The Importance of Gross Domestic Product

The gross domestic product (GDP) is a measurement of how healthy the economy is. The GDP is made up of income and spending totals. The rate is calculated either annually or quarterly, as compared to the previous year or quarter. For instance, if the quarterly GDP is up 1.5%, this means a 1.5% growth in the economy over the last quarter.


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The GDP formula is too complex to explain, but it can be simplified for discussion's sake. Calculation occurs by one of two methods. The income model totals annual workers' wages, or the spending model totals annual consumer spending. When both models' totals are compared, they should approximate the same figure.

The income model, identified as GDP(I), includes workers' wages, businesses' un-taxed profits, and taxes minus credits. The spending model, the standard method of computing GDP, adds up total consumer spending, investment( as in the stock market), government outlays, and taxed exports.

The GDP, representing economic output and rate of growth, affects virtually all workers and consumers in the economy-at-large. During a robust economy, unemployment is lower and wages higher, because the labor market has expanded to keep pace with economic growth.
If the GDP rises or drops significantly, there are repercussions on the stock market. A sluggish GDP translates to lower profit margins for businesses, which equal lower stock prices per share. Investors become alarmed when GDP growth is negative, because it is used to decide if the economy has fallen into a recession.

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