We hear the term GDP all around us but have we really tried to stop and think about what it is or how it impacts us? GDP stands for Gross Domestic Product reflecting the overall market value of all goods and services produced in the US. “Why should this matter to me as an individual or a small business owner?” you may ask.
Since GDP is the price tag of US products and services reflecting the size of our US economy anything we do as individuals and small business owners are contained within that GDP thus directly influences it. Think of our personal sphere as microeconomic world and the national sphere as the macroeconomic world. Just like a collection of droplets creates a rain storm microeconomics influences macroeconomic conditions we all function under as a nation. Individual households impact the local community and the small businesses hosted in that community; a collection of communities make up the United States and therefore influences the national economic picture. To understand GDP, it is important to know the mathematical equation that represents it.
GDP = C + G + I + NX
GDP = Consumer Spending + Govt Spending + Capital Invest Spending + Net Exports
What this tells us is a net increase from consumption, government spending, capital investment and exports incremental to imports will drive growth in the US economy. Now that we know the equation, let us explore what we can do in our own communities to help grow our GDP. The questions one has to ask are:
- Consumption (Private Consumer Spending): Is consumer spending increasing and if not what can I do to improve consumer spending in an effort to grow our economy? Job loss, reduction in take home pay due to increasing healthcare costs, loss of benefits resulting in reduced spending on consumer goods, reduction in consumer credit are examples of what is causing the reduction in consumption. While consumer spending has improved compared to the early days of financial crisis, we have not reached the pre-crisis levels yet thus causing shrinkage in our economy.
- Government Spending: How can I influence an increase in government spending? With the austerity measures resulting from legislative forces and accelerated loss of government jobs, we continue to see a shrinking in this area which also contributes to the shrinking GDP. Unemployment rate when adjusted for government job loss is 7.1% indicating the size of shrinkage caused by reduction in government spending.
- Investment (Capital Investment Spending): How can I influence Private sector or government sector capital investment spending? We are currently seeing some private sector investment but overall there is no government or private sector investment at a material level. This declining level of capital investment including infrastructure investment further shrinks our GDP. Government capital investment creates private sector jobs and historically this is how our country has managed GDP growth during challenging economic times.
- Net Exports: How can I influence a net increase in exports? US has historically had net imports making this always a drain on GDP because we import more than we export. Our recent trends indicate a growth in exports given the cheaper labor costs due to the economic conditions and changing global forces, but we have a long way to go for this to materially matter.
Since money is a zero sum game, when the US economy shrinks resulting from reduced consumption, government spending and capital investment some other economy grows by benefiting from it. How can we stop this shrinkage of the US economy? How can we help ourselves and our US GDP? Should we sit back and not influence the process as individuals and small business owners?
**Do share your thoughts and insights on how we can take control of our economic fate, keeping in mind that the lives we sustain will always be our own. I look forward to an engaging discussion! **