GDP–What’s in it for ME?

Robert Reich, former Secretary of Labor under President Clinton. did a little exercise where he took the GDP, divided it by the population and came up with a figure of $35,000 for every man, woman and child in this country IF GDP were to be divided equally.

GDP — is the sum of all goods and services produced in an economy in one year. Since that was several years ago, we’re going to update our ‘divided equally’ figure to $42,008 for 2005, based on GDP of $12,455.8 (in billions of dollars) and a 2005 population of 296,507,061.

We all know that dividing equally is not how we divide things up in this country. There are the rich, the poor, and those of us who are sandwiched in between. The rich get theirs off the top, the poor scrape theirs off the bottom, and those left in the middle continue to get smaller and smaller.

But let’s take a typical family of five – mother, father, and three children. GDP, divided equally, would mean a household income of $42,008 x 5 or $210,040.00. How many families do you know of with three children that have a household income of $210,040.00?

The chances are very good that your answer is — none. The median household income is now not much above $48,000. Median, you will remember, means the mid-point — half of the households are above the median, and half are below.

Why is GDP so unequally distributed? Not that it should be equally divided up, but why is so skewed to the top? Why do we continue to accept the “trickle down” theory when we’ve had years without seeing any trickle? Why to avert a recession is money in the form of tax-cuts poured in at the top instead of directing more in the middle and the bottom?

What is the point of all this? A very simple one — it makes no difference to you how much productivity is up or how much GDP is up, or how much business profits are up, if you are not getting any of the benefits.

The next time you read or hear those glowing numbers about the economy, just ask yourself these questions —

How is this benefiting my family?

What am I getting out of this?

What are these increases in GDP doing for me?

Even if you are not receiving any benefit from the increases in GDP everyone should know what the term Gross domestic product (GDP) means as well as the calculations, but few of us do. Do you?

There are various definitions out there for Gross Domestic Product, GDP, but the only one that should be given credence is the definition from the BEA – Bureau of Economic Analysis.

“Gross domestic product (GDP). The market value of goods and services produced by labor and property in the United States, regardless of nationality; GDP replaced gross national product (GNP) as the primary measure of U.S. production in 1991.”

GDP replaced GNP back in 1991 – what’s the difference? GDP is the market value of goods and services produced by labor and property in the US over a period of time, while GNP is the market value of goods and service produced by an economy’s productive resource over a period of time.

The GDP reports prepared by BEA for a quarter actually consist of three separate reports released approximately one month apart, the ‘advance estimate’, the ‘preliminary estimate’ and the ‘final estimate’.

GDP is described by the BEA customer guide as “the sum of final-expenditure components”, consisting of the following:

Personal consumption expenditures, (consumer spending).
Gross private domestic investment (business investment in structures, equipment and software, and inventories.
Net Exports (exports of goods and services less imports of goods and services).
Government consumption expenditures and gross investment (government spending).
There are a total of 299 NIPA tables consolidated into a seven summary account, double-entry system representing receipts and expenditures for the U.S. economy.

GDP is summarized on the right side of the first summary account called “Domestic Income and Product Account” while GDP income is summarized on the left hand side. In a double-entry system both sides must equal.

National accounts involve large sums and when rounding the various components for transfer to a summary account, there may be a discrepancy which is recorded on the income side of GDP. This statistical discrepancy is defined as “the net sum of offsetting, unknown, measurement errors” by BEA.

The seven summary accounts are as follows:

Account 1. Domestic Income and Product Account
Account 2. Private Enterprise Income Account
Account 3. Personal Income and Outlay Account
Account 4. Government Receipts and Expenditures Account
Account 5. Foreign Transactions Current Account
Account 6. Domestic Capital Account
Account 7. Foreign Transactions Capital Account

When GDP estimates are released by the BEA, they are issued indicating two dollar values, ‘current’ or ‘nominal’ dollar estimate, and ‘chained’ or ‘real’ dollar estimate. Calculating GDP in ‘chained’ dollars (using the year 2000) eliminates the effects of inflation and provides more meaningful comparisons from one period to another.

GDP measurement is not as accurate as it could be due to the fact that every country has an informal economy – sometimes called a ‘black economy’ that consists of incomes and expenses from illegal activities that are not reported to the government, i.e., sales from illegal drugs, gambling, black-market software, Cd’s, DVDs, etc.