Nominal GDP and Real GDP
When measuring the Gross Domestic Product, government agencies first assess it without the effects of inflation (nominal GDP), and then factor the impact of price changes (real GDP). Thus, real GDP is adjusted for inflation while nominal GDP does not consider how changes in the cost of living affect the total monetary value of the goods and services manufactured within a particular country or jurisdiction (Desmyter, 2022). Economists and policymakers favor real GDP since it reflects the true state of an economy’s production capacity and economic growth (Kapoor & Debroy, 2019).
In the case of this exercise, the nominal GDP for the United States in quarter two of 2023 was $27,063 billion while real GDP for the same period was indicated as $22,225.4 billion according to figures in Tables 1 and 2 below (BEA, 2023). These figures perfectly illustrate the difference between real and nominal GDP. Specifically, the difference between the two is $4,837.6 billion, which reflects inflation during the second quarter of 2023 in the US.
Table 1: Nominal GDP.
Table 2: Real GDP.
Components of GDP
The Gross Domestic Product is made up of several components and categories such as personal consumption expenditures, gross private domestic investments, net export of goods and services, and government consumption expenditures and gross investment. Personal consumption expenditures make up the largest portion of the GDP accounting for 68% and 69% of nominal and real GDP (see Tables 1 and 2). In contrast, net exports of goods and services contribute the smallest portion to the GDP making up -3% and -4% of nominal and real GDP respectively (see Tables 1 and 2) (BEA, 2023). The figures on net exports of goods and services show that the United States imported significantly more than it exported.
Net Exports of Goods and Services
Net export of goods and services is a factor of the difference between what has been exported versus what has been imported. When this figure is negative like in the second quarter of 2023, it indicates that the US is importing more than it exports (Stonecash, 2021). In economic terms, this illustrates that the country has a trade deficit, which could be driven by various factors such as increased consumer demand for imports or a strong dollar relative to other currencies.
National Defense Spending
In the second quarter of 2023, spending on national defense amounted to $820.1 billion against nominal and real government consumption expenditures and gross investment of $4669.80 billion and $3789.80 billion. During the same period nominal and real GDP was $27,063 billion and 22,225.40 billion (BEA, 2023). Thus, defense spending accounted for 17.56% and 21.64% of nominal government consumption expenditures and gross investment (BEA, 2023). Additionally, this expenditure was 3.03% and 3.69% of nominal and real GDP (BEA, 2023).
Analysis of the Significance of the Data
The collected data represents a snapshot of the economic performance of the United States in the second quarter. Among the insights that can be deduced from this data is that nominal GDP was significantly higher than real GDP because of inflation adjustment. Additionally, personal consumption and net exports make up the largest and smallest portions of the GDP respectively. Further, the negative contribution of net export was because, for various reasons, the US imported more than it exported.
Reflection from the Exercise
This exercise has given me a practical example of the calculation of GDP using its various components. In addition, it has allowed me to appreciate the effect of inflation on the Gross Domestic Product. This exercise provided me with knowledge of the role of government spending on GDP and the importance of a positive trade balance. Finally, the compilation of the data by the Bureau of Economic Analysis and the details it contains made me appreciate the value of accurate and reliable information.
Table 3: GDP, National Income, and Personal Income.
GDP, GNP, and their Calculations
Gross Domestic Product (GDP) represents the value of goods and services produced within a particular jurisdiction while the Gross National Product (GNP) measures the value of goods and services produced irrespective of whether a citizen resides in a specific country or not (Stonecash, 2021). From the details in Table 3, one can calculate GNP from GDP by adding the net income earned from US citizens abroad and subtracting the net income earned by people residing in the US who are not legally considered citizens of the country.
National Income and GNP
National income is the value of goods and services produced by all factors of production within a country. This metric measures the income generated by domestic production and its elements include profits, rent, interest, etc (Stonecash, 2021). For the second quarter of 2023, national income was lower than GNP by $5,003.70 billion $(27,263.1 – 22,259.4) (BEA, 2023). The value of national income can be calculated from GNP through the subtraction of depreciation (capital consumption allowance). Additionally, in the various constituents of national income, wages and salaries make up the greatest portion, which represents the money earned from various sectors and industries.
Personal Income, National Income, Personal Disposable Income, and Personal Savings
Personal income can be calculated from national income through the addition of income earned but not received and income received but not earned. Alternatively, personal income can be calculated by adding government transfer services and subtracting corporate income taxes, social insurance contributions, and undistributed corporate profits from national income (Stonecash, 2021). For personal disposable income, one can calculate this figure by subtracting personal taxes from personal income (Stonecash, 2021). Additionally, personal savings are calculated by subtracting expenditure on personal consumption from personal disposable income.
Significance of the Collected Data
The seemingly unrelated data contained in Table 3 has deepened my understanding of macroeconomic concepts such as GDP, GNP, National Income, Personal Income, Personal disposable income, and Personal Savings. These concepts are essential in the accurate and timely relaying of the economic performance of various economies such as the US. I have also understood that the data is interrelated and various other economic metrics could be calculated from them. Overall, this exercise provided me with a hands-on approach to measuring the Gross Domestic Product, Gross National Product, and their constituent economic metrics.
References
BEA. (2023). Gross Domestic Product (Third Estimate), Corporate Profits (Revised Estimate), Second Quarter 2023 and Comprehensive Update. Bureau of Economic Analysis. Web.
Desmyter, S. (2022). Never mind the economics! there’s more to markets than GDP. Forbes. Web.
Kapoor, A., & Debroy, B. (2019). GDP is not a measure of human well-being. Harvard Business Review. Web.
Stonecash, R. E. (2021). Principles of Macroeconomics. Cengage.