GDP (Gross Domestic Product):
Definition:
Gross Domestic Product or GDP is an important economic indicator that is used to measure the performance of an economy. It represents what an economy has been able to produce (in terms of goods and services) within a year.
As you can imagine, this is a daunting task given that in order to calculate the GDP, one has to keep record of all the goods and services along with their respective prices, calculate the total dollar amount (or other currency), and then adjust it for any inflation so it’s comparable to other periods.
Alternatively, we can measure GDP by the amount of money spent in an economy, using the following widely used formula (which can be found in any economy book):
GDP = C + I + G + (X-M)
C: Consumer Spending
I: Investments
G: Government Spending (and investment)
(X-M): Net export (exports minus imports)
Bureau of Economic Analysis (bea) publishes GDP and the updates thereto.
‘bea’ also publishes a detailed report highlighting the reasons for quarter-over-quarter changes in the GDP.
Presentation:
GDP is usually presented as a quarter-over-quarter percentage change. You might hear “real” GDP. The word real simply means that the numbers have been adjusted for inflation, so we’re not comparing the inflated numbers. As an example, when we hear that Q4-2021 Real GDP was 6.9%, it means that compared to Q3-2021 and adjusted for inflation, the economy’s output grew by 6.9%. Likewise, when we hear that Q1-2022 Real GDP was -1.6%, it means that the economy shrank by 1.6%. Please note that ‘nominal’ GDP might have grown, but when adjusted for inflation, we got a negative number, which is a better comparison point.
See below a chart from the BEA website, showing the GDP changes:
GDI (Gross Domestic Income)
As mentioned above, calculating GDP, or any financial indicator is a daunting task. Therefore, it’s worth mentioning another indicator that can be used in conjunction with GDP. GDI, or Gross Domestic Income, is intended to measure economic activities, but unlike GDP which uses expenditures, it uses income. Conceptually, income should equal expenditures. But in practice and the methodologies that are used to calculate these indicators, they don’t always come out as equal. A good example is Q1-2022 and Q2-2022. The GDP for these two periods came in as negative, but the GDI was +1.8% and +1.4%, respectively.
The formula for GDI is as per the following:
GDI = Wages + Profits + Interest/rental income + Taxes (certain references included adjustments for import taxes and statistical adjustments)
