Gross Domestic Product Explained in Layman’s Terms | 10/19/2018 | Dr. Sam Clovis
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Every time I start to write about the economy, I worry that I might drill down too deep, because most people don’t care as much about the details of the economy as they care about how much money is in their bank accounts and wallets. I get that, but I think it is important to offer some thoughts on the internals of the economy that may or may not be known to most. As I used to teach my students, it is the interconnectivity of things that really give us the best picture of what is really going on in the economy. Unfortunately, most of the talking heads on TV are quick to speak in jargon, spout numbers that are hedged by probabilities and predict economic performance without context.

The Gross Domestic Product is a course measure of the income of the nation based on the value of final goods produced and other factors. The operative word is “course.” As precise as the talking heads would like to imply about the GDP, it is simply a crude aggregation.

GDP - Formula - GDP= - C - +

The GDP is most easily explained in the following formula: GDP= C + I + G + (X-M). Here, C is consumption, I is investment, G is government spending and the rest is exports minus imports. In recent years, C + I is around 80%, G is about 25% and X-M is –5%. WE could get into the accelerators, the Keynes Multiplier, etc., but I think it best to talk about the big chunks.

If we have more money in our pockets and businesses have more money to invest, then one can see that the GDP will grow. Of course, some would argue that giving more income to the people and business will reduce the amount of money that Government can spend. This does not...
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