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 final estimate of the 4Q 2014 activity. Students will understand the recent trends in real GDP, the role of exports and imports, and the effect of trade balance on GDP and GDP growth.

KEY CONCEPTS

Balance of Trade, Consumption, Economic Growth, Exports, Government Expenditures, Gross Domestic Product (GDP), Imports, Investment, Net Exports

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
  • Explore the effect of imports on an economy
  • Discuss the benefits of costs of trade deficits

Current Key Economic Indicators

as of April 4, 2015

Inflation

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2% in February on a seasonally adjusted basis. Over the last 12 months, the all-items price index was unchanged. The energy index increased after several months of decline. Core inflation rose 0.2% in February, the same increase as in January.

Employment and Unemployment

The unemployment rate stayed at 5.5% in March, 2015, according to the latest release from the Bureau of Labor Statistics on April 3, 2015. The number of jobs added was much lower than in previous months, with only 126,000 new jobs added to the economy, the fewest number since December of 2013. Some job categories added workers, including health care, professional and business services, financial services, and retail. Average hourly wage growth was 7 cents, but average hours worked fell.

Real GDP

Real GDP increased 2.2% in the fourth quarter of 2014, according to the final estimate released by the Bureau of Economic Analysis. This estimate is consistent with the revised estimate. In the third quarter, real GDP increased 5.0%. Consumer spending rose 4.4%, compared to 3.2% in the third quarter. Business investment and exports also increased. Offsetting these gains were increases in imports and decreases in federal government spending, particularly defense spending. (

Federal Reserve

In its March 18, 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 increase in the medium term. The statement reaffirmed the FOMC intention to keep the federal funds rate at its current low level, but also said that a rate hike was highly unlikely at its April meeting. Notably, the FOMC dropped the word "patient" from its language describing its stance on an improving economy and a rate hike. The Fed revised downward its economic projections, including the rate of unemployment that would sustain a stable inflation rate.

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 third, or final estimate of real GDP for the 4th quarter of 2014 (October-December). Students further explore the relationship between imports and exports and GDP. 

RESOURCES


Key Economic Indicators

as of April 4, 2015

Inflation

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2% in February on a seasonally adjusted basis. Over the last 12 months, the all-items price index was unchanged. The energy index increased after several months of decline. Core inflation rose 0.2% in February, the same increase as in January.

Employment and Unemployment

The unemployment rate stayed at 5.5% in March, 2015, according to the latest release from the Bureau of Labor Statistics on April 3, 2015. The number of jobs added was much lower than in previous months, with only 126,000 new jobs added to the economy, the fewest number since December of 2013. Some job categories added workers, including health care, professional and business services, financial services, and retail. Average hourly wage growth was 7 cents, but average hours worked fell.

Real GDP

Real GDP increased 2.2% in the fourth quarter of 2014, according to the final estimate released by the Bureau of Economic Analysis. This estimate is consistent with the revised estimate. In the third quarter, real GDP increased 5.0%. Consumer spending rose 4.4%, compared to 3.2% in the third quarter. Business investment and exports also increased. Offsetting these gains were increases in imports and decreases in federal government spending, particularly defense spending.

Federal Reserve

In its March 18, 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 increase in the medium term. The statement reaffirmed the FOMC intention to keep the federal funds rate at its current low level, but also said that a rate hike was highly unlikely at its April meeting. Notably, the FOMC dropped the word "patient" from its language describing its stance on an improving economy and a rate hike. The Fed revised downward its economic projections, including the rate of unemployment that would sustain a stable inflation rate.

PROCESS

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

    How much did the economy grow in the fourth quarter according to the final estimate? (2.2%) What was the advance estimate for the fourth quarter? (2.6%). How does the final estimate compare to the revised (2nd) estimate? (it's the same).  What was final real GDP growth for the third quarter? (5.0%)
     
  2. Which components of GDP increased the most in the fourth quarter? (consumer spending, business investment, exports, state and local government spending. Imports also increased, which is a subtraction from GDP). What components decreased? (federal spending, esp. on defense). What components increased more than expected from the 2nd estimate to the final? (exports and consumer expenditures). What component was lower than previously estimated? (inventories, which is part of investment)
     
  3. Call students' attention to these components--the ones that increased more than expected, consumption and exports, and investment, which was lower than expected. Ask, what would have happened to GDP if the only revisions had been that consumption and exports increased more than previously thought (GDP would have increased more than 2.2%).

    Ask students to assume that consumption increased more than expected, and that imports (not exports) increased more than in the revised estimate. Tell them to further assume that both of these changes were of the same magnitude. Ask students what would have happened to GDP under these conditions (GDP would have stayed the same). Ask why (consumption is an addition to GDP and imports are a subtraction from GDP, so the two would offset). 
     
  4. Tell students to assume that their class manufactures video game consoles and the class next door manufactures iPhones. Tell them to also assume that there is a greater demand for iPhones than video game consoles. Finally, tell them that these are barter economies, so they can disregard currency differences.

    Ask students if their classroom will be a net importer or a net exporter if they trade with the other class (they will be a net importer because the iPhone is in higher demand). Tell students that means their classroom is running a trade deficit. If all other components of GDP between the two classes is identical, how does our class's GDP compare to the other class's? (our class GDP is smaller because we are a net importer). Ask students if they feel like a less prosperous class than the one next door (answer will vary, but they will probably say they do not). Ask why (again, answers will vary, but should include the fact that they can get what they want--iPhones). 
     
  5. Tell students that because higher levels of imports mean that GDP is lower, people sometimes assume that higher imports reduces our living standards. Ask students who buys imports (consumers, businesses, governments). It must be the case, then, that if imports are increasing, that it indicates growing domestic demand on the part of the other economic agents--C, G and I. 
  6. Show students the following chart:



    Ask students what they notice about the relationship between imports and domestic demand (C+I+G) (they are highly correlated). 

    Show students the following chart:



    Ask students what the notice about consumer import demand (it is increasing). Ask what conclusions they draw about the strength of domestic demand (it has been increasing since the end of 2011). 
     
  7. Ask students, if some trade imbalance is OK, then is a lot of imbalance OK, too? (answers will vary, but they should recognize that there are limits to the benefits of being a net importer). Tell students that like a lot of macroeconomic measures, the Goldilocks approach applies to trade as well. Being too much of an importer is not a good thing, nor is being too much of an exporter. There is a range of imports/exports that is "just right".

    Being a net importer, then, is not necessarily a bad thing. It indicates that domestic demand is strong because economic agents are consuming more than is being produced domestically. That means that everyone has access to more goods and services. Being too much of an importer, however, could indicate that the country is not producing goods and services that are competitive with those being produced in other countries, a situation that creates a long-run problem.

    Therefore, although increasing imports results in lower GDP growth, it does not necessarily translate into lower living standards.

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. 

While imports represent a mathematical subtraction from GDP, they can, in fact, indicate an economy where domestic demand in strong. 

EXTENSION ACTIVITY

Ask students if a trade imbalance is simply a reflection of the quality and quantity of the goods and services being traded? (no, a trade imbalance can also exist because of differences in relative prices). Ask students what would happen to the trade deficit if the value of the dollar increases (the trade deficit would worsen). Why? (a more valuable dollar means that people in other countries can buy fewer dollars, leading them to buy fewer U.S. manufactured goods. A more valuable dollar also means that U.S. citizens can buy more imported goods because the dollar now converts into more of the other currency.)

EDUCATOR REVIEWS