- What is GDP?
- Gross domestic product (GDP), simply put, is a measure of economic activity and can be an indicator of society’s standard of living. It determines the monetary value of all final goods and services produced by the individuals and businesses within a country during a given period.
- It is meant to evaluate any growth or decline on an annual or quarterly basis and can tell you how an economy is changing. A healthy economy is one that can maintain its business expansion and balance it’s inflation and unemployment rates. Ideally, a healthy GDP is between two and three percent increases.
- However, like any other large-scale measurement that makes assumptions based on millions of interactions, results should be taken as a rough indicator and should remain focused on the real intuition. When doing this, you can accurately reason what is likely to happen and make the right decisions to secure your financial future.
- How does GDP affect me?
- Since GDP is a marker of economic condition and standard of living it can be reasoned that any changes, for better or for worse, can affect personal finances, investment choices, and job progression. Any shifts in the economy, even slightly, can have long-reaching effects.
- When an economy experiences growth, it will also encounter inflation. Therefore if the GDP were to rise, the Federal Reserve would have to implement certain policies to offset the economic increases. As a result, lenders and creditors would charge higher interest on loans and rates would increase on adjustable rate mortgages too. It could also be a marker for increased employment opportunities.
- Further, GDP reports can display which economies are improving or declining. This can be helpful to identify work in growing sectors and investment possibilities in expanding businesses. Investors frequently source GDP reports to decide if they should adjust their asset allocations and identify countries with the best opportunities.
- If economic growth slows, it can be an indicator that jobs may be lost and unemployment rates may escalate in the following months. Two consecutive periods of contraction could signify that an economy is in a recession, while a GDP that is too high may denote that there is an asset bubble with too much money to being invested into too few opportunities.
- Therefore, understanding where your country or region stands economically can be critical for determining many future financial decisions.
- What is this calculator for?
- The GDP calculator is very easy to use and is designed to help you analyze your country or regions economic trends. GDP can be calculated using two methods, which should produce roughly the same figure, as income and expenditure are interrelated and work in a circular flow. What is spent on a product is nearly equivalent to the revenue of those who helped to produce it.
- Resource Cost-Income basis : the technique indicates the total profit and income generated by the production of goods and services, as well as business taxes, depreciation, and net income of foreigners.
- Expenditure approach : this method summarizes the value of all goods and services that were purchased by the government and households. It includes the value of exports and deducts imports.
- The GDP calculator is adapted to make calculations based on either approach, however, for accurate determinations, the figures should later be adjusted to the price index (more on this later).
- How to use the calculator
- The GDP calculator has two parts: an information intake and a results section. It requires some information on current economic activity, provided in the table below, for an accurate report to be generated. Let’s review the rest of the information together.
- Initially, you must decide which method you would like to use to calculate GDP between the expenditure approach and the resource cost-income basis . You may make your selection by clicking on the first or second tab at the top of the calculator.
- Expenditure approach
- Step 1 : On the first line of the calculator you should add a dollar figure for personal consumption. This is typically the largest value in GDP computations and represents the total household spending on goods and services.
- Step 2 : On the second line of the calculator include the amount of gross investment. This figure is an indicator of future productivity in the economy and measures the value of any goods in production, but not yet completed, by the end of the period. It can also include purchases of equipment to aid in production, any changes in business inventories, and any purchases of new residential housing.
- Step 3 : Next, you can indicate government consumption on the third line of the calculator. This specifies the total public expenditure on education and defense and the value of all the goods and services produced by the government.
- Step 4 : Finally, you may add a figure for exports and imports on the following lines of the calculator.
- Step 5 : Click on ‘calculate’ to get your results.
- Resource cost-income basis
- Step 1 : On the first line of the calculator you may add a value for employee compensation. This includes all wages, salaries, benefits, social security contributions, and health and pension plans attributed to workers.
- Step 2 : On the second line of the calculator you can include a figure for proprietor’s income. This is the revenue from incorporated businesses, sole proprietorships, and partnerships.
- Step 3 : Next you should indicate a rent value on the third line of the calculator. This represents any revenue to property owners from rentals.
- Step 4 : Corporate profits can be added to the next line of the calculator, which is the income from corporation stockholders regardless of if it was paid out or re-invested.
- Step 5 : On the fifth line, please add all interest earnings. This is the income from the suppliers of money capital.
- Step 6 : You should specify a figure for indirect business taxes on the sixth line of the calculator as this summarizes all general sales taxes, business property taxes, and licensing fees.
- Step 7 : Depreciation can be added to the next line of the calculator.
- Step 8 : Finally, the net income of foreigners should be indicated on the last line of the calculator. This figure is the difference between the income earned by the world and the revenue from the rest of the world
- Step 9 : Click on ‘calculate’ to compute your results.
- GDP data table
- To make your calculations easier, we have surveyed four years worth of data from the Bureau of Economic Analysis . The BEA is an extension of the US Department of Commerce and is the entity responsible for measuring the GDP. Please view the table below.
Resource Cost-Income Data
Indirect business taxes
Net income of foreigners
These figures are a raw measurement and would have to be revised for an accurate measure of economic activity.
- Real and nominal GDP
- There are different ways to measure a country or region’s GDP that can improve the accuracy of the calculations.
- The nominal GDP is a raw measurement that includes price increases but does not account for the effects of inflation. Nominal GDP also does not chronicle increases in the quantity of production or real increases in market value, which can be more accurate measures of a growing economy.
- The BEA uses the nominal GDP for its quarterly estimates and updates these figures retroactively to identify the real GDP. Real GDP accounts for inflation by implementing a price deflator and can determine how much prices have changed in the last year.
- Depending on the growth or decline of an economy the real GDP can be lower or higher, respectively, then the nominal GDP
- GDP limitations
- GDP is limiting as a measure of a society’s standard of living because not all factors that contribute to happiness can be bought or sold. It does not capture leisure time, the effect of GDP contributions, equality in society, the variety of goods that are available to consumers, and the possibilities created by technology.
- While GDP does account for money spent on education and environment, it does not actually measure the quality of education, whether the population can read, write, or do intermediate mathematics, or if the air and water are any less polluted. In another instance, GDP will measure all health care costs, but will not address if the life expectancy of its citizens has increased or if mortality rates have decreased.
- GDP also cannot quantify the value society may place on various types of output and whether the society views certain spending as a positive or negative or if it actually provides benefits to an individuals quality of life.