Gross Domestic Product (GDP)

Times Square scene in New York city

Times Square scene in New York city

Components of the GDP

Gross Domestic Product (GDP) is the dollar value of what the national economy produced during a certain period. You can think of it as the report card for the United States. The GDP includes the following items: 

  1. How much you, your family, and other citizens spend on food, clothing, services, and other items.

  2. The money businesses spend to buy equipment for their factories, the money families spend to buy homes, and the change in certain items on the balance sheets of companies.

  3. The money spent by the government for defense, roads, schools, and other items.

  4. The amount of goods and services the United States sells to other countries.

  5. Of all the items listed above, the biggest contributor to the GDP is item 1 – how much you, your family, and other citizens spend on food, clothing, services, and other items. 

How the GDP is Published

You will rarely see the actual dollar amount of GDP printed anywhere. What you are likely to see is the percentage of growth in GDP. The growth figure is watched very carefully to check the health of the economy. Since 1930, the annual real GDP growth has ranged from about negative 13% in (in 1932) to about 19% (in 1942.) The 2019 GDP change was a positive 2.3%.This was a far cry from the change in GDP from 2008 to 2009 of negative 2.8% due to the 2008 financial crisis in the US.

Economists also watch the quarterly change in GDP. A quarter is a group of 3 months. The first quarter is January, February, and March. The second quarter is April, May, and June, and so on,. Due to the COVID-19 pandemic, the change in GDP from the first quarter of 2020 to the second quarter of 2020 was a whopping negative 9.5%. This was the highest quarterly GDP decline in US history. On an annualized basis, this decline was negative 33%. This decline occurred because the pandemic caused a national lockdown so consumers could not spend money besides buying essentials like foods and prescription drugs. Consumer spending, which is the biggest component of the GDP, was of course, dramatically reduced,.

Economists define a recession as two consecutive quarters of a negative GDP change.

A fast-growing GDP can lead to inflation, because this probably means that too many consumers are buying goods and services. (When you have more people with more money trying to buy goods and services, prices tend to go up). When the GDP does not grow but instead declines, this is known as a recession. As mentioned earlier, one way the government tries to cure too much inflation or a recession by changing the discount rate to the amount of borrowing and spending. This process is described later in this section. You can find an Excel spreadsheet of GDP figures published by the U.S. Bureau of Economic Analysis.