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The stock market is something that is greatly influenced by the state of the economy. After all, it acts as a gauge to the economy. When a nation's economy is doing well, its stock market usually mirrors this economic growth. With this in mind, understanding the economy, or at least the basics, is important.The Gross Domestic Product (GDP) is one economic number that is key to many investors and economists. It is a number that gives people an idea of the state of a country's economy.
What is the GDP?The GDP is an economic number that tells us the total value of all the final goods and services produced by resources located in the country you live in during a period of one year. So the 2004 US GDP would be the value of all the goods produced in the US in 2004.The GDP is seen as one of the most important economic numbers because it gives economists a rough idea of how fast the economy is growing. For example, the GDP for the United States rose 4.5% in 1999 which shows that our domestic economy rose during that year.
The GDP is also important for determining the domestic economic policies and monetary policies, such as the Federal Reserve's position on interest rates. By examining the GDP's of other countries, we can also determine approximately how much we should give them in aid.
What Makes up the GDP?The GDP is figured by taking the total value of all the final goods and services of one country and adding them up. The GDP doesn't account for intermediate goods because the value would be counted twice.The GDP is composed of three major groups. The first is consumer goods, which account for nearly two-thirds of the total GDP, which include durable goods (cars, refrigerators, etc...), nondurable goods (clothes, food, etc...), and services. It is also composed of investment goods such as new plants and equipment, housing, and business inventory. The last major group that makes up the GDP is the government sector which includes the production of public goods and services.
What Are Some Problems with the GDP?1.) Doesn't measure per capita to determine the most accurate standard of living2.) Doesn't measure how the goods are distributed to the population3.) Doesn't allow for changing price levels4.) Doesn't include unpaid household work5.) Doesn't include the barter system, which is still used by many undeveloped countries6.) Doesn't measure the quality of items producedThe GDP has a few small flaws in it but it is, overall, a very good number to look at when you're determining the state of the economy. If you are interested in finding the latest Gross Domestic Product figures, you can visit the Bureau of Economic Analysis' website at http://www.bea.doc.gov/
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