REAL GROSS DOMESTIC PRODUCT

What is Real GDP?

Also known as Real Gross Domestic Product, it is the legal market value of all final goods and services produced within a country in a given period of time. Recorded quarterly, the total quantity of output households, firms, government, and foreign sects spend, indicate the rising and falling fluctuations of U.S. economy.

GDP contains four components of spending:

• Consumption (C)
• Investment (I)
• Government Purchases (G)
• Net Exports (X — IM)

The cumulative amount of these components determine GDP (Y) by this equation,

Y = C + I + G + X — IM

which determines the rate in which market changes.

Real GDP, — different from Nominal GDP which only calculates current prices— values output using the prices of a given base year to detect how this change was impacted and by how much, as well as being corrected by inflation.

What does the graph tell us?

On average, Real GDP grows 2-3%. Taking a look at the graph, from 1950 to last year, we see that there are two sets of shaded areas. This is because Actual GDP fluctuates around an increasing slope of its Potential GDP. These fluctuations are known as business cycles. The white spaces are known as periods of expansion, where GDP increases gradually, also raising inflation (the increase of prices, and decreasing value of purchasing power). The gray shaded areas, which are below potential GDP are known as recessionary terms or periods. In a year such as 1973, the U.S. economy suffered a minor setback in GDP due to the oil crisis in the Middle East, causing a recession lasting up until 1975. We really see a drop in the curve once we get to the housing market crash in 2007-2009, which dropped home prices dramatically due to the bursting of the housing market bubble. Also, notice the trends of GDP before recessions. Often, the market experiences a booming economy and spiking inflation before collapsing into a recession.