Friday, November 23, 2007

Gross Domestic Product

AC - Speeches by Management (Project I)
The Briefing
November 9, 2007

It is a warm Sunday evening. You drive your car down to the nearest Wal-Mart and buy some chips, beer and groceries. You swipe your credit card to pay $50 at the counter. On the way back home, you stop at the gas station. You swipe your card again to fill gas for 50 bucks. You come back home, sit on the couch and watch TV - drinking bear and eating those crispy chips. Do you know that you increased the nation's GDP by $100 on that evening?

In the next 6 minutes, you are going to learn, the various factors that have an impact on the country's GDP.

GDP - Defined

For those brains that are wondering what GDP is - GDP stands for Gross Domestic Product. It is the monetary value of all the finished goods and services produced within a country's border in one year.
For all the mathematicians in this room, this is the formula used to compute the GDP of a nation:

GDP = C + G + I + NX


"C" is equal to all consumer spending in a nation's economy
"G" is the sum of government spending
"I" is the sum of all the country's business investment on capital
"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports)

Now, let us take a closer look at each of these factors.

Consumer Spending

Consumer spending includes all the money that you spend in shopping - right from your computer to your car, right from your gloves to your house. Whatever money you spend out of your pocket is accounted under consumer spending.

When labor department reports, "Unemployment rate has gone down" Wall Street becomes happy. Why is it so? A low unemployment rate indicates that most of the people have stable jobs. If they have a stable job, they'll continue to get their paychecks. If they continue to get their paychecks, they'll continue to spend more. When consumers spend more, the GDP value goes up. High GDP value is an indicator of a flourishing economy. When the economy grows, investors make more money.

Government Spending

This includes money spent on constructing bridges, laying roads, buying missiles for national defense, government employees' salaries etc., Bush spends about 1% of the nation's GDP in Iraq war, every year.

Spending by federal, state, and local governments account for about twenty percent of the GDP. From now on, if you see "Road work ahead" signs, don't get frustrated. Feel happy that government is spending money and it is good for the GDP.

Capital Investments

What are some of the capital investments done by businesses? Buying land for office space, purchasing new computers, purchasing machinery etc.,

How can companies help to improve the economy? By doing more capital spending. When will the companies do more capital spending? When they feel that the economy is looking good. It is a "chicken & egg situation".

Net Exports

This is the difference between all the exports and imports made by the country. For example, if you export "Windows software" for $100 and import 100 tainted toys for $1 each, the "Net Export" value is "zero".

What are not included?

Now that we understood what are included in GDP, let us take a look at the things that are NOT included in GDP.

Intermediate spending is not accounted in GDP. Recall the definition ... "GDP is the value of all finished goods and services".

Transferred payments like "unemployment benefits" do not come under GDP because government is not getting any service in return.

U.S GDP - Breakdown

As of 2006, the US GDP is $13.1 trillion. Let us take a quick look at the break down of the US GDP value:

Consumer Spending 65%
Business Investment 15%
Government Spending 20%
Net Exports 0

Let us have a quick recap of what GDP is. It is the sum of consumer spending, government spending, business investments and the net exports.

Don't worry that the economy is going down. Now, you know the factors influencing the economy and GDP. Remember ... consumer spending is the biggest part of U.S GDP. Start to spend the money that you have and economy will continue to improve. Don't wait for the government to start spending :)

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