How to Measure GDP - Essay Example

Name: Professor: Institution: Course: Date: Table of content 1.0 Introduction……………………………………………………………….…………………...2 2.0 Summary of the article………………………………………………………………………...2 3.0 Analysis……………………………………………………………………………………..…5 3.1Consumers…………………………………………………………………………...…5 3.2 Investment…………………………………………………………………………..…6 3.3 Government expenditure………………………………………………………………6 3.4 Net Exports……………………………………………………………………………6 4.0 Conclusion…………………………………………………………………………………….6 5.0 References……………………………………………………………………………….……8 6.0 Appendix…………………………………………………………………………..…………..9 1.0 Introduction Economic growth refers to an increase in the capacity of an economy to offer services and goods from one period to another. Economic growth can be measure in real terms or in nominal terms which includes inflation. In comparing economic growth between two countries Gross Domestic Product must be used as it takes into account population differences between the nations. GDP is an indicator that is used to gauge the health of an economy. GDP growth rate determines the increase in value of commodities and services produced in a country and n order to eliminate the effects of changes on the prices on these commodities and services it’s calculated in inflation adjusted terms or in real terms. There are various approaches used to measure GDP, namely; expenditure approach, income approach and product approach. To start with, expenditure approach measure GDP by summing up total investment, net exports, consumption and government spending, it works on the principle that the value of total commodities should be equal to people total expenditure. On the other hand, income approach sums up all producers’ income i.e. adding up total gross profits from non incorporated and incorporated companies, compensation to workers, and taxes less subsidies to measure GDP; it works on the principle that the incomes of the productive factors should be equal to their product. Lastly, product approach sums up all outputs from every class of enterprise to measure GDP. Real Gross Domestic Product per capita of an economy is mostly used as an indicator of the average standard of living of citizens in that country 2.0 Summary of the Article U.S. economic growth for the first quarter of 2012 was a bit slower that initially thought as government spending declined sharply and businesses restocked shelves at a moderate pace. Economists had expected GDP to grow at an annual rate of 2.5% for the first quarter of this year but because of a slowdown in business investment and government budget-cuts, it grew at a rate of 2.2% within the first three months (commerce department). Moreover, stronger import growth and a decline in consumer spending which accounts for more than 70% of economic activity in the U.S accounted for weaker first-quarter output. As compared with a year earlier, American’s income after tax rose by about 0.6% within the first quarter of this year. Consumers spent more since they saved less, savings rate declined by 3.9% which was down from 4.5%. Economists worry the Americans’ will not keep spending more unless their income rises. Investment increased by $57.7 billion instead of $69.5 billion adding only 0.21% point to GDP growth as compared to 0.59% point in the previous estimates. In the January-March quarter, growth was held back due to inventory build-up. However, restocking of shelves by businesses, retreating gasoline prices and an improving housing market will offer a boost to output in the second quarter. Economic growth in the second quarter is estimated at a pace of about 2.5%. In the first quarter, without including inventories, the economy grew at a revised rate of 1.7% as compared to 1.6% and up from 1.1% in the fourth quarter. In addition, government spending declined at a 3.9% which is more as compared to the previously reported 3.0%. However, both imports and exports were much stronger that initially estimated. On the positive side, business spending on software and equipment increased by a 3.9% growth rate compared to 1.7% previously reported. Moreover retrenchment in investment on nonresidential structures was not as deep as previously thought and residential construction revised slightly up. Therefore, during the first period of this year the economy expand at a 2.7% rate when measured from the income approach. Gross domestic income increased at a revised 2.6% pace in the 4th quarter, previously reported as 4.4% rate. In the 1st quarter of this year, real disposable income rose 0.4%. 3.0 Analysis Economic growth is determined in terms of an increase in the size of a country’s and therefore the most widely used measure of economic output is GDP. From the above analysis, we have seen that U.S 1st quarter GDP revised down to 1.9% and this has slowed down economic growth. Using the expenditure approach to calculate GDP we will explain what caused a revise in GDP. Expenditure approach calculate GDP by summing up the four possible types of expenditures i.e. GDP= Consumption + Investment + Government Purchases + Net Exports 3.1 Consumption It is the largest component of the GDP which is calculated by adding durable and non durable goods and services expenditures. Consumer spending which accounts for about 70% of U.S economic activity accounted for weaker first-quarter output as it only grew at a 2.7% pace instead of the previously reported 2.9%. This decline was caused by an increase in prices of goods and services. This has lead to a decline in the U.S. GDP resulting to a slowdown in the economic growth. 3.2 Investment There was a decline in inventory investment which was due to decreased inventory investment in the wholesale and in the manufacturing industries. However, inventory investment retail industries. There was also a slower growth in fixed investment which was mainly due to slowdowns in power and communication structures, and in industrial equipment. These have contributed to slower growth in GDP. 3.3 Government spending Due to cutbacks in the budget, this has caused a decline in government spending as compared to the previously reports. During the first quarter, government spending declined at a 3.9% rate which is more from 3.0% for the fourth quarter in 2011. This will result to a decline in the GDP as the government is correcting taxes but they not spending this money meaning less money are available to buy goods and services. 3.4 Net Exports During the 1st quarter of this year, both imports and exports were much stronger that initially estimated. There net exports did not affect the slow growth of the GDP in the U.S. Conclusion In conclusion, economic growth can be measured using the Gross Domestic Product. GDP growth rate measures the increase in value of the goods and services offered by an economy. The U.S has experienced a slower economic growth within the first quarter of this year due to slow growth in GDP. This has been caused by some factors such as decreased consumer spending due an increase in prices of goods and services, declined investment as businesses are restocking stocks as well less government spending. However, activities such as restocking shelves by business and the expected energy prices fall will boost the second quarter. References U.S Department of Commerce (2012) bureau of economic analysis, Retrieved on 21st June 2012 from http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm Fox Business (2012) U.S. 1Q GDP Growth Revised Down to 1.9% Retrieved on 21st June 2012 from http://www.foxbusiness.com/economy/2012/05/31/us-1q-gdp-growth-revised-lower/ Figure: 1.0 U.S. GDP GROWTH RATE Read More