2 + 2 = 4 vs. GDP

Economists seem to love equations and mathematical formulas to show their point. Since GDP appears to be a measuring stick used to determine how severe national debt is, we need to understand in more detail what GDP is. It is a formula that looks simple. Kahn Academy has a very nice depiction:

Screen Shot 2014-08-29 at 4.25.25 PM

Starting with the “I,” it needs explaining what that means. The “I” stands for what firms invest to get their product (widget) out. Labor to make the widget, as well as machinery, a building, supplies to construct it are the all factors. The “C” stands for what households buy and NX is the difference between imports and exports. NX can be a positive or negative.

United States GDP Growth Rate 1947-2014

The Gross Domestic Product (GDP) in the United States expanded by a seasonally adjusted annual rate of 4.2 percent in the second quarter of 2014 over the previous quarter. GDP Growth Rate in the United States averaged 3.27 Percent from 1947 until 2014, reaching an all time high of 16.90 Percent in the first quarter of 1950 and a record low of -10 Percent in the first quarter of 1958. GDP Growth Rate in the United States is reported by the U.S. Bureau of Economic Analysis.

united-states-gdp-growth

 

The USA has by far the biggest GDP growth rate at 4.2 %. Germany at -0.2, Canada at 0.8, Netherlands at 0.5, Russia at -0.3. That is one reason I believe America is not too concerned about the national debt.

There are various forms of GDP (and other mathematical equations in economics), which in the media get used to the advantage of whatever the writer wants to prove or disprove. More about that later. The fact is: GDP ≠ GDP, like 2+2=4. It all depends on the premise used for a particular GDP equation as to what the outcome will be. That is why I always look for the definition used in an economical article but cannot always find it.

 

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