Indicator 1 – GDP (Gross Domestic Product)

23 May

US GDP 1960-2010

Let’s start with some basics before we move onto analysis…

Gross Domestic Product (or real GDP) is the market value of all goods and services produced in a nation during a specific time period.  It is labeled “real” because each year’s data is adjusted to account for changes in year-to-year prices.  Mathematically, GDP = private consumption + gross investment + government spending + (exports − imports), or GDP = C + I + G + (X – M).  The U.S. Department of Commerce’s Bureau of Economic Analysis (www.bea.gov) releases the data quarterly, including any revisions, within the last week to 10 days of each month following the end of the quarter.

The economy of the United States is the world’s largest national economy.  Its nominal GDP was estimated at over $15 trillion in 2011, approximately a quarter of nominal global GDP.  Its GDP at purchasing power parity is the largest in the world, approximately a fifth of global GDP at purchasing power parity.  Purchasing power parity (PPP) allows us to compare the GDP between countries by taking into account the exchange rates between the two countries.

GDP in the U.S. expanded 2.2% in the first quarter of 2012 over the previous quarter.  Historically, from 1947 until 2011 the U.S. average quarterly GDP Growth was 3.28 percent; reaching an historical high of 17.20 percent in March of 1950 and a record low of -10.40 percent in March of 1958.  As the economy of the U.S. is a mixed (and diverse) economy, it has maintained a stable overall GDP growth rate (as the graph above indicates), a moderate unemployment rate, and high levels of research and capital investment.  It has been the world’s largest national economy (not including colonial empires) since at least the 1890s.  GDP per capita is often considered an indicator of a country’s standard of living but not a measure of personal income.

GDP is important because the Federal Reserve uses data such as the real GDP and other related economic indicators to adjust its monetary policy – specifically, to set the target for the federal funds rate (fed funds rate).  The federal funds rate is the interest rate banks charge one another for short-term loans.  Banks obtain short-term loans to stay in compliance with legally mandated minimum cash reserves or to cover capital needs.  Changes in the federal funds rate influence the money supply, which influence the interest rates in the economy.  Typically, an increase in the federal funds rate puts upward pressure on market interest rates, while a lower federal funds rate puts downward pressure on interest rates.

So let’s put these numbers in context by comparing the economies of the United States and China, and breaking down GDP contribution by sector:

2011

United States

China

GDP

$15.09 Trillion

$12.46 Trillion

GDP Growth

1.7%

9.5%

GDP Per Capita (PPP)

$48,387

$5,184

Labor Force

155 Million

780 Million

% GDP by Sector:

Services

76.7%

43.6%

Industry

22.1%

46.8%

Agriculture

1.2%

9.6%

 

The services sector is the primary economic sector in the U.S – contributing over ¾ towards the GDP. Information, retail, scientific, technical and professional services form the major parts of this sector.  Out of all the services, wholesale and retail trade comes up as the leading business areas.  If net income is taken into consideration, then finance and insurance services feature as the top business option.

As of 2012, the country remains the world’s largest manufacturer, representing a fifth of the global manufacturing output.  Main industries include petroleum, steel, automobiles, construction machinery, aerospace, agricultural machinery, telecommunications, chemicals, electronics, food processing, consumer goods, lumber, and mining.

Agriculture (despite representing less than 2% of GDP) is a major industry in the United States and the country is a net exporter of food.  With vast tracts of temperate arable land, technologically advanced agribusiness, and agricultural subsidies, the U.S. controls almost half of world grain exports.  Products include wheat, corn, other grains, fruits, vegetables, cotton; beef, pork, poultry, dairy products; forest products; fish.

Remember, our goal in examining these indicators is to gain a better understanding of the economic state of the nation.  A couple questions come to mind:

  1. Is GDP a good measure of economic health?
  2. Can a country based significantly on services sustain economic growth?
  3. Is sustained growth in GDP over a 50+ year period really desirable?
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