FAQ: The Basics of GDP
What are the latest dynamics of GDP in the US?
Taking a look at the indicators, provided by the US Bureau of Economic Analysis, by the last quarter of 2017, the US Gross Domestic Product stood at $19.919 trillion. It surpassed the $20T mark during the first quarter of the following year. The latest report, published for Q4 of 2019, puts GDP at $21,729 trillion.
During the same 3 year period, 2017, 2018, and 2019 the actual growth rate of Real Gross Domestic Product has fluctuated from 1.1% to 3.5%. The average of the last 12 quarters is 2.54%.
Which are the top 5 countries with the largest GDP in the world?
By the latest 2019 data for Gross Domestic Product, the US still represents the largest economy in the world, with its GDP standing at $21.427 trillion. In real terms, it expanded by 2.3% compared to 2018.
China has the second-largest economy, with a GDP $14.140 trillion, according to the Chinese authorities this puts an annual growth rate at 6.1%
Japan holds 3rd position, its GDP reaching $5.154 trillion, representing only 0.9% expansion over the 2018 numbers.
Next comes Germany, with the Gross Domestic Product at $3.863 trillion, however the economic growth has slowed significantly, standing only at 0.6%.
India represents the fifth largest economy in the world, with GDP running at $3.202 trillion, with economic growth near 5%.
How does the Chinese GDP composition differ from the US counterpart?
The first most obvious difference which comes up when comparing those two economies is that the portion of consumption in China is much smaller than in the USA. In fact, it is not even the largest part of GDP, only making up 39.1%.
In China Investment is the most important component with its share of 44.4%, more than 2.5 times bigger than in the USA. One similarity between the two countries is that Government Spending has similar portions in relation to GDP, in Chinese case making up 14.5%.
Unlike the US, China is running a trade surplus. Net exports are contributing 2% of GDP. In summary, this Asian country has a less consumer-oriented economy, more focusing on Investment and exports.
Can the long term appreciation of currency hurt its GDP growth?
According to one economic theory, the strengthening currency can be hurtful for the economy. The reasoning goes as follows: the appreciation of currency makes exports more expensive, with foreigners needing more money to purchase goods and services from this country. At the same time for the local residents, the imports become cheaper and affordable. The trade balance formula is very simple: Exports - Imports and strong currency undermine it from both sides of the equation.
As one of four essential components of GDP, If Net Exports turn negative, then it drags down the Gross Domestic Product and consequently reduces economic growth.
This sounds quite logical, but it can be helpful to check the validity of this theory against some real-life examples. The major currency pairs always fluctuate considerably and sometimes it is difficult to find one currency who has consistently has appreciated against its peers.
However, the example of Swiss Franc might be useful here. At the beginning of 2000, USD/CHF traded at 1.60 and EUR/CHF near 1.61, with GBP/CHF standing at 2.58. Let us take a look at how things changed after more than 20 years.
The Swiss currency surpassed parity with USD in 2010, nowadays, at the beginning of April 2020, one Franc is worth around $1.03. We see a similar picture with EUR/CHF, which fell significantly over the years, eventually trading at 1.05. It has already pierced the parity level back in 2015, so it might happen again. The appreciation of Swiss Currency is even more dramatic against the pound, with GBP/CHF falling from 2.58 in 2000 to all the way down to 1.20.
Now, small periods of currency strength may not have much impact, but according to the economic theory mentioned above, the 20-year history of CHF appreciation must have been a devastating blow to the country's exports. By now the Swiss government should be faced with a massively expanding trade deficit. Is this not the current state of affairs?
Surprisingly, Swiss exports are doing quite well. The last time the country had an annual trade deficit was back in 1983. Despite the significant long term appreciation of CHF, the trade surplus has expanded from 6.13% of GDP in 2000 to 12.23% in 2018. So the exports not only held their ground under stronger Franc, but it has expanded considerably during the last two decades.
So what can be the reason behind this unexpected outcome? Many goods require the import of raw materials from abroad, the strengthening currency obviously, makes them cheaper. Therefore the lower input costs can potentially offset some of the price gains due to CHF appreciations. Other factors such as quality and brand loyalty can also play an important role in the rising number of Swiss exports.
On the other end of the spectrum, we can take an example of the US from 2002 to 2006. During this period USD depreciated significantly against its peers. Theoretically, this should have helped with exports; however, the trade deficit still expanded massively, surpassing $700 billion by 2006.
Therefore, currency appreciation does not always lead to an increasing trade deficit and also devaluations do not guarantee an improvement in the Net Export category.
Did the US always have a trade deficit?
The US did run a trade surplus some years in the past. The last time it happened was back in 1975 when the country’s exports exceeded imports by approximately $16 billion. Despite going negative, until 1996 the Net Exports stayed more or less close to balance.
This changed after 1997 when with the strengthening of USD, the trade deficit started to expand massively. Interestingly enough, the weakening of the dollar since 2002 did not improve the picture. By 2006 it reached an all-time high of $771 billion.
After the Great Recession of 2008, the demands for exports moderated somewhat, and by 2009 reducing the trade deficit to $396 billion. However, as the economy started to recover the number of imports increased substantially, eventually pushing Net Exports to minus $617 billion.