What is Gross Domestic Product (GDP)? How Does it Impact the Economy?

Woo-hoo! GDP hit 2.6%!

Wait, what does that mean?

The Bureau of Economic Analysis releases the percent increase in Gross Domestic Product (GDP) each quarter and revises it, twice. GDP measures all the goods and services produced in the United States. An increase of 2-3% is ideal, because anything higher could lead to inflation.

GDP measures spending in four areas, but CONSUMPTION is the largest contributor, taking up 68.6% of the GDP pie.

So, what exactly constitutes “consumption”?

Consumption is consumer spending. It’s the purchases we make every day including food, clothing, a roof over our head, utilities, healthcare, education, transportation, insurance, etc. Now someone may drive a Ford Fiesta and another may drive a Tesla. Does this affect our country’s GDP?

To answer that, let’s take a minute to look at two different types of people. We’ve all heard about people being high or low maintenance, but have you ever thought about how being high maintenance contributes to our economy?  

For instance, every time you employ another person’s services (versus doing the task yourself), you are starting the trickle-down effect. Like a champagne fountain cascading down, more and more glasses are filled. Higher employment numbers mean there are more people with money to spend.

So, if you hire Mary to clean your house, she will have the income to create her own trickle-down effect. All this trickle-down adds to our country’s Gross Domestic Product (GDP) which represents all the goods and services produced in the U.S. GDP growth is what keeps our economy humming.

But how much “trickle-down” can you afford? Or put another way, how much of your work can you delegate before you’re in debt?

Years ago, the New York Times printed this cartoon about the High GDP and Low GDP man. 

The high GDP man enjoys a gourmet dinner with a wine paring served by a fancy waiter. The low GDP man snacks on a sandwich and a beer while enjoying the sunset.  They’re both contributing to GDP.  But they’re not contributing the same amount.

You get the picture! 

Sixty-eight percent of GDP is based on consumer spending. That’s why the most important indicator of our economy’s health is employment. The rest is made up of government spending, investments and net import/exports.

So just remember, depending on where you are in life, there is a GDP balance to be maintained in order to have peace-of-mind

-       Written by Gail Gill, CFP®, Worley Erhart-Graves Financial Advisors