GDP = C + I + G + (X – M)
The change in GDP is just the change in the components.
Consumption is about 70% of the equation, Investment 16%, Government 20% and Exports – Imports -4%
With weigthings the equation looks like this after dropping Exports and Imports as having little effect:
GDP growth = (.70)*C + (.16)*I + (.20)*G
To come up w/ a forecast for the change in GDP, estimate the change in each component, multiply by the weights and sum the results:
How much will Consumption change next year?
- Given systemic unemployment, Consumption should be about unchanged over the next 12 months
How much will private Investment change next year?
- Given the reluctance of banks to lend to all but the best customers, the problems in the Eurozone and sovereign debt problems worldwide, Investment should be about unchanged over the next 12 months
How much will government spending change next year?
- Government spending should be about unchanged next year as the government begins working on the deficit
You can sub in your own assumptions and numbers but from my estimates above,
GDP growth = (.70)*(0) + (.16) * (0) + (.20) * (0), or
GDP growth for 2012 = 0%
With all of the natural implications for tax revenues, the deficit and unemployment. And also for the SP Fair Value estimate given earlier.
–h