GDP Explained

Most consumers have probably heard economists talking about GDP, but what is GDP and why does it matter? Gross Domestic Product (GDP) is one of several indicators that measure the health of a nation’s economy. Basically, GDP is a number that represents all of the goods and services produced by the nation during a certain period of time.

There are two basic ways for GDP to be calculated, either from combining all the income earned, or all the money spent. The former, where all income is added up, is called the income method of calculating GDP. The latter is the expenditure method. Sometimes economists refer to GDP calculated from income as GDP(I). To get that number, economists add the amount that employees were paid, along with the gross profits from companies. That’s a pretty basic explanation of GDP(I), although there are a few more steps.

It’s much more common for economists to use the expenditure method to determine GDP. This approach is a little more straightforward and the numbers are calculated by adding the total consumption, government spending, investment and net exports.

To put it simply, an increase in the GDP is good news for the economy, and by extension for individual consumers. A healthy economy means higher wages and new businesses. Those are all good things for consumer’s wallets. What’s more, when the GDP goes up, the stock market usually responds in a positive way with the DOW rising. That’s good news for anyone with investments or retirement accounts as their value increases.

The Federal Reserve also pays close attention to the GDP and uses that information to decide if it needs to implement new monetary policies to prevent inflation. For example, if the GDP is increasing too rapidly, the Fed can raise interest rates to help stem inflation.

The bottom line is the GDP is an important indicator of the financial health of the United States Economy, but there is good news. According to analysts, the GDP should come up to 2.9 percent an increase from the 2017 GDP of 2.3 percent. That’s likely due to the Tax Cut and Jobs Act signed into law. GDP increased 2.3 percent in the first quarter of 2018, due to a modest increase in consumer spending of 1.1 percent, but more importantly, inflation-adjusted consumer disposable income climbed 3.4 percent due to the Tax Cut and Jobs Act.