Gross Domestic Product Busn 300

Gross Domestic Product

Gross domestic product is used to measure the health of the United States' economy. Gross domestic product or GDP represents the monetary value of goods and services that was produced. It also represents the size of the economy. GDP is measured quarterly by the Bureau of Economic Analysis or BEA. To calculate economic growth each quarter is compared to the previous quarter (Stanford, 2008).

Economic production and growth affects everyone. When the economy is thriving unemployment is low and wages increase because businesses need the labor. When the GDP is at a decline it indicates that the unemployment rate is on the rise. GDP also affects the stock market. An economy that is down means that companies have lower profits and that means stock prices is lower. Investors rely on the GDP to determine if the economy is rapidly changing, which tells them whether or not they need to adjust their asset allocation. The GDP also allows investors to determine the best opportunities for purchasing shares. The Federal Reserve also uses the GDP growth rate to help indicate if the economy should be stimulated or restrained. GDP shows if the economy is growing quickly or slowly and is compared to previous quarters. GDP is compared to all economies all over the world to compare the relative growth rate (Stanford, 2008).

There are two measures of GDP; nominal and real GDP. Nominal GDP is when the GDP does not reflect inflation. Nominal GDP is also known as chained dollar GDP. When inflation is not accounted for the GDP can be higher than what it actually is. Real GDP is when inflation is configured in the GDP measurement and it reflects the value of all goods and services. Real GDP is also known as inflation-corrected GDP. Real GDP accounts for changes in the price level and the measure of Real GDP is accurate. Overall, Nominal GDP measures the value of all goods and services and is expressed in current prices. Whereas Real GDP measures the value of all goods and services that were produced and is expressed in prices of the base year (Trading Economics, 2012).

Calculating GDP can be done in two ways; income or expenditure. The income method adds up everyone's yearly income. The income method calculates the total compensations, gross profits, and taxes. The expenditure method adds up what was spent. The expenditure method is calculated by adding the total compensations, investments, government spending, and net exports (Stanford, 2008).

Each quarterly GDP gets three releases; the advance report, the second report, and the third report. The advance report is released a month after the quarter ends. The second report is released two months after the end of the quarter. The third report comes out three months after the end of the quarter. The advance report of 2011 showed that the economy grew 2.5%. The second report showed the BEA estimate was lowered to 2%; which was a result from leaner inventories. The third report showed the estimate was lowered again to 1.8%. The estimate resulted from a lower consumption. In the third quarter of 2011 the real GDP increased