What Is Gross Domestic Product (gdp)

GDP

Gross Domestic Product GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country's standard of living.

GDP = C + G + I + NX

where:

"C" is equal to all private consumption, or consumer spending, in a nation's economy

"G" is the sum of government spending

"I" is the sum of all the country's businesses spending on capital

"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports)

Real GDP

Real GDP is an inflation-adjusted measure of the value of all goods and services produced in a given year, expressed in base-year prices. It is also referred to as "constant-price", "inflation-corrected" GDP or "constant dollar GDP". Unlike nominal GDP, real GDP can account for changes in the price level, and provide a more accurate figure. Real GDP is the most inclusive summary measure of all the finished goods and services being produced within the geographic boundaries of the nation.

For example, if the year 2000 is taken as the base year, and the nominal GDP for 2004 were $200 billion. Accounting for the increase in the level of prices from 2000 to 2004, the real GDP for 2004 would actually be $170 billion.

Forecasting GDP Growth

Using the "regression towards mean" principle would imply that the GDP growth will converge towards the historical mean (since 1970) of 3.2%. By assigning appropriate "weights" to the current GDP growth and the historical mean growth, we can forecast the GDP growth for the next few quarters. The following formula will be used:

Forecasted growth = (Weight for Curr.Qtr. x curr.Qtr. growth) + (weight for Mean GDP x mean GDP growth) + a fudge factor

= ( 0.52 x ??? ) + ( 0.48 x 3.2 ) + -0.44

= (0.52 x curr. Qtr. GDP growth) + 1.096

3Q 2011 = 2% (Already published)

4Q 2011 = 2.14%

1Q 2012 = 2.21%

2Q 2012 = 2.24%

(The hand-calculated constant fudge factor corrects for modelling errors. It can probably be factored into the 'weights' instead.)

Cautious Optimism

Surveys of economists reveals that most are optimistic overall, but think the economy is likely to slow again after the third-quarter bump. They forecast a 2.2% annual growth rate in the fourth quarter, and only 2.3% growth from that quarter through the end of 2012.

Typically, growth of at least 3% or better is seen as necessary to make a significant improvement in U.S. labor markets. The continued slowness in hiring, static income and loss of wealth in the housing market are some of the reasons that many economists remain cautious about growth going forward. A lot of downward pressures exist.

The business side is much more careful with their investment and how much inventory they're keeping on the shelves. They are staying lean. Investment in equipment and software grew at a 15.6% annual rate, accounting for half of the increase in GDP.

The fear that a new recession is imminent has greatly abated in recent weeks. Despite significant policy and/or news events such as the debt ceiling debate, the Fukushima nuclear disaster, the US credit-rating downgrade, fears about default in Europe and failure of the Congressional Super Committee, the markets did not seize up.

A pick-up in consumer spending, up from 0.7% to 2.3%, remained a major driver of economic growth in 2011. This pent-up consumer demand and business