Updated Feb 07, 2022

What Are Gross Domestic Product of USA (GDP)?

What are Gross Domestic Product of USA (GDP)?

The gross domestic product (GDP) is a metric for determining a country's economic output. Countries with greater GDPs produce more goods and services and, as a result, higher the standard of living of the people also. Many people and political leaders related to GDP development as a vital indicator of national success, using the terms "economic growth" and "GDP growth" interchangeably. But several economists contend that GDP should not be used as a proxy for overall economic performance, greatly lowering the success of society in general, due to many constraints.

Types of GDP Measurements

There are many various ways to calculate a country's GDP, so it's crucial to understand them all and how they're used. The nominal GDP of a country is the raw figure that incorporates price changes. Because it is calculated using current market prices, it is sometimes known as "current-dollar" GDP. By the end of 2020's first quarter, the nominal U.S. Gross Domestic Product (GDP) was $21.538 trillion.

Nominal GDP

Nominal GDP is a measure of a country's economic output that includes current prices into accounts. In other terms, it does not account for inflation or the rate at which prices rise, both of which might overstate the growth rate.

All nominal GDP products and services are evaluated at the prices at which they are sold in that year. To compare countries' GDPs in purely financial terms, nominal GDP is calculated in either the native currency or US dollars at market exchange rates.

When comparing different quarters of output within the same year, nominal GDP is used. Real GDP is used to compare the GDP of two or more years. This is because, by removing the effect of inflation, the comparison of various years may now be based only on volume.

Real GDP

The Bureau of Economic Analysis (BEA) subtracts the impacts of inflation to obtain real GDP. Economists can compare numbers from different years using the real GDP. Otherwise, it may appear that the economy is expanding while it is experiencing double-digit inflation. The BEA uses a price deflator to calculate real GDP, which shows you how much prices have changed since a base year.

The impact of currency rates and trade policy is removed because income from U.S. companies and people from outside the country is not included. Real GDP is lower than nominal GDP, and it was $18.988 trillion at the end of the first quarter of 2020. The BEA will utilize 2012 as the base year for its real GDP data as of May 22, 2020.

GDP Growth Rate

The GDP growth rate is the percentage increase in GDP from one quarter to the next quarter, and it varies as the economy progresses through its economic cycle. When the growth rate is negative, the economy declines, signaling a recession. A depression occurs when the body contracts for a long period. Inflation occurs when the growth rate is too high. The Bureau of Economic Analysis publishes the US GDP growth rate every month, and by the conclusion of the first quarter of 2020, nominal and real GDP in the US had declined by 3.5 percent and 4.8 percent, respectively.

GDP Per Capita

Because of their vast population, several countries have a high GDP. Because it divides GDP by the number of residents and evaluates the country's standard of living, GDP per capita is the best approach to compare GDP between countries.

The GDP per capita in the United States was $57,621.7 in the first quarter of 2020. Real GDP per capita is the best technique to compare GDP per capita by year or between countries. This eliminates the effects of inflation, currency rates, and demographic disparities.

GDP Purchasing Power Parity (PPP)

While purchasing power parity (PPP) is not a direct measure of GDP, economists use it to compare how one country's GDP compares to that of other countries in "international dollars" using a method that accounts for differences in local prices and living costs to make cross-country comparisons of real output, real income, and living standards.

How Does the GDP Affect You?

Personal finance, investments, and employee development are all influenced by GDP. Investors use a country's growth rate while determining whether or not to modify their asset allocation, as well as when comparing country growth rates to locate the best international prospects. They invest in companies that are based in fast-growing countries.

Rates of Interest

To avoid a recession, the Fed uses expansionary monetary policy, whereas contractionary monetary policy is used to prevent inflation. The federal funds rate is its main tool. If the rate of growth is increasing, for example, the Fed will boost interest rates to combat inflation.

The federal funds rate influences all interest rates in your life, from mortgages to personal loans to savings account yields. Because the Fed is boosting interest rates in this case, you should lock in a fixed-rate mortgage. An adjustable-rate mortgage's payments would climb in lockstep with the fed funds rate.

Unemployment

If economic growth slows or reverses, you should update your resume because low growth leads to layoffs and unemployment. Because it takes time for CEOs to compile the layoff list and prepare exit packages, it may take a few months to see the corresponding job loss, but as economic growth slows, it's unavoidable for many businesses. Unemployment is a lagging indicator due to the time lag between economic growth rates and their impact on individual workers.

Identifying Opportunities During Economic Downturns

The BEA provides GDP data breakdowns that look at specific industries and goods. These details can be used to assess which sectors of the economy are expanding and which are contracting. Even in difficult economic times, certain industries, such as the health-care business during the 2008 financial crisis, continue to add jobs. 8 This study might also assist you to decide whether you should invest in a tech-specific mutual fund rather than an agriculture fund.