Understanding GDP

September 24, 2019
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If you turn on the news frequently, you’ll likely hear market pundits talking about GDP or Gross Domestic Product. But what exactly is it and why is it important? GDP is a 10,000 foot view of the economy. And while it doesn’t show everything, it does give us a good pulse of where things are.

4 components of GDP

  1. Personal consumption – What amount of goods and services are being bought?
  2. Business investment – What amounts are businesses spending to produce goods and services?
  3. Government spending – What amount is the government spending?
  4. Net Exports – What amount is being sold to other countries minus what it being bought from other countries?

Knowing how much each of these components factors into GDP can help you screen news for relevant information. Think of your own household for a minute. If your bank sends you a notice that CD rates are increasing from 2% to 3% - it has a much different impact to you depending on the amount you have in savings.

In the same way, you can screen more global news. For example, there has been a lot of conversation lately about possible tariffs on US exports. However, the US imports more than it exports, meaning Net Exports is actually a negative contributor to GDP and the tariffs have a very small direct impact on our GDP.


Disclaimer: Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized legal advice. We suggest that you discuss your specific situation with an estate attorney. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies may be appropriate for you, consult your financial advisor and other appropriate professionals, such as an estate attorney.