Gross Domestic Product (GDP) is an economic indicator that is used to compare the standard of living between countries around the world. It is the currency value of all goods and services produced or all economic activity as measured during a specific time period. GDP is considered the king of economic metrics.
The United States has the world’s largest economy with a GDP of a little more than $20 trillion. To put that into perspective, the GDP of the New York City metropolitan area is larger than the entire GDP of Canada. In addition, the United States’ three largest metropolitan areas (New York City, Los Angeles, and Chicago) combined have a larger GDP than both the United Kingdom and France. The United Kingdom and France rank 5th and 6thin GDP worldwide.
If over a given year a country’s Gross Domestic Product increased by 3%, it would be interpreted as the country’s entire economy grew by 3%. When calculating this indicator there are two main types, nominal and real. Real GDP is considered more reflective of an economy’s value because it adjusts for inflation and deflation. This adjustment also allows GDP to be compared over different time periods. Nominal GDP ignores the inflationary factors and is the raw GDP data before any adjustment occurs.
Nominal GDP can be calculated using the following formula:
GDP = C + G + I + (X – M)
- C = Consumer spending
- G = Government investment and government spending
- I = Private investment (or capital expenditures)
- X – M = Net exports (or exports – imports)
In the United States, the Bureau of Economic Analysis (BEA) issues an annualized real GDP growth rate for every quarter, as well as a full year calculation. When comparing quarters ideally a country would like to have growth of at least .75%, which is 3% when presented as an annual rate (.75 multiplied by 4 equals 3). The table and graph below break-down the quarterly average and annual percent change of the United States’ Gross Domestic Product.