Gross Domestic Product

Gross Domestic Product (GDP) is the total value of goods and services produced in a country over a period of time. Most economists consider it to be the broadest indicator of a country's economic health. In the United States too, the GDP has been adopted as a key measure of economic activity since the early 1990s and the U.S. Bureau of Economic Analysis (BEA) regularly releases detailed GDP figures that are keenly tracked by the markets to gauge the current and future state of the economy.

This paper discusses Gross Domestic Product with particular reference to the U.S. economy, describes how it serves as an indicator of the country's economic health and explains the components that make up the GDP. GDP and GNP Until the early 1990s, the Gross National Product (GNP) rather than the Gross Domestic Product (GDP) was used by the U.S. To measure economic activity.

The main difference between the two measures is that GNP indicates the total income earned by residents of a country regardless of where their assets are located while the GDP measures a country's domestic economic activity regardless of the ownership of the assets. (Watts, 2001) In practical terms, however, there is no major difference between the U.S.'s GNP and GDP figures. The GDP figures indicate the size of a country's economy as well as the living standards of its people.

The United State's GDP is by far the biggest in the world and stood at a staggering $9.25 trillion in 1999. Its per capita GDP is also among the highest in the world at over $30,000. (Watts, 2001) Per Capita GDP figures, however, do not reflect the disparity in incomes levels of a country's population or the cost of living. GDP is an important indicator of the economy's health as it provides a broad sectoral detail including data about income as well as expenditure flows.

The detail available in the GDP reports provides comprehensive information on supply and demand conditions, and enables the financial markets and economists to identify or predict developing imbalances in the business cycle. ("Economic Indicator," 1997) How is GDP Calculated? GDP can be derived by three different methods: (1) By summing up the expenditures on the goods and services; (2) by adding the value of all goods and services produced in a country, or (3) by adding up the incomes of the producers from the sale of goods or services.

Out of these, it is easier to obtain reliable estimates for expenditures since expenditures are measured more directly than income. The expenditure approach for calculating GDP figures is also the method most closely followed by the financial markets. ("Economic Indicator," 1997) Components of GDP From an "expenditure" perspective of the GDP, its main components are personal consumption -, gross private domestic investment (I), government purchases (G), and net exports (X-M). Hence GDP may be depicted mathematically as = C + I + G + (X-M).

The personal consumption expenditure (PCE) is the major component of the GDP, making up about two-thirds of the total. (Ibid.) The most striking trend about the United State's GDP over the last half-century has been the constantly increasing share of the Services' Sector and the declining share of the Agricultural and Industrial Sectors. For example, the share of Agriculture, Fishing and Forestry in the GDP fell from 4% (in 1960) to.