In the previous Economic Insight we introduced the concept of GNP, or Gross National Product. For decades this was the major macro-economic indicator of final output produced for the economy over a year’s time.
As the world became more internationalized, and as increasing numbers of companies became more globalized, the measurement of GNP became ever more difficult, especially in the attempt to identify what would be “national” product (which could be produced anywhere in the world). So the concept was updated to GDP — or Gross Domestic Product.
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This indicator measures final output produced domestically, or within our borders — whatever the nationality of the producer. And conceptually this more closely reflects that output which is produced by our domestic labor force. Also, theoretically, this should be equivalent to Gross Domestic Income — that which is earned domestically from production.
Today, as measured by GDP, the U.S. economy is about $14 trillion on an annualized basis. Now the question is: how do we grasp the impact of this number?
Actually, more accessible and understandable to us are the changes in GDP, one period over the next. And this is really the focus of our concern: is GDP growing (increasing), or is it not ? Or, is it decreasing?
In fact, we have become so interested in this indicator that we measure the changes in GDP not only annually, but also quarterly. Let us understand what these percentage changes mean.
First, year over year : We take the dollar value of GDP of any particular year (say 2009 = V2), and compute the percentage change in that value from the dollar value of GDP of the previous year (2008 in this example = V1).
What we have is a percentage change on an annual basis. And this is intuitively understandable, much as interest rates are always stated in terms of annual percentage rates.
But what do the quarterly changes in GDP mean? And what are the comparisons being measured ? Is it GDP of any particular quarter, compared to the same quarter of the previous year? Or a percentage change in GDP, quarter over quarter?
Actually, it can be done either way. However conventionally, as reported by the Bureau of Economic Analysis and the financial press, we observe the change in GDP, of the most recent quarter, compared to the previous quarter. So, for example, the advance GDP report determined the percentage change of GDP for the first quarter 2010, compared to the GDP of the fourth quarter 2009.
However this raises a concern with interpretation. Quarter-over-quarter percentage changes will most likely be quite different than the percentage changes we would see year-over-year. So to allow for consistency, the reported percentage changes in our quarterly measures of GDP are annualized.
In sum: the real GDP for first quarter 2010 was 3.2% greater than the real GDP of fourth quarter 2009 at an annual rate.
Next time: what is real GDP, and what are the changes in real GDP? And what other measures do we utilize to gauge the overall Macro Economy?
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Tags: Economics, Economy, GNP, Gross domestic product, Management, Measures of national income and output, Real gross domestic product, United States, United States Economy
