Business owners spend most of their time analyzing their own numbers. But it’s also important to look at the bigger picture.
Gross Domestic Product (“GDP”) is one of the most important measures of the condition of our economy. Both GDP in dollar terms and changes over time to GDP can help us understand where things stand today and where they will most likely go over the next several years. As business owners, we spend most of our time analyzing the numbers of our company. But every once in a while—say once a quarter—it is valuable to take a step back and look at the bigger picture.
So where is the economy today? More importantly, where do we expect it to go? Let’s take a closer look.
A primer on the GDP
Put simply, GDP is the value of all of the goods and services produced in the U.S. during a given period of time. It includes both domestic companies as well as the operations of foreign-owned companies located in the U.S. There are two main ways to calculate GDP: the income method (which I won’t cover here), and the expenditure method. The expenditure method calculates what everyone in the economy spent on goods and services to determine the value of all of that “stuff” that was made. The formula is calculated as the sum of:
- The value of goods and services bought by consumers (“C”)
- Capital investments (such as machinery) and increases in inventory made by companies (“I”)
- Government spending (“G”)
- Net exports, calculated as the value of exports minus imports (“Ex-Im”)
Last year, the U.S. GDP was $14.66 trillion, the largest of any country in the world.
GDP is important because it gives us a very clear picture of how each “player” is fairing and their impact on the overall economy. When the “C” decreases, we know that means that consumers aren’t buying as much. This has implications for companies (lower sales) and government (lower tax revenues). In a healthy economy, GDP will grow steadyily and consistently over time.
What do the most recent GDP numbers tell us?
During the first quarter of 2011, GDP grew at an annualized rate of 1.8 percent; this is weak. During the last two quarters of 2010, GDP grew at annualized rates of 2.6 percent and 3.1 percent respectively. While most economists were expecting the first quarter of 2011 to show weaker growth,
