Introduction to U.S. Economy: GDP and Economic Growth
link to page 1 
Updated January 5, 2023
Introduction to U.S. Economy: GDP and Economic Growth
Economic activity and longer-term growth are of concern to
measure of domestic production, this approach subtracts
policymakers due to the connection between the economy’s
imports from exports to arrive at net exports.
performance and the overall well-being of Americans. This
In Focus provides an introduction to the U.S. economy,
Alternatively, GDP can be calculated through the income
including how economists measure its performance and the
approach by summing all income earned within the
factors that influence its long-run trajectory.
economy, including wages, rental income, interest income,
and profits. Measurements of GDP produced through the
What Is Economic Activity?
expenditure approach and income approach are equivalent
Economic activity includes any actions involved in the
because the final market price of a good or service should
production, distribution, and consumption of goods and
reflect all of the incomes earned and costs incurred
services.
throughout the production process.
Figure 1. Circular Flow of Resources
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.
Source: Figure created by CRS.
Economic Growth
Notes: This is a simplified representation of the economy. Other
Growth in economic activity brings about benefits to
sectors—including the government, financial sector, and imports and
economic actors, and it is the predominant measure of
exports—can also be represented as flows within the economy.
changes in material living standards. In general, as GDP
Economists generally view economic activity as a circular
grows, individuals’ incomes increase, as does the
flow of resources. As shown in Figure 1, businesses
production of goods and services; individuals not only have
purchase their factors of production—land, labor, and
access to more goods and services but also have income to
capital—from households to produce goods and services.
purchase those goods and services. However, GDP growth
Households then use the income earned from businesses to
does not give any indication of how income growth is
purchase goods and services. Income that households
distributed within the economy.
choose to save remains in the circular flow of resources; it
is distributed to businesses through the financial sector in
In the near term, growth in economic activity is largely
the form of loans rather than through consumption
governed by the business cycle, which shifts from
spending.
expansionary phases to contractionary phases (recessions)
to recoveries. Policymakers can use monetary and fiscal
Measures of Economic Activity
policies to affect aggregate demand (i.e., total spending) in
The standard measure of economic activity is gross
an effort to diminish the volatility of the business cycle.
domestic product (GDP), which is calculated in the United
However, these policies are unlikely to have large impacts
States by the Bureau of Economic Analysis (BEA). GDP is
on the long-term growth rate of the economy. For further
defined as the total value of all final goods, services, and
information on the business cycle, refer to CRS In Focus
structures produced by a nation’s economy during a
IF10411, Introduction to U.S. Economy: The Business
specified period—in other words, the total value of the
Cycle and Growth.
economy’s output.
To affect the economy’s long-term growth rate, it is
GDP can be measured in two different ways. The
important to focus on the supply side of the economy
expenditures approach calculates GDP by summing all
instead of factors that impact demand within the economy.
expenditures on goods and services by final users.
In the long run, the rate of economic growth is largely
Expenditures are divided into five categories: (1)
dependent on the economy’s ability to increase its
consumption (expenditures by households), (2) investments
productive capacity over time.
(largely expenditures by businesses), (3) government
spending, (4) imports, and (5) exports. Because GDP is a
https://crsreports.congress.gov
link to page 2
Introduction to U.S. Economy: GDP and Economic Growth
Determinants of Long-Term Growth
more efficient manner, producing more or improved goods
The long-term growth rate is largely determined by the
with the same amount of resources. For example, the
amount of physical capital and human capital and the rate
discovery of chemical fertilizer increased the productive
of technological change in the economy.
capacity of agriculture. Economists tend to use technology
as a catch-all term for any changes that impact the
Physical Capital
productivity of the economy. Changes in regulatory
Physical capital includes all the man-made resources
structure, trade policies, or patent laws, which may impact
workers use to produce goods and services, including tools,
the productivity of the economy, are often discussed
machinery, and other infrastructures. The current amount of
alongside technological changes.
physical capital available in the economy, or the stock of
United States Economic Growth
physical capital, impacts the economy’s productive
Policymakers generally use growth in real GDP—the total
capacity. For example, giving each member of a
value of economic output adjusted for inflation—to
construction crew a set of tools allows them to produce far
understand changes in economic output over time.
more than if they had to share only one set.
Failing
to adjust for inflation would typically result in an
overstatement of the economy’s output as prices rise.
The stock of physical capital in an economy is largely
Therefore, real GDP is used to make more accurate
dependent on the rate of investment in the economy.
comparisons of economic growth over time.
Physical capital depreciates over time as machines break
down or become obsolete. Therefore, to maintain a certain
An alternative measure of economic activity is real GDP
level of capital stock, there must be sufficient investment in
per capita, a country’s real GDP divided by its population.
new capital over time to replace any depreciated capital.
For comparisons over time or across countries, real GDP
The higher a country’s investment rate, all else equal, the
per capita is often an improved measure of economic
faster its capital stock will grow.
growth because it accounts for differences in population.
Figure 2. Real GDP and Real GDP per Capita
Physical capital investment comes at a cost. Resources that
are diverted to investment in physical capital can no longer
be used to purchase present goods or services. Investment
in physical capital leads to greater economic activity in the
future but less consumption of goods in the present. For
more investment information, see CRS In Focus IF11020,
Introduction to U.S. Economy: Business Investment.
Human Capital
Just as increasing the amount of physical capital available
to workers can help the economy to grow, so can increasing
the amount of human capital. Human capital refers to the
skills, knowledge, and abilities of the workers within the
economy. As workers receive higher levels of education or
training, they typically tend to be more productive. This
higher level of productivity among workers increases the
Source: U.S. Bureau of Economic Analysis (BEA).
productive capacity of the economy and may spur economic
Note: Data are presented in 2012 dol ars.
growth. Improvements in the productivity of the labor
supply are generally referred to as investments in human
As shown in Figure 2, real GDP at the end of 2019 was
capital.
roughly 9.5 times as large as it was at the beginning of
1947. Real GDP per capita increased by roughly four times
Similar to investments in physical capital, investments in
over the same period. In 2020, due to COVID-19, both real
human capital also face a tradeoff between current and
GDP and real GDP per capita fell in the first half of the
future consumption. Consider an individual who is deciding
year but then recovered and surpassed pre-pandemic levels
whether to attend a four-year college or to enter the
in second quarter 2021. The 2020 second-quarter drop in
workforce immediately after high school. If he or she
real GDP and 2020 third-quarter increase in real GDP were
chooses to attend college, he or she will likely be more
both the largest single-quarter loss and gain since BEA
productive when entering the labor market after college but
began collecting these data in 1947. The most recently
would forgo all of the consumption he or she could have
available data as of publication indicate that real GDP rose
financed by working for those four years instead. In
in the third quarter of 2022 after falling in the first two
addition to investments in human capital, increases in the
quarters.
size of the labor supply can increase the productive capacity
of the economy, potentially leading to economic growth.
Mark P. Keightley, Specialist in Economics
Lida R. Weinstock, Analyst Macroeconomic Policy
Technology
Technological improvements and efficiency gains allow
IF10408
individuals to use the different factors of production in a
https://crsreports.congress.gov
Introduction to U.S. Economy: GDP and Economic Growth
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF10408 · VERSION 49 · UPDATED
Updated January 5, 2023
Introduction to U.S. Economy: GDP and Economic Growth
Economic activity and longer-term growth are of concern to
measure of domestic production, this approach subtracts
policymakers due to the connection between the economy’s
imports from exports to arrive at net exports.
performance and the overall well-being of Americans. This
In Focus provides an introduction to the U.S. economy,
Alternatively, GDP can be calculated through the income
including how economists measure its performance and the
approach by summing all income earned within the
factors that influence its long-run trajectory.
economy, including wages, rental income, interest income,
and profits. Measurements of GDP produced through the
What Is Economic Activity?
expenditure approach and income approach are equivalent
Economic activity includes any actions involved in the
because the final market price of a good or service should
production, distribution, and consumption of goods and
reflect all of the incomes earned and costs incurred
services.
throughout the production process.
Figure 1. Circular Flow of Resources
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.
Source: Figure created by CRS.
Economic Growth
Notes: This is a simplified representation of the economy. Other
Growth in economic activity brings about benefits to
sectors—including the government, financial sector, and imports and
economic actors, and it is the predominant measure of
exports—can also be represented as flows within the economy.
changes in material living standards. In general, as GDP
Economists generally view economic activity as a circular
grows, individuals’ incomes increase, as does the
flow of resources. As shown in Figure 1, businesses
production of goods and services; individuals not only have
purchase their factors of production—land, labor, and
access to more goods and services but also have income to
capital—from households to produce goods and services.
purchase those goods and services. However, GDP growth
Households then use the income earned from businesses to
does not give any indication of how income growth is
purchase goods and services. Income that households
distributed within the economy.
choose to save remains in the circular flow of resources; it
is distributed to businesses through the financial sector in
In the near term, growth in economic activity is largely
the form of loans rather than through consumption
governed by the business cycle, which shifts from
spending.
expansionary phases to contractionary phases (recessions)
to recoveries. Policymakers can use monetary and fiscal
Measures of Economic Activity
policies to affect aggregate demand (i.e., total spending) in
The standard measure of economic activity is gross
an effort to diminish the volatility of the business cycle.
domestic product (GDP), which is calculated in the United
However, these policies are unlikely to have large impacts
States by the Bureau of Economic Analysis (BEA). GDP is
on the long-term growth rate of the economy. For further
defined as the total value of all final goods, services, and
information on the business cycle, refer to CRS In Focus
structures produced by a nation’s economy during a
IF10411, Introduction to U.S. Economy: The Business
specified period—in other words, the total value of the
Cycle and Growth.
economy’s output.
To affect the economy’s long-term growth rate, it is
GDP can be measured in two different ways. The
important to focus on the supply side of the economy
expenditures approach calculates GDP by summing all
instead of factors that impact demand within the economy.
expenditures on goods and services by final users.
In the long run, the rate of economic growth is largely
Expenditures are divided into five categories: (1)
dependent on the economy’s ability to increase its
consumption (expenditures by households), (2) investments
productive capacity over time.
(largely expenditures by businesses), (3) government
spending, (4) imports, and (5) exports. Because GDP is a
https://crsreports.congress.gov
link to page 2
Introduction to U.S. Economy: GDP and Economic Growth
Determinants of Long-Term Growth
more efficient manner, producing more or improved goods
The long-term growth rate is largely determined by the
with the same amount of resources. For example, the
amount of physical capital and human capital and the rate
discovery of chemical fertilizer increased the productive
of technological change in the economy.
capacity of agriculture. Economists tend to use technology
as a catch-all term for any changes that impact the
Physical Capital
productivity of the economy. Changes in regulatory
Physical capital includes all the man-made resources
structure, trade policies, or patent laws, which may impact
workers use to produce goods and services, including tools,
the productivity of the economy, are often discussed
machinery, and other infrastructures. The current amount of
alongside technological changes.
physical capital available in the economy, or the stock of
United States Economic Growth
physical capital, impacts the economy’s productive
Policymakers generally use growth in real GDP—the total
capacity. For example, giving each member of a
value of economic output adjusted for inflation—to
construction crew a set of tools allows them to produce far
understand changes in economic output over time.
more than if they had to share only one set.
Failing
to adjust for inflation would typically result in an
overstatement of the economy’s output as prices rise.
The stock of physical capital in an economy is largely
Therefore, real GDP is used to make more accurate
dependent on the rate of investment in the economy.
comparisons of economic growth over time.
Physical capital depreciates over time as machines break
down or become obsolete. Therefore, to maintain a certain
An alternative measure of economic activity is real GDP
level of capital stock, there must be sufficient investment in
per capita, a country’s real GDP divided by its population.
new capital over time to replace any depreciated capital.
For comparisons over time or across countries, real GDP
The higher a country’s investment rate, all else equal, the
per capita is often an improved measure of economic
faster its capital stock will grow.
growth because it accounts for differences in population.
Figure 2. Real GDP and Real GDP per Capita
Physical capital investment comes at a cost. Resources that
are diverted to investment in physical capital can no longer
be used to purchase present goods or services. Investment
in physical capital leads to greater economic activity in the
future but less consumption of goods in the present. For
more investment information, see CRS In Focus IF11020,
Introduction to U.S. Economy: Business Investment.
Human Capital
Just as increasing the amount of physical capital available
to workers can help the economy to grow, so can increasing
the amount of human capital. Human capital refers to the
skills, knowledge, and abilities of the workers within the
economy. As workers receive higher levels of education or
training, they typically tend to be more productive. This
higher level of productivity among workers increases the
Source: U.S. Bureau of Economic Analysis (BEA).
productive capacity of the economy and may spur economic
Note: Data are presented in 2012 dol ars.
growth. Improvements in the productivity of the labor
supply are generally referred to as investments in human
As shown in Figure 2, real GDP at the end of 2019 was
capital.
roughly 9.5 times as large as it was at the beginning of
1947. Real GDP per capita increased by roughly four times
Similar to investments in physical capital, investments in
over the same period. In 2020, due to COVID-19, both real
human capital also face a tradeoff between current and
GDP and real GDP per capita fell in the first half of the
future consumption. Consider an individual who is deciding
year but then recovered and surpassed pre-pandemic levels
whether to attend a four-year college or to enter the
in second quarter 2021. The 2020 second-quarter drop in
workforce immediately after high school. If he or she
real GDP and 2020 third-quarter increase in real GDP were
chooses to attend college, he or she will likely be more
both the largest single-quarter loss and gain since BEA
productive when entering the labor market after college but
began collecting these data in 1947. The most recently
would forgo all of the consumption he or she could have
available data as of publication indicate that real GDP rose
financed by working for those four years instead. In
in the third quarter of 2022 after falling in the first two
addition to investments in human capital, increases in the
quarters.
size of the labor supply can increase the productive capacity
of the economy, potentially leading to economic growth.
Mark P. Keightley, Specialist in Economics
Lida R. Weinstock, Analyst Macroeconomic Policy
Technology
Technological improvements and efficiency gains allow
IF10408
individuals to use the different factors of production in a
https://crsreports.congress.gov
Introduction to U.S. Economy: GDP and Economic Growth
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF10408 · VERSION 49 · UPDATED