In this lesson, students explore the advance estimate of real GDP data for the fourth quarter of 2014. These data, released by the Bureau of Economic Analysis, are presented first as estimates, then as revisions as more data for the time period is collected. This lesson uses data from the initial estimate of the 4Q 2014 activity. Students will understand the recent trends in real GDP, as well as explore alternative ways to measure a country's well-being. 

KEY CONCEPTS

Government Expenditures, Gross Domestic Product (GDP), Investment, Macroeconomic Indicators, Macroeconomic Policies, Macroeconomics, Per Capita Gross Domestic Product (GDP), Real Gross Domestic Product (GDP)

STUDENTS WILL

  • Analyze the components of the latest GDP report
  • Compare the estimate to the predicted GDP growth and to the previous quarter's performance
  • Discuss alternative ways of measuring a country's health
  • Analyze the implications for alternative measures

Current Key Economic Indicators

as of February 6, 2015

Inflation

The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.4% in December on a seasonally adjusted basis. The gasoline index fell 9.4% and was the main cause of the decrease in the seasonally adjusted all items index. The all items index increased 0.8% over the last 12 months, although the core inflation rate (less food and energy) did not change in December.

Employment and Unemployment

The unemployment rate rose to 5.7% in January of 2015, according to the Bureau of Labor Statistics release of Feb. 6, 2015. Total nonfarm employment rose by 257,000. Job gains were particularly strong in retail trade, construction, health care, financial activities, and manufacturing.This is the second month in a row that posted gains in construction and manufacturing.

Real GDP

Real GDP increased 2.6% in the fourth quarter of 2014, according to the advance estimate released by the Bureau of Economic Analysis. Consumer spending drove growth due to the reduction in gas prices, while a decrease in government expenditures was the most significant drag on growth. Third quarter growth was 5%.

Federal Reserve

In its January 28, 2015, statement, the FOMC cited the continued growth of the labor market, increased household and business spending, and below-target inflation as indicators of an economy that continues to recover. They expect below-target inflation to rise as oil prices and other "transitory" effects diminish. The statement reaffirmed the FOMC intention to keep the federal funds rate at its current low level. Notably, the FOMC added international variables to its list of factors to monitor for the timing of a rate increase.

INTRODUCTION

The Bureau of Economic Analysis, an agency of the U.S. Department of Commerce, releases an  estimate of each quarter's real GDP, one of the major components of economic activity. In the first month following the end of a quarter, the "advance" or first estimate, is released. In the second month following the end of a quarter, this estimate is revised using additional information. Finally, in the third month, the final data are released. This means that a report is released once a month but real GDP is measured quarterly.

This lesson focuses on the BEA's advance estimate of real GDP for the 4th quarter of 2014 (October-December). Students investigate alternative measures of a country's well-being.

RESOURCES


Key Economic Indicators

as of February 6, 2015

Inflation

The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.4% in December on a seasonally adjusted basis. The gasoline index fell 9.4% and was the main cause of the decrease in the seasonally adjusted all items index. The all items index increased 0.8% over the last 12 months, although the core inflation rate (less food and energy) did not change in December.

Employment and Unemployment

The unemployment rate rose to 5.7% in January of 2015, according to the Bureau of Labor Statistics release of Feb. 6, 2015. Total nonfarm employment rose by 257,000. Job gains were particularly strong in retail trade, construction, health care, financial activities, and manufacturing.This is the second month in a row that posted gains in construction and manufacturing.

Real GDP

Real GDP increased 2.6% in the fourth quarter of 2014, according to the advance estimate released by the Bureau of Economic Analysis. Consumer spending drove growth due to the reduction in gas prices, while a decrease in government expenditures was the most significant drag on growth. Third quarter growth was 5%.

Federal Reserve

In its January 28, 2015, statement, the FOMC cited the continued growth of the labor market, increased household and business spending, and below-target inflation as indicators of an economy that continues to recover. They expect below-target inflation to rise as oil prices and other "transitory" effects diminish. The statement reaffirmed the FOMC intention to keep the federal funds rate at its current low level. Notably, the FOMC added international variables to its list of factors to monitor for the timing of a rate increase.

PROCESS

  1. Have students look at the advance fourth quarter report of real GDP for 2014 .

    How much did the economy grow in the fourth quarter? (2.6%) How much did it grow in the third quarter? (5%
  2. Which components of GDP increased the most in the fourth quarter? (consumer spending, business investment, exports. Imports also increased, which is a subtraction from GDP). What component decreased the most? (government expenditures (down 7.5%), particularly defense spending (down 12.5%)). 
  3. Ask students what these numbers make them feel about the country--happy, hopeful, depressed, anxious? (answers will vary). Read students the following quote by Robert Kennedy about GNP (the way we measured economic health back in 1968):

    ...(it) "measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything, in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans."

    Ask students if they think that statement is correct. Tell them that even the economist who came up with the idea of measuring a nation's output--Simon Kuznets--said, "The welfare of a nation can scarcely be inferred from a measurement of national income as defined by the GDP".

    Ask students what characteristics of a country they think make it a good place to live--that make them proud to be Americans, as Kennedy said (answers will vary, but will probably include a low crime rate, low pollution, economic opportunity, low infant mortality, "creature comforts", technology, good climate, etc.).

    Ask students how many of these things appear in GDP--ask where they appear. It should become obvious that many of the things they think make a country a good place to live are not measured by GDP.
  4. Review the activities that are excluded from GDP (see the previous month's lesson). Tell students that it is obvious that many things we think comprise our well-being are missing from our primary measure.

    Tell students that there is a growing movement to expand our measure of well-being. One measure that two states (Maryland and Vermont) have adopted is the Genuine Progress Indicator (GPI). The GPI has 26 variables, divided into three categories: economic, environmental, and social progress. Economic progress includes measures of inequality and the costs of unemployment. Environmental variables include the costs of water and air pollution, climate change, depletion of natural resources. Social variables include the value of volunteer and housework, and the costs of crime.

    Ask students if they think the GPI is greater or less than the GDP (answers will vary, but they will probably say less than). Show them the following graph:



    Ask them why they think the two measures have been diverging over time (growing income inequality, pollution, crime).

    Ask them which measure they think is better (they might need help in getting to "it depends". If we're strictly measuring economic output, GDP; if we're measuring progress or welfare, perhaps GPI).
  5. Tell students that the GPI is not the only alternative measure of a nation's well-being. The Prosperity Index also measures countries' well-being along 8 dimensions: economic; entrepreneurship and opportunity; governance; education; health; safety and security; personal freedom; and social capital.

    Tell students to go to the Prosperity Map  and check out how various countries rank on the prosperity index. Point out that for 2014, the U.S. ranks #10 in the world. What country is #9? (The Netherlands) What about #1? (Norway--for the 5th straight year). The values of the 8 dimensions appear at the bottom of the map. What does the U.S. rank highest on? (health--#1); worst? (safety and security).
  6. Tell students that each of the 8 dimensions were weighted the same--that is, were considered equally important when arriving at the index number. Ask if they think each of the 8 is equally important as the others--if not, which should be given more weight, less weight? (answers will vary).

    Tell students that they can change the relative weights of the dimensions by clicking "rankings 2014" at the top of the page, under "explore". Have them see what happens to the index numbers of various countries when they change the weights. 
  7. Under "features" have students click on "prosperity since the financial crisis". This is the graph that opens up:



    Point out that while the United States has experienced solid growth in GDP, the prosperity index has not changed much since the recession, in contrast to Canada, which saw a larger increase in both. On the other hand, Germany, the U.K. and Japan all saw large increases in the prosperity index, but little in the way of GDP growth. Ask students, if they could only have growth in one, which would they prefer, to live in a country with a growing prosperity index or a growing GDP? (answers will vary, but make sure they include in their discussion those things that are missing from GDP). 

    To emphasize that factors other than economic variables can influence well-being, point out that China is now in 6th place on the economy measure, while the U.S. is 17th. Ask students if they would like to live in China (most will probably say no). Ask why not (most will probably mention the lack of freedom). In fact, China is 117th on the personal freedom index, while the U.S. is 21st. 

    (Note: this interactive can be used in a wide variety of ways--explore all the tabs and features to discuss changes over time and what caused them; the recession's lingering effects in Europe, especially Greece; developing countries and the interplay of economics and culture; etc.).

ASSESSMENT ACTIVITY

CONCLUSION

Real GDP data are released monthly, but are reports of quarterly activity. One month after the end of a quarter, the first ("advance") report is released. As more data come in, the second report is issued at the end of the second month from quarter's end, with the "final" or third report coming at the end of the third month from the end of the quarter. These three reports, while all containing data pertaining to one quarter, represent progressively more accurate accounting of what activity actually happened in the quarter. 

Given some of the issues (discussed in last month's lesson) inherent in measuring GDP, some alternative measures have been developed to measure a country's well-being. Two of these measures are the Genuine Progress Index and the Prosperity Index. Because they both include characteristics that are excluded from GDP, they can represent a broader picture of the health of a country.

EXTENSION ACTIVITY

Ask students how they think GDP and some of the other variables are related. For example, how is GDP related to education, entrepreneurship and opportunity? How is it related to personal freedom or safety and security? 

EDUCATOR REVIEWS