The components of GDP are: Personal Consumption Expenditures plus Business Investment plus Government Spending plus (Exports minus Imports). Now that you know what the components are, it's easy to calculate GDP using the standard formula: C + I + G + (X-M).
Nominal GDP:
GDP per Capita:
If you want to compare GDP between countries, keep in mind some countries have a large economic output because they have so many people. To get a more accurate picture, it's helpful to use GDP per capita. This divide GDP by the number of people, and shows the real productivity of the population.
Real GDP:
- Income from U.S. companies and people from outside the country are not included, so the impact of exchange rates and trade policies don't muddy up the number.
- The effects of inflation are taken out.
- Only the final product is counted, so that if someone in the U.S. makes shoelaces, and it is used to make shoes in the U.S., only the value of the shoe gets counted.
Real GDP per Capita:
You've probably already guessed that the best way to compare GDP by year and to other countries is with real GDP per capita. This takes out the effect of inflation, exchange rates and differences in population.
In fact, if you look at U.S. GDP History, you'll see that real GDP per capita has increase 180% since 1960 ($17,747 to $49,800). That sounds great until you realize that nominal GDP for the country has risen 2,882% ($520 billion to $15.776 trillion) in that same time period. That's the effect of inflation and population growth.
GDP Growth Rate:
In the U.S., the BEA calculates the growth rate. For the most recent quarterly report, see Current GDP Statistics. Read U.S. GDP Growth to see the forecast of this important economic indicator, and to compare it each year since 1929 with the business cycle phase.
What GDP Tells You About the Economy:
The GDP growth rate measures if the economy is growing more quickly or more slowly than the quarter before. If it produces less than the quarter before, it contracts and the GDP growth rate is negative. This signals a recession. If it stays negative long enough, the recession turns into a depression. As bad as a recession is, you also don't want the GDP growth rate to be too high. Then you'll get inflation. The ideal GDP growth rate is between 2-3%.
How GDP Affects You:
The Federal Reserve uses the GDP growth rate to decide whether to implement expansionary monetary policy to ward off recession or contractionary monetary policy to prevent inflation. (For more, see The Federal Funds Rate and How It Works).
If GDP is slowing down, or is negative, then you should dust off your resume. Declining GDP usually leads to layoffs and unemployment, but it can take several months. Declining GDP means business revenues are down. It can take awhile before executives can put together a layoff list and package. If you follow GDP statistics, you can be better prepared.
More About GDP:
You could also use the GDP report from the BEA to look at which sectors of the economy are growing and which are declining. This would help you determine whether you should invest in, say, a tech-specific mutual fund vs a fund that focuses on agribusiness. It can also help you find training in sectors that are growing. Even during the 2008 financial crisis, health care related industries continued to add jobs. (Article updated May 9, 2013)
