Expected U.S. GDP Growth Rate Going Forward
Interpreting GDP
The Gross Domestic Product (GDP) covers the money value of all services and goods, evaluated at their respective market prices, produced within the US economy. However, GDP excludes the money value of all unpaid work within the economy. Examples of unpaid work include reproductive labor such as home caring. Calculation of GDP is done by summing up all value-added at every production stage while at the same time deducting the cost of inputs incurred.
GDP takes several forms that include real GDP, nominal GDP, GDP deflator, and GDP per capita. Real GDP refers to the value of GDP that has been adjusted to cover the level of overall prices in the economy and it is a prerequisite that real GDP must be expressed in terms of its base year. For instance, the current US statistics are expressed in the level of prices that prevailed in the US economy in 2005. Nominal GDP refers to the simplest form and most direct measure of GDP. Similarly, the GDP deflator refers to a price index that gives a reflection of the average increase in the total domestic output and it equals to the ration of nominal GDP to real GDP. Lastly, GDP Per Capita refers to the level of GPD when divided to the total US population and is often used as a standard measure of living (Mather, 2008).
Trends, forecasts, and statistics
According to advance estimates for the 4th quarter of 2011 released February 2012 by the Bureau of Economic Analysis, the real GDP increased by an annual rate of 2.8% as compared to those of 2011 (Bureau of Economic Analysis (February 2012)). The statistics further showed that there was a 1.8% increase in the 3rd quarter. However, the average increase in GDP for 2011 was 1.7 Bureau of Economic Analysis (February 2012). For the past 64 years (1947-2011), the average quarterly increase of US GDP growth rate stood at 3.28% with an all-time high of 17.20% (March 1950) and all-time low of -10.40% (March 1958) Bureau of Economic Analysis (February 2012).
This increase in the rate of real GDP provides a positive contribution (upturn in inventory) from sectors in the economy such as acceleration personal consumption expenditures, private inventory investment, and acceleration in residential fixed investment and deceleration in non-residual fixed investment. These sectors acted as a major boost in offsetting the backward (negative) contributions from local, state, and federal spending.
GDP statistics are by far, the most closely watched and significant economic indicators of the US economy. GDP statistics are often published on National Accounts (parts of extensive statistical data sets produced on a quarterly basis). In the US, the Bureau of Economic Analysis is responsible for producing and publishing GDP statistics.
How GDP is determined
Three different ways can be used when determining GDP and by principle means, the three methods should produce similar results. The approaches include the expenditure approach, the income approach, and the product (or output) approach (Godfred, 2009). The expenditure approach entails a process of determining GDP by obtaining the final figure of total costs spent on services and goods. The expenditure approach operates under the principle that someone must purchase products in the economy and the value of the total products purchased can be equated to the people’s total cost of spending (Godfred, 2009). The expenditure approach consists of several parts such as gross investment, private consumption, private spending, and net exports.
GDP by Expenditure Method = C + I + G + (X-M)
The income approach determines GDP by estimating the entire income accumulated by producers throughout the US. It is the simplest and direct form of GDP calculation. Using the Income approach to calculate GDP in the US uses five categories under the National Expenditure and Income Accounts. This income accounts include corporate profits, farmers’ income, salaries, wages, and supplementary income, miscellaneous investment income and interests, and income obtained from other unincorporated businesses that are non-farm related (Godfred, 2009). However, certain adjustments are made (depreciation is deducted from the net GDP and Indirect taxes less subsidies are included). Last, the product approach is used to determine the GDP by estimating the total value of goods and services produced within the country. The product approach follows three stages that include the estimation total gross value in all economic activities, estimation of the intermediate consumption, and reducing the value of intermediate consumption from the total gross value to get the domestic output net value.
Interpreting GDP
The value of GDP gives a reflection of how the US economy is performing over selected periods (Farzad and Quade, 2003). Simply put, GDP acts a way of gauging the fundamental growth rate of the US economy. For instance, a positive GDP figure gives a reflection that the economy of the United States is growing whereas a negative GDP value implies that the economy of the US is declining (Farzad and Quade, 2003). Equally, when the value of GDP declines over two consecutive quarters, the economy of the US will be undergoing a recession. However, economists are capable of obtaining the performance of different economic variables such as consumer spending, private investment, and fixed investments from the GDP figure.
References
Bureau of Economic Analysis (February 2012). GDP and the Economy: Advance Estimates for
the Fourth Quarter of 2011. Bureau of Economic Analysis
Farzad F., and Quade, S. (2003) "An Empirical Analysis of the Relationship between GDP
and Unemployment,” Humanomics, 19 (3), pp.1 – 6
Godfred A. B., (2009) "Macroeconomic development and capital structure decisions of firms:
Evidence from emerging market economies", Studies in Economics and Finance, 26 (2),
pp.129 – 142
Mather, M. A. (2008). U.S. Labor Force Trends. Population Bulletin .
