The Meaning of GDP

August 25, 2016 11:57AM CDT

The GDP report comes out Friday, August 26th at 8:30 AM eastern time. Why is it important? The gross domestic product,or GDP, is one of the primary indicators used to gauge the health of a country’s economy. It represents the total dollar value of all goods and services produced over a specific time period. Usually, GDP is expressed as a comparison to the previous quarter or year. So for example, if the year to year GDP is up 3%, this means that the economy has grown by 3% over the last year.

Measuring GDP is complicated. The calculation can be done two ways. One way is by adding up what everyone earned in a year. This is called the Income Approach. This approach is often referred to as GDPI. It is calculated by adding up total compensation to employess, gross profits for incorporated and non incorporated firms and taxes minus subsidies. The second way is by adding up what everyone spent. This is called the Expenditure Method. This method is the more popular approach. It is calculated by adding total consumption ,investment, government spending, and net exports. Realistically, both approaches should arrive at approximately the same total!

When the economy is healthy, you will usually see low unemployment and wage increases. A poor economy usually means lower profits for companies, which in turn means lower stock prices. So is our current economy in good shape or not?

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