GDP (gross domestic product)
The value of everything a country produces over a period: its change measures growth.
Three ways to count the same output
GDP adds up the value of everything produced in a country over a period. It can be computed from output (sum of value added), from demand (consumption + investment + government spending + exports - imports) or from income (wages, profits, production taxes). The three approaches give the same total, up to statistical error.
Real and nominal growth
Nominal growth includes rising prices; real growth (in volume) strips them out. Statistical offices announce real growth. The US publishes quarterly growth at an annualised rate, which must not be compared directly with European quarter-on-quarter growth (roughly four times smaller for the same pace).
Its limits
GDP measures neither well-being, nor income distribution, nor the depletion of natural resources, nor unpaid household work. It remains the central gauge of activity because it is available quickly, everywhere, under comparable rules.
- C: household consumption
- I: business and household investment
- G: government spending
- X - M: exports minus imports
Quarterly or annualised?
- The euro area reports +0.4% quarter on quarter.
- Annualised the US way: (1.004)^4 - 1 = +1.6%.
- The US reports +2.4% annualised, about +0.6% quarter on quarter.
On the same basis the two paces are close: 0.4% against 0.6% a quarter.
2020, the lockdown year
French GDP fell about 7.5% in 2020, the largest drop since the Second World War, before rebounding by nearly 7% in 2021. In the US the fall was about 2.2%, cushioned by massive public support.
Common mistakes
- Comparing annualised US growth with quarter-on-quarter European growth.
- Forgetting revisions: the first estimate is often changed by several tenths.
- Confusing nominal and real growth when inflation is high.
Notitia newsroom · education, not investment advice.