Discussing the country's GDP (or Gross Domestic Product) growth rate is a popular topic around election time. In particular, some politicians believe we are "losing" against more economically vibrant countries like China when it comes to ensuring that the GDP growth rate is strong. So if the U.S. has an annual growth rate of 2.0% and China has a growth rate of 6.0% does that mean we are "losing"?
Fear not. I will spell out for you exactly what constitutes a "healthy" GDP, and when it comes to the comparison of other countries (like China) it's really apples and oranges.
What is GDP?
As mentioned above, GDP stands for "Gross Domestic Product", and this is the monetary value of all the finished goods and services produced within a country's borders in a specific time period. Though GDP is usually calculated on an annual basis, it can be calculated on a quarterly basis as well, and such is the case here in the United States. The dollar amount by itself is pretty useless for analysis, so we calculate what the change of the value is over a particular time. This is called the "growth rate" and it helps us to see how the economy is performing relative to the same time frame in the previous year or in the previous quarter. This growth rate is really what most people in the media fixate on and often serves as a point of angst for the average citizens who don't fully understand it.
What is Included in a Country's GDP?
There are 4 factors that are included in a country's GDP and all of them are necessary, but in an ideal world, the would all be roughly similar. Here is the formula that economists use:
GDP = C + I + G + (Ex - Im)
Where “C” equals spending by consumers, “I” equals investment by businesses, “G” equals government spending and “(Ex - Im)” equals net exports, that is, the value of exports minus imports. Net exports may be negative, and in the case of a lot of developed countries, this is true - they can afford to import more products than need to export them.
What is a "Healthy" GDP Growth Rate?
To answer this question, you first need to understand the economy of whatever country you're talking about. A developed economy - or an industrialized country - possesses advanced technological infrastructure relative to other less industrialized nations. The United States, Germany, the United Kingdom, and Japan are all examples of developed economies. Since the potential for further development in these countries is low, the growth rate for these countries is relatively small (between 0% and 3%). What economists look for is that the growth rate a) stays positive and b) does not show a negative reading on a quarterly basis for more than 2 consecutive quarters. A negative growth rate for 2 quarters or more is considered a "RECESSION" - remember that word? Essentially, a "healthy" GDP for a developed country is anything that indicates consistent growth - the amount of growth is not that significant.
Developing economies, on the other hand, are typically former poor agricultural countries that are seeking to become more advanced economically and socially. Countries like China, India, and Brazil are considered "developing" by high economic standards - although some of these are approaching developed status. Many African nations are developing economies. Naturally, GDP growth rates are higher because a developing country has a lot of catching up to do in terms of infrastructure and technology. As such, if you have a country going from 0 to 100 -- that's a 100% growth rate (not realistic of course, but you get the idea). As these countries develop, GDP growth slows down because they are reaching their growth capacity. China treats its recent slow down as something to be ashamed of so they are constantly trying to keep growing but at a substantial cost to its citizens and their overall health. So what is a healthy growth rate here? Again, anything that this positive and over many years slowly becomes consistently similar to that of developed countries.
So is the United States "Healthy"?
The short answer, is 'yes'. Every recession has been overcome and even though growth is not phenomenal, it's still a miracle that we are growing at all. Trying to swing the U.S. growth numbers as "unhealthy" just because they are not as high as developing countries is a real insult to all American workers who keep working hard to make sure that number stays consistently high. Is it healthy? For the most parts, yes, but one has to consider a LOT of factors deep within the GDP to determine if this is true. Below is a growth rate of the U.S. GDP over the past 10 years for some reference:
Next week, I will give an example of a relatively developed economy and show how excessive growth is not imperative to a nation's stability.
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