Although the United States is not the largest country on Earth (either by landmass or population), it is the world's biggest economy in terms of gross domestic product (GDP), a position it has maintained since 1871. GDP measures the total value of goods and services a country produces over a given time period. This offers a simple metric for gauging the overall economic health of every nation in relationship to each other. There are several variations of GDP measurements; the figures featured in this article are "real GDP," which is an inflation-adjusted measure reflecting the quantity of goods and services produced by an economy in a given year.
In addition to the country's overall GDP, each individual state within the U.S. has its own GDP, a few of which are larger than the GDP of entire other countries. In fact, GDP can be recorded all the way down to the city level, though only the District of Columbia's GDP is typically reported on the state level. As of the fourth quarter of 2020, according to the U.S. Bureau of Economic Analysis (BEA), the top five states by real GDP in the United States were California, Texas, New York, Florida, and Illinois.
Understanding Gross Domestic Product (GPD)
Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a region's borders over a specific time period. A location's GDP is composed of all private and public consumption, government outlays, investments, additions to private inventories, paid-in construction costs, and the foreign balance of trade.
Although GDP gives a good impression of the U.S. economy's status as a whole, it doesn't elucidate which states are contributing the most or the least to the total. For example, California's GDP in Q4 2020 was approximately $3.16 trillion. Conversely, Vermont's GDP for the same period was a substantially (relatively speaking) lower $33.72 billion. By making the distinction among state contributions, determining which regions of the U.S. are the most economically healthy becomes substantially easier. It's less informative to analyze GDP on an even smaller scale, considering our research has found that there were 19,502 cities, towns, and villages in the U.S. in 2019, compared to just 50 states.
There are several factors that contribute to how much GDP a state is capable of generating. One such element is the size of a region's workforce: A state like California with its nearly 19 million laborers is naturally going to have a higher output than Oklahoma with its almost 1.9 million. There are also differences in the availability of physical capital (i.e., man-made goods used to create a product or service), the amount invested in human capital (i.e., education, experience, or unique skills), and readily accessible natural resources, in addition to the level of technology available to most workers.
Although GDP isn't completely indicative of economic prosperity because typically there are still poor people in countries with high GDP (and vice versa), several studies have shown a correlation between the two. In 2017, the Federal Reserve Bank of St. Louis found that economic growth and rising income levels are key for both citizens and nations seeking to escape poverty; for the latter, this means outputting a larger GDP.
Additionally, a 2018 report from the Crawford School of Public Policy found that high poverty has a negative impact on GDP, as it limits the availability of both physical and human capital as well as delaying the adoption of modern technology. Meanwhile, a 2019 report from the London School of Economics and Political Science found that a one-percentage-point increase in the top 20%'s income can actually reduce GDP growth over the medium term, whereas a rise in the bottom 20%'s income typically boosts growth.
Gross Domestic Product (GPD) Per Capita
GDP on a per capita basis paints a completely different picture. Upon dividing the GDP of each state by its population, the list of the five economically "healthiest" states changes, with the District of Columbia, Massachusetts, New York, Alaska, and North Dakota ending up on top. The economic powerhouse that is California—while contributing 14.8% to the overall U.S. GDP in the fourth quarter of 2020—ranked seventh highest in terms of GDP per capita as a result of its larger population.
GDP per capita is often presented alongside standard GDP because it enables analysts to better determine how much of a location's economic output is the result of each individual citizen. For instance, although California might generate more money overall than any other state, each citizen is responsible for outputting less than those in North Dakota, which has one of the lowest overall GDPs. If a state has a smaller population and a high GDP per capita, it typically means the local economy is based on an abundance of particular natural resources.
As mentioned previously, human capital is an important contributing factor to a territory's GDP. As GDP per capita is inherently a cross-sectoral measurement, it's incredibly valuable for helping economists understand how both a location's GDP and its population are contributing to the area's overall economic health and rate of growth.
The Bottom Line
GDP and GDP per capita are imperfect measures of a state's economic health, considering that they ignore the value of informal or unrecorded economic activity, count unprofitable costs and waste as economic benefits, and prioritize material output over the public's general well-being. However, both values are still useful for judging whether the local economy is contracting or expanding, in addition to serving as early warnings of a recession or inflation.