GDP equals C + I + G + NE.
Simple.
C = Consumer spending
I = Investment by business
G = Government spending
NE = Net exports over net imports (usually negative and subtracts from GDP)
RESIDUAL of over-spending balances out the equation based on www.bea.gov data used.
In the news, we often hear how consumer spending drives the economy. Is this news? It is true and yet it is not much different than other periods in history, but there are exceptions. Let's look at a few sample years.
Before the Great Depression, consumer spending (C) was higher than today's 70% and increased afterwards:
In 1929, C=76%; I=10%; G=14%
In 1934, C=82%; I=4%; G=20%; NE=(1%); Residual (5%)
WW II resulted in a tremendous change in GDP makeup where consumer spending went from 82% in 1934 to only 47% 10 years later in 1944:
In 1944, C=47%; I=3%; G=73%; NE=(2%); Residual (21%)
But in the 1950's, GDP started its return to more normal levels which continued into the 1970's and 1980's:
In 1974, C=65%; I=13%; G=23%; NE=(.5%); Residual (.5%)
In 1982, C=67%; I=12%; G=23%; NE=(.5%); Residual (.5%)
In 1991, C=67%; I=12%; G=22%; NE=(1%)
As you can see, not much changed in the makeup of GDP by these major categories even into the 21st century.
In 2001, C=69%; I=16%; G=18%; NE=(3%)
In 2008, C=70%; I=15%; G=18%; NE=(3%)
In dollar terms, GDP is near $14 trillion. So, if consumer spending has increased from 65% in 1974 to 70% today, then that 5% increase in GDP is about $700 billion. So, if consumer spending drops back to 65% of GDP (to what level is still to be determined) and the government makes up the difference and increases its contribution from 18% today to closer to the 1974 level of 23% - that is just about 5%.
Interestingly, the stimulus package of government spending is around these numbers also. The dollar amounts (billions and trillions) seem quite high but it should be placed within the perspective of the overall economy.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.