In this lesson, students explore the final (third) estimate of real GDP data for the third 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 final estimate of the 3Q 2014 activity. Students will understand the recent trends in real GDP, as well as gain insight into the problems and limitations inherent in measuring GDP.

KEY CONCEPTS

Business Cycles, Consumption, Economic Growth, Government Expenditures, Gross Domestic Product (GDP), Investment, Macroeconomic Indicators, Macroeconomics, Nominal 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
  • Understand the limitations of measures of GDP
  • Discuss how these limitations influence discussions of comparisons of economic growth both within countries and between them

Current Key Economic Indicators

as of January 19, 2015

Inflation

The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.3 % in November on a seasonally adjusted basis. The gasoline index posted its sharpest decline since December 2008 and was the main cause of the decrease in the seasonally adjusted all items index. The all items index increased 1.3% over the last 12 months, a notable decline from the 1.7 percent figure from the 12 months ending October.

Employment and Unemployment

The unemployment rate for December, 2014, fell to 5.6%, and the economy added 252,000 jobs, according to the Bureau of Labor Statistics. Job gains occurred in professional and business services, construction, food services, health care and manufacturing. The long-term unemployed was unchanged, accounting for approximately 32% of the unemployed.

Real GDP

Real gross domestic product (GDP) increased 5.0 percent in the third quarter of 2014, according to the “third” or final estimate released by the Bureau of Economic Analysis. The second estimate for the third quarter was 3.9%. The second quarter growth of GDP was 4.6%

Federal Reserve

The FOMC believes that the labor market is continuing to modestly improve and will continue to do so. Household and business spending are also increasing, and while the housing market continues to lag, the outlook for the economy is positive. Inflation is below the 2% target, largely due to the decline in energy prices. The FOMC believes that inflation will rise toward the target as the labor market tightens and energy prices return to their normal level. The FOMC reaffirmed its position of a low federal funds rate, possibly continuing beyond the return of inflation and unemployment rates to sustainable levels.

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 final estimate of real GDP for the 3rd quarter of 2014 (July - September). Students investigate the problems with measuring GDP.

RESOURCES


Key Economic Indicators

as of January 19, 2015

Inflation

The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.3 % in November on a seasonally adjusted basis. The gasoline index posted its sharpest decline since December 2008 and was the main cause of the decrease in the seasonally adjusted all items index. The all items index increased 1.3% over the last 12 months, a notable decline from the 1.7 percent figure from the 12 months ending October.

Employment and Unemployment

The unemployment rate for December, 2014, fell to 5.6%, and the economy added 252,000 jobs, according to the Bureau of Labor Statistics. Job gains occurred in professional and business services, construction, food services, health care and manufacturing. The long-term unemployed was unchanged, accounting for approximately 32% of the unemployed.

Real GDP

Real gross domestic product (GDP) increased 5.0 percent in the third quarter of 2014, according to the “third” or final estimate released by the Bureau of Economic Analysis. The second estimate for the third quarter was 3.9%. The second quarter growth of GDP was 4.6%

Federal Reserve

The FOMC believes that the labor market is continuing to modestly improve and will continue to do so. Household and business spending are also increasing, and while the housing market continues to lag, the outlook for the economy is positive. Inflation is below the 2% target, largely due to the decline in energy prices. The FOMC believes that inflation will rise toward the target as the labor market tightens and energy prices return to their normal level. The FOMC reaffirmed its position of a low federal funds rate, possibly continuing beyond the return of inflation and unemployment rates to sustainable levels.

PROCESS

  1. Have students look at the revised third quarter report of real GDP for 2014: Final 3rd Quarter GDP report, 2o14.

    How is this revised estimate different than the second estimate for the third quarter? (it is an increase from 3.9% to 5.0%). How is it different than the final report of the second quarter? (the second quarter real GDP growth was 4.6%, the third quarter's activity was stronger
     
  2. Which components of GDP increased the most in the third quarter? (federal government expenditure, consumption, business investment and exports).
     
  3. Ask how many students remember Hurricane Katrina. Ask how many of them think that the hurricane was good for the country (probably no one will think it was good for the country). Ask students what happened in the aftermath of the disaster (many will say that people were dislocated, lost their lives, had their homes destroyed). Keep probing--ask what happened after  that--for example, does New Orleans today look like it did in the immediate aftermath of the storm? (No, No has largely recovered). 

    Point out to students that while the hurricane interrupted a lot of economic activity, it also generated a lot of economic activity, as NO and other locations devastated by the storm began to rebuild. Ask students for examples of economic activity that might have occurred in the weeks and months after the storm (answers could include new home construction and home repair; repair of bridges, roads and levees; temporary housing; increased social service provision; new car sales and car repairs).

    Make the point that no one wishes for natural disasters, and while they cause a lot of economic disruption, they can also generate economic activity which would show up in GDP measures.
     
  4. Tell students to imagine that all the timber in the country was cut and used to produce furniture. Ask them what would happen to GDP for this year (GDP would increase due to the economic activity around the labor required to fell the trees and the value of the furniture produced).

    Next ask students what will happen to GDP next year (they should understand that with no trees left to cultivate, GDP will fall)

    Point out that GDP does not differentiate between current production and protecting the ability to produce future goods. Put another way, GDP only looks at the current use of resources, not the preservation of resources for future use.
     
  5. Ask students what happens to GDP when a single person hires someone to clean their house every week. (GDP will increase). Ask students what would happen to GDP if the single person married their housecleaner and that person continued to perform the same duties as before? (GDP would decrease). 

    Ask students to imagine that one of their New Year's resolutions is to get into shape and they join a gym--what happens to GDP? (GDP would increase). If instead, they run around their neighborhood, how will GDP change? (it won't)

    Make the point that GDP only includes activities that occur in markets, i.e., where money changes hands. Activities that do not include a monetary exchange are excluded from GDP accounts. Ask students for other examples of productive activities that may not be included in GDP (answers could include do-it-yourself projects, mowing your own lawn, any volunteering, donating blood as opposed to selling blood)
     
  6. Tell students that the existence of a market does not guarantee that an exchange will appear in the GDP accounts. Ask them if they have ever attended a sporting event or a concert and seen people who want to buy tickets or who have tickets for sale.

    Ask if these transactions are likely to show up in GDP (
    no, because there is no reporting mechanism to account for them). Point out that money has changed hands--there's clearly a market for these tickets--but GDP does not capture the exchange. Ask students for examples of other exchanges that would "not be on the radar" in terms of GDP accounting (answers could include illegal activities such as drug sales, bootleg sales, etc.). If they only give examples of illegal activities, make sure they understand that there are more examples--hiring a neighborhood kid to mow the grass, barter arrangements, hiring a contractor who will work for a "cash" price. These activities are not illegal--in some cases, the tax avoidance surrounding them is, but the point that students should understand is that sometimes entire markets do not get counted as part of GDP.
     
  7. Ask students what their conclusion is with respect to GDP. Given the problems with what it measures and what it doesn't, is it a legitimate way to measure the health of an economy? Point out that although measuring GDP is problematic, the same basic problems have persisted from the beginning (Note: the way GDP is measured has actually undergone some revision--the redefinition of geographic boundaries, for example--but these have been changes at the margin. The basics have remained the same). So if we are using GDP to look at trends, these problems become irrelevant because the same problems exist over time.

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. 

There are several challenges in measuring real GDP, including what kinds of activity to include: whether all economic activity is a "good", present activity that threatens future activity, and the role of nonmarket and not-reported market activities.  

EXTENSION ACTIVITY

Although the issues with defining and measuring GDP within a country are not overly problematic, when GDP is used to compare countries, these issues do pose a problem. Ask students to give examples of how different economies could lead to erroneous conclusions about the health of different countries. (If a country's culture includes a heavy reliance on barter, GDP for that country will be low but the economy could actually be strong, for example).  

EDUCATOR REVIEWS