How the economy's growth is measured, at a glance

AP News
Posted: Apr 28, 2011 7:02 PM
How the economy's growth is measured, at a glance

The nation's economy grew at a 1.8 percent annual rate in the January-March quarter, a much slower pace than the 3.1 percent rate reported in the previous three months. High gas prices, bad winter weather and steep government spending cuts were responsible for the slowdown.

Economists think many of those factors are temporary and growth will pick up later this year. That remains to be seen.

Either way, how is the economy's growth calculated?

The broadest measure of the economy's output is the gross domestic product. It's the value of all goods and services produced in the United States. It's affected every time someone buys a car, has a manicure, sees a doctor or fills a gas tank.

To calculate GDP, the government adds consumer spending, business investment and government spending. Then it subtracts the trade deficit. The United States has a trade deficit because the value of its imports exceeds that of its exports. By subtracting imports, the government excludes the value of goods and services from overseas.

Consider the example of how a washing machine would factor into GDP. The costs that a manufacturer pays for parts to build the machine aren't factored into GDP. But the price the consumer pays for it is. That avoids double-counting the production costs as well as the consumer price.

Suppose the washing machine is produced in the first three-month quarter of a year but isn't sold until the next quarter. Until it's sold, the value of the machine is counted as business investment in inventory. Once it's sold, the machine's cost is counted as consumer spending and is offset by a reduction in inventories.