Understanding GDP
Gross Domestic Product or GDP is defined as “the market value of all final goods and services produced within a country in a given period of time”. The GDP growth rate is the percent increase (or decrease) of a country’s GDP from one quarter to the next. During the 4th quarter of 2025, the US economy increased at a rate of just 1.4% (1st Estimate), which result was about half of that forecast. This followed strong growth in Q3 (4.4%) and Q2 (3.8%) and a contraction in Q1 (-0.5%), which together resulted in a solid 2.2% GDP growth rate for 2025. In comparison, GDP growth in 2024 came in at a similar level of 2.4%. In Q4 (2025), a downturn in government and consumer spending contributed to the weaker data. The 43-day government shutdown resulted in a steep decline (-16.0%) in federal government spending and subtracted 1.15% from GDP growth. Consumer spending during the quarter rose just 2.4%, a significant slowdown from the healthy 3.5% seen in the previous quarter. Over the past fifty years, the US economy has grown on average by about 3.0% per year.
GDP measures two things at once: the total income of everyone in the economy and the total expenditure on the economy’s output of goods and services. If you are following this closely, you will see that total income and total expenditure are just mirror images of each other and, thus, for an economy, income must equal expenditure. Remember that each dollar you, as a buyer, spend (expenditure) is a dollar of income for the seller. GDP includes both tangible goods (food, clothing and cars) and intangible services (beauty salon, repairs and medical). In the case of goods, GDP only considers the value of the final product – think of the final value of the car, not the value of each individual part or component. This points, perhaps, to a limitation of the GDP calculation in that it ignores intermediate spending and transactions between businesses and overstates the importance of consumption relative to production. Other excluded items from GDP consideration are the sales of used goods and the sales of black market (illegal) goods and services. GDP measures the value of production within the geographic boundaries of a country; thus, items are included in a nation’s GDP if they are produced domestically, regardless of the nationality of the producer.
I recall a college economics professor referring to GDP as like “adding apples and oranges together”. There is good reason behind that analogy. GDP is the sum of 4 very different components and in mathematical terms is written like this: GDP = C + I + G + NX. The “C”, is for consumption or the spending by households on goods and services. Consumer spending typically accounts for about 70% of US GDP. “I” is for investment which includes both the purchase of new housing and the investment by businesses in new plants, equipment and inventory. Investment accounts for about 18% of GDP. The “G” stands for the purchases of goods and services by local, state and federal governments. “G” accounts for about 17% of GDP. Did you notice my new math? Not to worry. When we add “C” (70%) and “I” (18%) and “G” (17%) we arrive at 105%. The last component of GDP, “NX” stands for net exports which are calculated by subtracting imports from exports. As a nation of consumers who consume more than we export, NX is typically about -5% of GDP. A widening trade deficit (which would result in a larger negative value for “NX”) can act as a drag on domestic economic growth. So, how did the now overturned Trump tariffs impact the trade deficit? In 2025, the trade deficit saw wide monthly swings in trade flows and ended the year at $901.5 billion – compared to $903.5 billion in 2024. The largest deficits, by country, were seen with China ($202.1 billion), Mexico ($196.9 billion), Vietnam ($178.2 billion) and Taiwan ($146.8 billion).