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- Wouldn't it be nice if there was one common way to talk about economic growth? Fortunately, there is. When people talk broadly about the actual rate of growth in an economy, they're almost always talking about GDP, which stands for gross domestic product. When people say that the US economy grew at 2% last year or Germany grew by 3% last quarter, they're talking about GDP. And GDP includes all new activity, all new goods and services produced inside the border of a country.
GDP is comprised of four main categories of growth activity, and this is true in any economy. Consumption, what people are buying. Business investment, what companies are spending their money on to grow. Net exports, that's the balance of trade, exports minus imports, which can be negative. And government spending, what the government is spending money on. GDP includes everything new made in an economy, all the new cars, new construction, new schools, new investments, and new government expenditures.
In the United States, the Bureau of Economic Analysis, or BEA, is tasked with pulling together all of the growth data in the economy, and these reports are released every quarter. The most important number to watch in the GDP report is the percent change for the quarter-over-quarter annualized real GDP growth rate. That sounds like a mouthful, and it is. But it's the rate of GDP growth that's quoted in the press. They usually just say GDP rose by 3.1% in Q1, or GDP fell by 1.5% in Q4.
They leave out all the sticky details that get you to an annualized rate of change based on the level of GDP compared to the prior quarter. Two other things about this quarter-over-quarter growth rate that's quoted in the press. This is a seasonally adjusted growth rate, and that strips out seasonal factors like holiday retail sales or summer vacations. And it's a real rate because it strips out inflation.
You see, economic growth can be measured in current prices, or it can account for inflation. Real GDP excludes inflation, showing real growth, and this is the number people want to know. They want to know how the economy is growing without including inflation. Because prices usually rise, and that can be deceiving. Of course, there's a way to measure GDP plus inflation, and that's called nominal GDP.
That shows growth in current dollar values. If the economy grows by 5%, but that includes 2% inflation, nominal GDP would be all of that, 5%, but real GDP would exclude the inflation. So that'd be the 5% minus 2% inflation rate. Real GDP would then be 3%. You will almost never see nominal GDP quoted in the press. When it comes to GDP, the press is trying to keep it real.
While GDP is an important economic indicator, there are a couple of big drawbacks to the US GDP reports. First of all, these reports are released quarterly in the United States and in most economies, which means that it isn't the most up-to-date series, and that's why other economic reports are more important if they're timely. Plus, this report is revised a lot. Whatever the growth rate's reported to be, you can expect it will change, and that makes planning and policy decisions more difficult.
The report for a given quarter's actually released three different times, with the third report released almost three months after the end of the quarter that the GDP report's actually about. This means that a report for the first quarter of the year, January through March, would be released in its advanced form at the end of April, a preliminary report then at the end of May, and a final report at the end of June! This means that the year's half over before you know what growth in January looked like.
Yikes. Plus, the final number that you still get at the end of June is likely to be revised again in future multiyear revisions. So just to recap, this super important report about US growth is both highly revised and kind of old in economic terms. By the time you know what's actually going on, may be too late. This is why we need all the other economic data that's more timely. Do you know how much GDP grew last year? What about last quarter? You can find all this information on bea.gov or at fred.gov.