money generated on the black market by illegal means.

    Nevertheless, GDP can be one of many indicators for measuring a country's economic strength, as well as its rate of growth or failure.

    <p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Take-away"data-reactid =" 91 ">Take-away

    GDP is the total value of all goods and services that a country produces in a given period of time. Governments follow it to make economic policy decisions, which can directly affect their citizens. Investors also look closely at GDP to determine the economic sectors and countries in which they need to invest. However, it has its limits because it does not take into account all the economic activities and externalities.

    <p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Tips for Understanding GDP & nbsp;"data-reactid =" 113 ">Tips for understanding GDP

  • The GDP analysis can help you make important decisions regarding investment and asset allocation. If you want professional advice on how to use GDP analysis to your advantage, you should call a qualified financial advisor. We can help you find one with our SmartAdvisor Match Tool. Once you have answered simple questions, it will involve you with three qualified financial advisors in your area. You can access their profiles and compare their specialties before deciding to work with one of them.
  • Photo credit: © iStock.com / Kagenmi, © iStock.com / MarioGuti, © iStock.com / liulolo

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