Economists use lots of fancy college words and abbreviations to talk about things. It makes ‘em sound smarter, you know. But just because they’ve got those Ivy League degrees and talk fancy doesn’t mean the rest of us should be clueless about what they’re saying.
In this article, let’s take a look at something we hear about a lot: GDP.
Here are Five Fast Facts about GDP:
- 🩺💰 What Is It - GDP is short for gross domestic product. It’s the total market value of all goods and services produced by a country. It’s a great measure for the overall health of a country’s economy. Kind of like the total of your checking account.
- ⏳ A Brief History - GDP was first used in 1937 in a report to Congress about the Great Depression. Since then, it has been adopted as a key general metric by just about everyone, though many more specific variations have been developed to make it even more useful. It is typically calculated on an annual or quarterly basis. Adding up all those widgets takes a while, you know?
- 🙈 It’s Nominal - One of the main variations of GDP is Nominal GDP. It uses current prices in its calculation, meaning inflation is baked in. This can inflate the numbers during times of high inflation. Politicians love this one because they don’t have to admit to all the inflation they’ve caused.
- 😱 Let’s Get Real - To balance Nominal GDP, there’s also Real GDP. This calculation is based on prices at a certain point in time, and compares to a base year in order to capture the effects of inflation. It’s the GDP of the people!
- 👨👩👧👦 Per What Now? - Another common variation of GDP is Per Capita GDP. This takes the whole output of the country and divides it by the number of people living there to show how much economic output there is per person. This might also be called Purchasing Power Parity, and is often the best way to understand how far a dollar goes for normal people as they buy stuff.
🔥Bottom line: So what? Well, here’s why it matters to us normal folks. Investors use these metrics to make decisions about where to invest, where to focus, and where to pull back. This impacts different sectors, meaning your job may be affected by how much investment those investors are willing to do in your sector. It also helps guide lawmakers and government types as they create laws, adjust policies, tweak interest rates, and more. Again, this has an indirect impact on you, but it is very real. GDP isn’t designed for specifics, but it does give us a high level understanding of an economy and its trends, and that can help us all make better financial decisions every day.
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