Gross Domestic Product (GDP), SimplifiedSubmitted by Prosperity Advisors on January 2nd, 2020
by Brent A. Evans, CFA
Economic progress is typically measured by GDP growth. Here, we break it down into basic components that are easier to understand.
GDP is the value of all final goods and services produced by a country’s economy. Investors typically look at the growth rate of GDP as a gauge of economic health. The total value of GDP is broken down into several subcategories, but at a high level it is the sum of consumption, private investment, government investment & spending, and net exports (exports-imports).
Thus, GDP = C +I+G + NX
Consumption can be thought of as our everyday spending on goods and services like groceries, a cup of coffee, a haircut, or taking clothes to the dry cleaners. Consumer spending is currently the primary contributor to GDP.
Private Investment includes home purchases as well as business spending on new factories, land, buildings, equipment and other technology. When economic conditions are good or perceived to be good, businesses tend to spend more for growth. When conditions are less favorable, they save.
Government Investment & Spending consists of federal, state, and local government spending and includes items like defense, infrastructure, and schools.
Net Exports (Exports-Imports). The U.S. often has negative net exports, meaning we import more than we export.
Data sourced from Factset Research Systems as of 12/30/2019.