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1 [1] (April 1, 2025)

handle is hein.crs/intousecnm0001 and id is 1 raw text is: Congressional Research Service Inforrning the legislative debate since 1914 Updated April 1, 2025 Introduction to U.S. Economy: GDP and Economic Growth Economic activity and longer-term growth are of concern to policymakers due to the connection between the economy's performance and the overall well-being of Americans. This In Focus provides an introduction to the U.S. economy, including how economists measure its performance and the factors that influence its long-run trajectory. What Is Economic Activity? Economic activity includes any actions involved in the production, distribution, and consumption of goods and services. Figure 1. Circular Flow of Resources Paymentsfor land, labor, and capital Businesses Households Paymentsfor goods and services Source: Figure created by CRS. Notes: This is a simplified representation of the economy. Other sectors-including the government, the financial sector, and imports and exports-can also be represented as flows within the economy. Economists generally view economic activity as a circular flow of resources. As shown in Figure 1, businesses purchase their factors of production-land, labor, and capital-from households to produce goods and services. Households then use the income earned from businesses to purchase goods and services. Income that households choose to save remains in the circular flow of resources: It is distributed to businesses through the financial sector in the form of loans rather than through consumption spending. Measures of Economic Activity The standard measure of economic activity is gross domestic product (GDP), which is calculated in the United States by the Bureau of Economic Analysis (BEA). GDP is defined as the total value of all final goods, services, and structures produced by a nation's economy during a specified period-in other words, the total value of the economy's output. GDP can be measured in two different ways. The expenditures approach calculates GDP by summing all expenditures on goods and services by final users. Expenditures are divided into five categories: (1) consumption (expenditures by households), (2) investments (largely expenditures by businesses), (3) government spending, (4) imports, and (5) exports. Because GDP is a measure of domestic production, this approach subtracts imports from exports to arrive at net exports. Alternatively, GDP can be calculated through the income approach by summing all income earned within the economy, including wages, rental income, interest income, and profits. Measurements of GDP produced through the expenditure approach and income approach are equivalent because the final market price of a good or service should reflect all of the incomes earned and costs incurred throughout the production process. Potential GDP and Economic Performance GDP is often used as a measure of economic health. One of the ways in which economic performance is often measured is by the output gap-the difference between real GDP and potential GDP. Potential GDP is an estimate of the highest sustainable level of output the economy can produce. When actual output is above its potential, it can signal that the economy is overheating (expanding at an unsustainable rate). When actual output is below its potential, it can signal less-than-full employment and potential recessionary conditions. Economic Growth Growth in economic activity brings about benefits to economic actors, and it is the predominant measure of changes in material living standards. In general, as GDP grows, individuals' incomes increase, as does the production of goods and services; individuals not only have access to more goods and services but also have income to purchase those goods and services. However, GDP growth does not give any indication of how income growth is distributed within the economy. In the near term, growth in economic activity is largely governed by the business cycle, which shifts from expansionary phases to contractionary phases (recessions) to recoveries. Policymakers can use monetary and fiscal policies to affect aggregate demand (i.e., total spending) in an effort to diminish the volatility of the business cycle. However, these policies are unlikely to have large impacts on the long-term growth rate of the economy. For further information on the business cycle, refer to CRS In Focus IF10411, Introduction to U.S. Economy: The Business Cycle and Growth. To affect the economy's long-term growth rate, it is important to focus on the supply side of the economy instead of factors that impact demand within the economy. In the long run, the rate of economic growth is largely dependent on the economy's ability to increase its productive capacity over time. https://crsreports.congress.gov

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