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About this lesson
 grade level: 9-12
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curriculum standards:
15 18 20
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author: Douglas Haskell
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posted on: February 16, 2009
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Focus on Economic Data (formerly Case Study)

Focus on Economic Data: U.S. Real GDP Growth, January 30, 2009

Key Economic Concepts:

Description:

This lesson focuses on the January 30, 2009, advance announcement of U.S. real gross domestic product (Real GDP) for the fourth quarter of 2008, reported by the U.S. Bureau of Economic Analysis (BEA). The current data and historical data are explained. The meaning of GDP and potential impacts of changes of GDP are explored. This lesson will also raise questions about the impact of the current level of growth on the U.S. economy and individuals.

Current Key Economic Indicators
as of November 6, 2009
Inflation On a seasonally adjusted basis, the U.S. CPI-U increased 0.2 percent in September after rising 0.4 percent in August. The index for all items less food and energy increased 0.2 percent in September after increasing 0.1 percent in August. (October 15, 2009)
Employment and Unemployment In October, the U.S. unemployment rate rose to 10.2 percent, the highest since April 1983, and nonfarm payroll employment declined by 190,000 jobs. The largest job losses over the month were in construction, manufacturing, and retail trade. (November 6, 2009)
Real GDP U.S. real gross domestic product increased at an annual rate of 3.5 percent in the third quarter of 2009. In the second quarter, real GDP decreased 0.7 percent. (October 29, 2009)
Federal Reserve The FOMC will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. (November 4, 2009)

Lesson Objectives:

Students will:

  • Determine the current and historical growth of U.S. real gross domestic product.
  • Identify the components of the measurement of the nation's gross domestic product.
  • Determine the difference between nominal and real gross domestic product.
  • Speculate about the nature and impact of current economic conditions and implications for the future.

Introduction:

Each month, the Bureau of Economic Analysis (BEA), an agency of the U.S. Department of Commerce, releases an estimate of the level and growth of U.S. gross domestic product (GDP), the output of goods and services produced by labor and property located in the United States.

This lesson focuses on the BEA "advance" announcement of January 30, 2009, for the fourth quarter (October, November and December) of 2008. Understanding the level and rate of growth of the economy's output (GDP) helps to better understand employment trends, the health of businesses, and consumer well-being. 

[Note to teacher: During the second half of the school year (January-June), EconEdLink will publish four Focus on Economic Data lesson on "U.S. Real GDP Growth." Real GDP data is announced three times for each fiscal quarter. For Q4 2008, the advance announcement is made in January (this lesson), the preliminary report is made in February, and the final O4 2008 report is made in March. The advance report for Q1 of 2009 will be made in April.

Note that the GDP data reports lag the reporting period. Each of the three announcements for a quarter will include more comprehensive data and may modify the growth rate reported earlier.]

Each Real GDP lessib will provide the most up-to-date data and focus on some specific topics or issues related to GDP:

  • January (advance Q4 2008): How to read the data, real vs. nominal, and how the data is collected
  • February (preliminary Q4 2008): Factors influencing the change in GDP, revisions, and seasonal adjustments
  • March (final O4 2008): Business cycles and indicators of future growth (decline)
  • April (advance Q1 2009): Year-end summary and current issues


Resources:

Current Key Economic Indicators
as of January 30, 2009
Inflation The Consumer Price Index for All Urban Consumers (CPI-U) decreased 1.0 percent in December, before seasonal adjustment. The December CPI-U level of 210.228 was 0.1 percent higher than in December 2007." (January 16, 2008) (January 16, 2008)
Employment and Unemployment Real gross domestic product decreased at an annual rate of 3.8 percent in the fourth quarter of 2008. In the third quarter, real GDP decreased 0.5 percent. (January 30, 2009) (January 30, 2009)
Real GDP U.S. Nonfarm payroll employment decreased by 524,000 jobs in December and the unemployment rate rose from 6.8 to 7.2 percent. (January 9, 2009) (January 9, 2009)
Federal Reserve At its January 28, 2009 meeting, the Federal Open Market Committee decided to keep its target range for the federal funds rate at 0 to 1/4 percent.(January 28, 2009) (January 28, 2009)

Process:

Bureau of Economics Analysis:   Gross Domestic Product: Fourth Quarter 2008 (advance)

Announcement date: January 30, 2009

"Gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 3.8 percent in the fourth quarter of 2008, (that is, from the third quarter to the fourth quarter), according to advance estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP decreased 0.5 percent."

This was the first of three monthly reports on the 2008 fourth quarter (Q4) gross domestic product (GDP). Each report, January, February and March, will be based on more reliable data.

"The Bureau emphasized that the fourth-quarter “advance” estimates are based on source data that are incomplete or subject to further revision by the source agency. The fourth quarter “preliminary” estimates, based on more comprehensive data, will be released on February 27, 2009."

The BEA announcement highlighted the key factors in the Q4 GDP data.

  • "The decrease in real GDP in the fourth quarter primarily reflected negative contributions from exports, personal consumption expenditures, equipment and software, and residential fixed investment that were partly offset by positive contributions from private inventory investment and federal government spending. Imports, which are a subtraction in the calculation of GDP, decreased."
     
  • "Most of the major components contributed to the much larger decrease in real GDP in the fourth quarter than in the third. The largest contributors were a downturn in exports and a much larger decrease in equipment and software. The most notable offset was a much larger decrease in imports."
     
  • "Final sales of computers subtracted less than 0.01 percentage point from the change in real GDP after subtracting 0.01 percentage point from the third-quarter change. Motor vehicle output subtracted 2.04 percentage points from the fourth-quarter change in real GDP after contributing 0.16 percentage point to the third-quarter change."

The full BES January 30, 2009, press release provides additional details about the various components of GDP and income: www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm [1] . 

The Recession

In December 2008, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) declared that a recession had begun in the U.S. economy in December 2007. At that time, U.S. output had slowed considerably from the previous quarters. More serious slowing (negative growth) accelerated in Q4 of 2008. Although the NBER's declaration that a recession had begun did not fit the commonly held definition of a recession, two consecutive quarters or negative or no growth, overall economic conditions had deteriorated enough for the NBER to make the decision that the recession had begun. The Q3 and Q4 GDP data bears out the NBER's decision to call a business cycle peak and the beginning of a recession.

U.S. Real GDP Growth
2008-2009
Year Quarter Growth Rate
2008
  Q1 0.1
Q2 4.8
Q3 4.8
Q4 -0.2
2009  
  Q1 0.9
Q2 2.8
Q3 -0.5
Q4 -3.8

Figure 1 shows the changes in U.S. real GDP growth from 1990 through 2008. Note the "business cycles" or periodic fluctuations in the growth rate. The times when growth has been negative for two or more quarters (1990-91 and 2001) have been recessions.

Figure 1 GDP

A recession is often the downward or declining segment of the business cycle. Cycles are measured from peak (top) to peak or trough (bottom) to trough. The upward segment of the cycle is a period of expansion. Figure 2 shows a typical business cycle: expansion (growth) - peak (top) - contraction (slowing or recession) - trough (bottom).

The NBER defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion." A decline in growth of, say, 5 percent to 2 percent will not be identified as a recession. It is only the slowing growth period of a normal business cycle.

 

Figure 2 GDP

[The following definitions and examples are summarized or quoted from "Measuring the Economy: A Primer on GDP and the National Income and Product Accounts," an online BEA publication: www.bea.gov/national/pdf/nipa_primer.pdf [2] .

Some of the details in the teacher version are not included in the student version.]

National Income and Product Accounts (NIPAs)

The Bureau of Economic Analysis produces the national income and product accounts (NIPAs), a set of economic measurements that provide information on the value and composition of output produced in the United States during a given period, and on the distribution and uses of the income generated by that production.

The primary measurement of the NIPAs is gross domestic product (GDP), which measures the value of the goods and services produced by the U.S. economy in a given time period. Thus, while GDP is the primary and most commonly used measurement of the economy’s output, it is only one of the BEA's measurements. Other NIPA's include personal income, corporate profits, and government spending.

The NIPAs help to answer questions such as: How fast is the economy growing or slowing? What industries are growing or slowing down? How does the trade deficit affect economic growth? How is the pattern of spending on goods and services in the economy changing? 

Gross Domestic Product

GDP measures "the value of final goods and services produced in the United States in a given period of time. While GDP is used as an indicator of economic progress, it is not necessarily a measure of well-being or quality of life. It does not account for rates of poverty, crime, or literacy. The determination of GDP is not simply measuring production or sales." Measurement of GDP is base on these constraints:

  1. "Measurement of GDP includes market production, goods and services that are produced for sale in private sector and sold through markets, and some non-market production, such as defense services provided by the Federal Government, education services provided by local governments, emergency housing or health care services provided by nonprofit institutions serving households, such as the Red Cross, and housing for persons who own and live in their home."
    "Not all "productive" activities are included in GDP. Some activities, such as caring for your own children, unpaid volunteer work for charities, or illegal or black-market activities, are not included. It is difficult to measure the value of these kinds of services."
     
  2. "GDP is valued at market prices. The NIPAs value market goods and services using prices set by the market. This provides a common unit of measurement (dollars) that facilitates comparisons of the various goods and services that make up economic activity.
     
    In some cases, market prices do not fully reflect the value of a good or service, and may include some types of services where an actual exchange has not occurred. In these cases, the value of the good or service produced is “imputed” from similar market transactions. Imputations measure the value of goods and services that are not fully reflected in market prices, such as the value of compensation-in-kind, such as meals provided by employers, and the value of owner-occupied housing."
     
  3. "GDP is a measure of current production, not sales. In the NIPAs, output measures when a good or service is produced, not when that good or service is sold. For example, an automaker may produce a car in one period and sell it in a later period. In the first period, the production of the car is recorded in GDP as an addition to inventories, a component of investment. In the later period, the sale of the car is recorded as a consumer expenditure and is offset by the withdrawal of the car from inventories."
     
  4. "GDP includes the value of “final” goods and services only. In the measurement of GDP, final products are those that are consumed and not used in a later stage of production, those that are sold to foreign residents, those that are durable goods and structures used to produce other goods and last more than a year, and those that may be inventoried for future consumption."

    When measuring the production of the whole economy, intermediate products, that is, goods and services that are used as inputs in the production process and will not contribute to future production, are excluded, so that the measure of output is an unduplicated total. The value of inputs is included in the price of the final good or service.
     
  5.  "GDP captures output produced in the United States. GDP is a measure of the goods and services produced by labor and property located within the United States (in the NIPAs, the United States comprises the 50 states and the District of Columbia). Thus, GDP includes the output of U.S. offices or establishments of foreign companies located in the United States, and it excludes the output of foreign offices or establishments of U.S. companies located outside the United States. This treatment aligns GDP with other key U.S. statistics associated with the domestic economy, such as population and employment."
     
  6.  "GDP is a “gross” measure. GDP reflects production in a given time period, regardless of whether that production is used for immediate consumption, for investment in new fixed assets or inventories, or for replacing depreciated fixed assets. Economic depreciation, or the consumption of fixed capital (CFC), is a measure of the amount that would need to be “set aside” to cover the aging, wear and tear, accidental damage, and obsolescence of existing fixed assets."
     
  7. Subtracting CFC from GDP leaves “net domestic product,” which is a measure of current production that excludes the investment that is necessary to replace fixed assets as they wear out. Thus, net domestic product is a measure that indicates how much of the nation’s output is available for consumption or for adding to the nation’s wealth.

GDP Can Be Measured in Three Ways.

  1. Expenditure Approach: "GDP can be measured as the sum of expenditures, or purchases, by final users. This is known as the expenditures approach (and is illustrated by the formula familiar to students of economics: GDP = Consumption + Investment + Government spending + eXports – iMports) and is used to identify the final goods and services purchased by persons, businesses, governments, and foreigners."
     
  2. Income Approach: "Because the market price of a final good or service will reflect all of the incomes earned and costs incurred in production, GDP can also be measured as the sum of these charges. This is known as the income approach and is used to examine the purchasing power of households and the financial status of business income."
     
  3. Value Added Approach: "GDP can also be measured either as total sales less the value of intermediate inputs or as the sum of the “value added” at each stage of the production process. The value-added approach to measuring GDP is central to the U.S. industry accounts and is used to analyze the industrial composition of U.S. outputs." 

GDP is the Sum of Four Basic Components

  • Personal consumption expenditures consist of purchases of goods and services by households and by nonprofit institutions serving households (NPISHs). These goods and services include imputed expenditures on items such as the services of housing by a homeowner (the equivalent of rent), financial and insurance services for which there is no explicit charge, and medical care provided to individuals and financed by government or by private insurance.
     
  • Gross private domestic investment consists of purchases of fixed assets (equipment, software, and structures) by private businesses that contribute to production and have a useful life of more than one year, of purchases of homes by households, and of private business investment in inventories. Inventory investment, which is shown as “change in private inventories,” includes the value of goods produced during a period but not sold, less sales of goods from inventories that were produced in previous periods. It is measured as ending period less beginning period inventories valued at current prices (and is equivalent to additions to, less withdrawals from, inventories), Intermediate inputs, which become an integral part of the final product and do not contribute to future production, are not included in investment. 
     
  • Exports consists of goods and services that are sold or transferred by U.S. residents to residents of the rest of the world.

    Imports, which is deducted in the calculation of GDP, consists of goods and services that are sold or transferred by the rest of the world to U.S. residents. The value of imports is already included in the other expenditure components of GDP, because market transactions do not distinguish the source of the goods and services. Therefore, imports must be deducted in order to derive a measure of total domestic output. Deducting total imports purchased by all sectors from total exports, rather than deducting each sector’s imports from its total expenditures, provides an analytically useful measurement of net exports that enables one to examine the effects of foreign trade on the economy.
     
  • "Government consumption expenditures and gross investment” consists of government purchases of investment measures final expenditures by Federal,state, and local governments. “Government consumption expenditures” represents the value of goods and services provided to the public by governments (such as defense or education). “Gross investment” consists of government purchases of equipment, software, and structures to use in producing those goods and services. These expenditures do not include government spending for social benefit programs (such as Medicaid), interest payments, and subsidies.

    GDP = C + I + G + X

    C = Personal Consumption Expenditures
    I = Gross Private Domestic Investment
    G = Government Consumption Expenditures
    X = Net Exorts (Exports minus Imports) 

Real GDP

The BEA reports the level and growth rate of "current" GDP, expressed in the current prices in the period being measured - Q4 in this announcement. This is also referred to as "nominal GDP." To factor out the effect of inflation, growth in the dollar amount that does not reflect additional output or "real" growth, GDP can be adjusted for inflation to result in real GDP. To factor out inflation, the growth rate is "chained" to prices in a base year. Calculating real GDP growth allows economists and planners to determine if production actually increased or decreased, without the impact of a change in the purchasing power of the dollar. If GDP increased by five percent and the rate of inflation was also five percent, "real" GDP growth was actually zero. 

What is the real GDP?

Current dollar, or "nominal" GDP, decreased 4.1 percent, or $148.2 billion, in the fourth quarter to a level of $14,264.6 billion. The BEA reported tat the decrease was 3.8%. The difference is a decrease in the price level during the quarter. In the third quarter, the current-dollar GDP had increased 3.4 percent, or $118.3 billion. 

  GDP and Real GDP, 2000-2008
   Year
GDP in current dollars
(billions)

Real GDP in
chained dollars
(billions)
Year GDP Real GDP
 2000  9,817.0 9,817.0
 2001  10,128.0 9,890.7
 2002  10,469.6 10,048.8
 2003  10,960.8 10,301.0
 2004  11,685.9 10,675.8
 2005  12,421.9 10,989.5
 2006  13,178.9 11,294.8
 2007  13,807.5 11,523.9
 2008 14,280.7 11,671.3

Per Capita Real GDP

Even real GDP doesn’t adequately measure what happened each individual's share of the economic output. A more meaningful measurement for individuals may be “per capita real GDP,” or the real GDP divided by the nation's population. Given that the U.S. polulation has increased, the decline in per capita real GDP was actually greater than the reported 3.8 percent decline in real GDP. If the U.S. population increased by 1.2 percent ovet the past year, the actual decline in per capita real GDP was about 5 percent. Per capita real GDP reached a high of $38,413 in Q3 2008 and is now slightly less than $38,000 (Q4). The chart below shows the growth and then decline of nominal and per capita real GDP over the last three years. 

U.S. Per Capita Nominal and Real GDP, 2006-2008
Year (Q4) Nominal GDP Real GDP
2006 $44,572 $37,859
2007 $46,328 $38,369
2008 $46,674 $37,954

Note that while nominal GDP continued to increase in 2008, real growth was negative, -3.8 percent.

Conclusion:

The January 30, 2009, BEA report on real gross domestic product confirmed that the U.S. economy is shrinking - in a recession. Personal consumption expenditures and private investment are down dramatically. Government spending has increased, but cannot replace the amount of decline in consumer spending.

As of the writing of this lesson, Congress and President Obama's administration are debating how an "Economic Recovery and Reinvestment Plan" should be structured and where government investment to stimulate the economy will be most effective.

If consumer spending and output continue to decrease and unemployment continues to increase, the recession will continue and possibly deepen. What should we do?

  • Increase government spending on infrastructure?
  • Cut personal income tax rates or give tax rebates?
  • Increase federal grants to state and local governments?
  • Tax incentives to business to create jobs?
  • Direct support to strengthen the banking and credit system?

The basic debate is which sector (in the determination of GDP) should be the stimulus - consumers, business, or government?

Assessment Activity:

Have your students click here to complete an interactive quiz on the GDP lesson.

1. According to the advance estimate, what was the change in the real GDP growth rate in Q4 2008?

a. 2.8%
b. 1.8%
c. -2.8%
d. -3.8% [CORRECT]

[See the BEA announcement, "Gross domestic product ... decreased at an annual rate of 3.8 percent in the fourth quarter of 2008..."] 

2. How did the growth rate of real GDP in Q4 compare to the growth rate in Q3?

a. Same
b. Greater change [CORRECT]
c. smaller change 

[See the BEA announcement, Gross domestic product ... decreased at an annual rate of 3.8 percent in the fourth quarter of 2008 ... In the third quarter, real GDP decreased 0.5 percent."] 

3. Which of these is not a component of the determination of GDP?

a. State government spending
b. Purchases of homes
c. Imports
d. Wholesale sales [CORRECT]

[From "Measuring the Economy" publication, page 3: "In the measurement of GDP, final products are those that are consumed and not used in a later stage of production, those that are sold to foreign residents, those that are durable goods and structures used to produce other goods and last more than a year, and those that may be inventoried for future consumption."] 

4. What is the largest spending component of GDP?

a. Personal consumption expenditures [CORRECT]
b. Government expenditures
c. Private investment expenditures
d. New exports

[Personal consumption expenditures are, by far, the largest component of GDP. In Q4 2008, personal consumption expenditures were $9.9 trillion of the GDP of $14.3 trillion, almost 70 percent of the total.] 

5. How does real GDP differ from GDP?

a. Real GDP is in current dollars and GDP is in constant dollars.
b. Real GDP is a net measurement and GDP is a gross measurement.
c. Real GDP is adjusted for inflation and GDP is not adjusted. [CORRECT]

["Real" means adjusted for the effect of inflation, so that GDP measurements over time can be more accurately compared in terms of actual output.] 

6. What was the U.S. per capital real GDP in Q4 2008?

a. $37,954 [CORRECT]
b. $46,674
c. $51,237

[According to the BEA, U.S. per capita real GDP was $37,954 in Q4. Nominal per capita GDP in Q4 was $46,674: www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=253&Freq=Qtr&FirstYear=2006&LastYear=2008 [7] .] 

7. When measuring GDP, the sum of incomes earned and costs incurred in production is called:

a. Expenditure approach
b. Income approach [CORRECT]
c. Value added approach

[The three basic ways GDP can be measured are outlined in the lesson. "Because the market price of a final good or service will reflect all of the incomes earned and costs incurred in production, GDP can also be measured as the sum of these charges. This is known as the income approach and is used to examine the purchasing power of households and the financial status of business income."] 

8. If the nation's nominal GDP in year 1 was $10 trillion and $11 trillion in year 2, and the rate of inflation from year 1 to year 2 was 5 percent, what was the nation's real GDP growth rate from year 1 to year 2?

a. 1 percent
b. 5 percent [CORRECT]
c. 10 percent

[The nation's nominal growth was 10 percent ($10 trillion to $11 trillion. If inflation in that time period was 5 percent, the real growth was just 5 percent. Subtract the annual rate of inflation from the rate of GDP growth in the year.] 

Short Answer Questions:

1. How is a nation's real per capita GDP determined?

[Real per capita GDP is the nation's real GDP divided by the nation's population.] 

2. What data from the BEA announcement supports the NBER decision that the U.S. is in a recession?

[The NBER decided that a recession began because GDP growth slowed dramatically and that unemployment had increased significantly throughout 2008. The January 30 BEA report cited a decrease in GDP in Q3 of 0.5 percent and a decrease of GDP in Q4 of 3.8 percent. The two consecutive quarter decrease of GDP fits the commonly cited definition of a recession.]


Extension Activity:

Table 1 is a breakdown of U.S. gross domestic product growth by quarter in 2008. Take a good look at the data. What are the areas of growth and decline? Was the data (growth rates) consistent throughout 2008? Summarize your interpretation of the data in Table 1.

Table 1 GDP

The data in Table 1 is from the BEA web page, "National Income and Product Accounts Table, Table 7.1., Selected Per Capita Product and Income Series in Current and Chained Dollars." You can use this page to look at changes in GDP over any selected period of time. There are links to other NIPA data: www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=253&Freq=Qtr&FirstYear=2006&LastYear=2008 [7] .

Links Used:

1. ^ ^ "www.bea.gov/bea/newsrel/gdpnewsrelease.htm" - (www.bea.gov)
2. ^ ^ "www.bea.gov/national/pdf/nipa_primer.pdf" - (www.bea.gov)
3. ^ "www.bea.gov/about/pdf/jep_spring2008.pdf" - (www.bea.gov)
4. ^ "www.bea.gov/bea/glance.htm" - (www.bea.gov)
5. ^ "www.conference-board.org/economics/bci/pressRelease_output.cfm?cid=1" - (www.conference-board.org)
6. ^ "http://wwwdev.nber.org/cycles/dec2008.html" - (wwwdev.nber.org)
7. ^ ^ "www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=253&Freq=Qtr&FirstYear=2006&LastYear=2008" - (www.bea.gov)

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