Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time. Gross National Product (GNP) is the GDP in addition to the intermediate goods and services which represents resources used to produce the final goods. GDP per capita is often considered an indicator of a country’s standard of living; however GDP per capita is not a measure of personal disposable income. There are two main types of GDP: Real GDP is a macroeconomic measurement of the size of an economy adjusted for price changes and inflation, Nominal GDP is GDP evaluated at current market prices and is unadjusted. Real GDP is used to measure economic growth due to fewer variables and is the common reference to GDP we usually here when referring to our GDP growth.
In the terms of the Circular Flow model, GDP = C + I + G + (X – M). C is the consumption expenditures of the households, I is the investments made by the financial markets, G is the government purchases, X is the exports and M is the imports to and from the foreign sector. In accordance to the equation of exchange, M x V = P x Q; M is the money supply, V is the GDP velocity of money, P is the GDP deflator, and Q is the real GDP. Since the GDP is adjusted, the nominal GDP is the product of the GDP deflator and Real GDP. When analyzing the growth of the economy, an increase in the GDP may lead to a decrease of unemployment and and an increase in incentives for households to consume. If the money supply remains constant, the financial market will notice an increase money demand which would normally increase interest rates. If the GDP decreases however, the result would normally yield the opposite.
In the business cycle we analyze the expansion and recession of the Real GDP (Y-axis) throughout time (X-axis). As the GDP growth peaks, it is likely a recession is coming in the near future. Once the recession occurs the GDP growth would trough in which it will stabilize and begin to expand. Currently if our economy continues to stabilize we would be in the state of a trough. If the GDP continues to rise then our economy will expand until it peaks and then eventually we will go into another recession. This business cycle tends to repeat, although the time spent in each state will vary. We would like to see the business cycle continue to grow and it may do so if we balance our work ethic, consumption and savings. We do not want to stop spending but we don’t want to over spend. The idea in a successful economy is to remain constant and grow steadily which with the exception of our ‘Great Recession’, we have maintained a ~2% GDP growth.
Image:http://cdn.phys.org/newman/gfx/news/hires/2013/studyshowsmo.jpg
