Question

The GDP for the United States is \(\$ 18,036\) billion and its current account balance is \(-\$ 484\) billion. What percent of GDP is the current account balance?

Short answer

The current account balance is about 2.68% of the GDP for the United States.

Step-by-step solution

Convert the current account balance into a positive value

Since the current account balance is given as a negative value (-$484 billion), we should convert it into a positive value to calculate the percentage. This can be done using the absolute value function: Absolute Value of the Current Account Balance = \(|-\$484 \text{ billion}|\) = \(\$484 \text{ billion}\)

Calculate the percentage

To find what percentage the current account balance is of the GDP, divide the current account balance by the GDP and multiply the result by 100: Percentage = \(\frac{\text{Current Account Balance}}{\text{GDP}} \times 100\) Insert the values from Step 1: Percentage = \(\frac{\$484 \text{ billion}}{\$18,036 \text{ billion}} \times 100\) Calculate the result: Percentage = \( \frac{484}{18036} \times 100 \) ≈ \( 2.68\% \) The current account balance is about 2.68% of the GDP for the United States.

Key concepts

Gross Domestic Product (GDP)

Gross Domestic Product, or GDP, is a key economic indicator used to determine the economic health of a country. It represents the total dollar value of all goods and services produced over a specific time period within a nation's borders. Economists use GDP to gauge the size of an economy and its growth rate.

The calculation of GDP can be approached in three ways: the output (or production) method, the income method, and the expenditure method. The output method sums the value of goods and services produced, the income method sums the income generated by production, and the expenditure method sums the total spending on final goods and services.

In simple terms, if you think of the economy as a large supermarket of goods and services, then GDP is like the total bill at the checkout—indicating how much the economy 'spent' overall.

Percent of GDP

Understanding the concept of 'percent of GDP' allows us to contextualize various economic figures in relation to the size of the economy. When a financial figure, such as government spending, exports, or, as in our exercise, the current account balance, is expressed as a 'percent of GDP', it gives a ratio that shows the scale of the figure within the national economy.

This percentage helps in comparing countries of different sizes by offering a common measurement. For instance, saying that country A has a defense budget of \(100 billion versus country B's \)50 billion doesn't give a clear comparison without context. But stating that country A's defense is 2% of GDP whereas country B's is 4%, despite the lesser absolute amount, indicates a proportionally larger burden on country B's economy.

Macroeconomics Calculations

Macroeconomics calculations involve working with indicators such as GDP, inflation rates, unemployment levels, and balance of payments to assess the health and functioning of an economy. These numerical exercises enable economists, policymakers, and students to understand and compare economic performance over time or between different economies.

For instance, calculation exercises like converting values to percentages of GDP, as seen in our original problem, provide analytical tools to clarify economic relationships. By expressing the current account balance as a percentage of GDP, we can measure how a country's trade relations and foreign investment impact its economic size and comprehend the significance of surpluses or deficits within its broader economic landscape.