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 grade level: 9-12
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author: Douglas Haskell
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posted on: February 9, 2010
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This lesson provides you with the resources that you will need to teach this lesson. We have also provided a link for your students to follow this lesson online. The link below contains only the information your students need:

http://econedlink.org/?a=895

Focus on Economic Data (formerly Case Study)

Focus on Economic Data: U.S. Real GDP Growth, January 29, 2010

Key Economic Concepts:

Description:

This lesson focuses on the January 29, 2010, first estimate of U.S. real gross domestic product (Real GDP) for the fourth quarter of 2009, 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 May 14, 2010
Inflation On a seasonally adjusted basis, the CPI-U rose 0.1 percent in March after being unchanged in February. The index for all items less food and energy was unchanged in March after rising 0.1 percent in February. (May 14, 2010)
Employment and Unemployment Nonfarm payroll employment rose by 290,000 in April, the unemployment rate edged up to 9.9 percent, and the labor force increased sharply. Job gains occurred in manufacturing, professional and business services, health care, and leisure and hospitality. Federal government employment also rose, reflecting continued hiring of temporary workers for Census 2010. (May 7, 2010)
Real GDP U.S. real gross domestic product increased at an annual rate of 3.2 percent in the first quarter of 2010, (that is, from the fourth quarter to the first quarter). In the fourth quarter, real GDP increased 5.6 percent. (April 30, 2010)
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. (April 28, 2010)

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.
  • Assess the relationship of real GDP data, the indexes of economic indicators, and business cycles.
  • 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's "first estimate" of real GDP released on January 29, 2010, for the fourth quarter (October-December of 2009. Understanding the level and rate of growth of the economy's output (GDP) helps to better understand growth, employment trends, the health of the business sector, and consumer well-being. 

[Note to teachers: During the second semester of the 2009-2010 school year (January-May), EconEdLink will publish five Focus on Economic Data lessons on "U.S. Real GDP Growth." Real GDP data is announced three times for each fiscal quarter. For Q4 2009, the first estimate is made in January, the second estimate is made in February, and the third estimate for Q4 is made in March.

Note that the GDP data reports lag the reporting period - fiscal quarter. The current estimate is for Q4 (October-December, 2009).  Each of the three estimates for a quarter will include more comprehensive data and may modify the growth rate reported earlier.

NOTE: The BEA previously used the terms "advance, preliminary and final" to identify the three quarterly real GDP estimates.  The terms "first, second and third" have replaced the previous announcement language.]

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

  • January (first estimate for Q4 2009): How to read the data, real vs. nominal, and how the data is collected
  • February (second estimate for Q4 2009): Factors influencing the change in GDP, revisions, and seasonal adjustments
  • March (third estimate for Q4 2009): Business cycles and indicators of future growth (decline)
  • April (first estimate for Q1 2010): Regional GDP growth data and international comparisons.
  • May (second estimate for Q1 2010): Year-end summary and future growth factors.

Resources:

Current Key Economic Indicators
as of January 29, 2010
Inflation On a seasonally adjusted basis, the CPI-U increased 0.1 percent in December 2009 after rising 0.4 percent in November. The index for all items less food and energy rose 0.1 percent in December after being unchanged in November. (January 29, 2010)
Employment and Unemployment U.S. nonfarm payroll employment edged down (-85,000) in December, and the unemployment rate was unchanged at 10.0 percent. Employment fell in construction, manufacturing, and wholesale trade, while temporary help services and health care added jobs. (January 8, 2010)
Real GDP U.S. real gross domestic product (real GDP) increased at an annual rate of 5.7 percent in the fourth quarter of 2009 (from Q3 to Q4). In the third quarter, real GDP increased 2.2 percent. (January 29, 2010)
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. (December 16, 2009)

Process:

"Happy days are here again,
The skies above are clear again
Let us sing a song of cheer again --
Happy days are here again"*

Is it time to sing this old song again?  The size of the US. economy increased at an annual rate of 5.7 percent in the fourth quarter of 2009.  The economy is growing and prosperity just around the corner.  Right?   Read more about the Q4 2009 GDP data and decide for yourself.

"Happy Days Are Here Again," by Jack Yellen & Milton Alger (November 1929). 
 
[Note to Teachers:  Songs from the 1930's may help student understand hpw people felt during times much harder than the current recession. There are a few on the Songs of the Great Depression [1] web page.

The PBS "American Experience [2] " video series "The 1930's" is about the Great Depression era.   Information about 5 videos programs in the series can be found at this site.]

Bureau of Economic Analysis Press Release: Gross Domestic Product: Fourth Quarter 2009 (First Estimate)

"Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 5.7 percent in the fourth quarter of 2009, (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis.  In the third quarter, real GDP increased 2.2 percent."

"The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency.  The "second" estimate for the fourth quarter, based on more complete data, will be released on February 26, 2010."

Remember, GDP data for a quarter is released three times over three months.  Each announcement is made with more data and more analysis.  This is the first estimate for Q4 2009.  The announcement first comments on the sector trends affecting the overall growth rate estimate.  NOTE:  These sectors are described later in this lesson.

"The increase in real GDP in the fourth quarter primarily reflected positive contributions from private inventory investment, exports, and personal consumption expenditures (PCE).  Imports, which are a subtraction in the calculation of GDP, increased."

"The acceleration in real GDP in the fourth quarter primarily reflected an acceleration in private inventory investment, a deceleration in imports, and an upturn in nonresidential fixed investment that were partly offset by decelerations in federal government spending and in PCE." 

Typically, any very significant data for industries are highlighted.  For Q4, motor vehicle sales were a highlight. "Motor vehicle output added 0.61 percentage point to the fourth-quarter change in real GDP after adding 1.45 percentage points to the third-quarter change.  Final sales of computers subtracted 0.03 percentage point from the fourth-quarter change in real GDP after subtracting 0.08 percentage point from the third-quarter change."

A Footnote from the BEA:  "Quarterly estimates are expressed at seasonally adjusted annual rates, unless otherwise specified.  Quarter-to-quarter dollar changes are differences between these published estimates.  Percent changes are calculated from unrounded data and are annualized.  “Real” estimates are in chained (2005) dollars.  Price indexes are chain-type measures."

Real GDP data is revised to adjust for the impact of inflation.  The mechanism to adjust the data is based on a price index.  "The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 2.1 percent in the fourth quarter, compared with an increase of 1.3 percent in the third."

The BEA also notes the difference between the "headline" or total estimate for GDP price index versus the data included  in the "core" index that excludes two expenditure groups that typically vary more from month to month - energy and food prices. "Excluding food and energy prices, the price index for gross domestic purchases increased 1.2 per cent in the fourth quarter, compared with an increase of 0.3 percent in the third."

For more information about the difference between the headline and core price indexes, see the recent EconEdLink lessons on the "CPI and Inflation."

[Note to Teachers:  It is critical that students can differentiate between nominal (current) GDP and real (adjusted for inflation) GDP]

The 2008-2009 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 a recession had begun. The 2008-2009 bears out the NBER's decision to call a business cycle peak and the beginning of a recession.  In addition, the U.S. unemployment rate doubled between January 2008 and November 2009.

Figure 1 shows the rates of change of real GDP from 2007 to the present.  If you refer back to the real GDP data reported in January of 2009 (January 30, 2009) "Focus on Economic Data" Lesson), you will see that these figures have been adjusted by the BEA to reflect slower growth in 2007 than had been reported earlier.  According to the BEA revised data, the real decline - negative growth - began in Q1 of 2008. The first estimate for Q4 of 2009 shows a dramatic reversal from negative growth that continued through Q3, to 2.2 percent growth in Q3, and the much greater growth of 5.7% in Q4 of 2009.

Figure 1:  U.S. Real GDP Growth Rate
2007-2009
Year Quarter Growth Rate*
2007 Q1 1.2%
  Q2 3.2%
  Q3 3.6%
  Q4 2.1%
2008 Q1 -0.7%
  Q2 1.5%
  Q3 -2.7%
  Q4 -5.7%
2009 Q1 -6.4%
  Q2 -0.7%
  Q3 2.2%
  Q4 5.7%
[NOTE:  The 2007 and 2008 Real GDP estimates have been adjusted since their original publication to reflect analysis of more accurate and detailed lagging economic data.]

Figure 2 shows the quarterly changes in U.S. real GDP growth from 1990 through Q4 2009. 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, 2001, and 2008-09) have typically been declared recessions by the National bureau of Economic Research (NBER).

 

GDP Figure 2

 

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 3 is an illustration of the concept of the business cycle.
 
GDP Figure 3 

Measuring the Economy - National Income and Product Accounts (NIPAs)

[The following definitions and examples are summarized or quoted from "Measuring the Economy: A Primer on GDP and the National Income and Product Accounts [3] ," an online BEA publication.]

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 auto maker 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 (PCE)
    I = Gross Private Domestic Investment (Investment)
    G = Government Consumption Expenditures (Government)
    X = Net Exports, Exports minus Imports (Net Exports) 

The January BEA announcement detailed the Q4 2009 GDP data by sectors and industry groups:

Sector Current Dollar* Chained Dollar* Change Q3 to Q4*
C 10,250.5 9,298.5 +45.9
I 1,522.8 1,601.8 +127.4
X -353.8 -341.1 +16.3
G 2,566.4 2,584.4 -1.1
GDP 14,463.4 13,155.0 +182.0
* Billions of U.S. dollars.

[Note to Teachers: This is a great opportunity for students to look at the historical GDP data to interpret what may have been happening in the economy at different times.  For historical data since 1929, go to Current-Dollar and "Real" Gross Domestic Product [4] .] 

"Real personal consumption expenditures increased 2.0 percent in the fourth quarter, compared with an increase of 2.8 percent in the third.  Durable goods decreased 0.9 percent, in contrast to an increase of 20.4 percent.  Nondurable goods increased 4.3 percent, compared with an increase of 1.5 percent.  Services increased 1.7 percent, compared with an increase of 0.8 percent."

"Real nonresidential fixed investment increased 2.9 percent in the fourth quarter, in contrast to a decrease of 5.9 percent in the third.  Nonresidential structures decreased 15.4 percent, compared with a decrease of 18.4 percent.  Equipment and software increased 13.3 percent, compared with an increase of 1.5 percent.  Real residential fixed investment increased 5.7 percent, compared with an increase of 18.9 percent."

"Real exports of goods and services increased 18.1 percent in the fourth quarter, compared with an increase of 17.8 percent in the third.  Real imports of goods and services increased 10.5 percent, compared with an increase of 21.3 percent.

"Real federal government consumption expenditures and gross investment increased 0.1 percent in the fourth quarter, compared with an increase of 8.0 percent in the third.  National defense decreased 3.5 percent, in contrast to an increase of 8.4 percent.  Nondefense increased 8.1 percent, compared with an increase of 7.0 percent.  Real state and local government consumption expenditures and gross investment decreased 0.3 percent, compared with a decrease of 0.6 percent."

"The change in real private inventories added 3.39 percentage points to the fourth-quarter change in real GDP after adding 0.69 percentage point to the third-quarter change.  Private businesses decreased inventories $33.5 billion in the fourth quarter, following decreases of $139.2 billion in the third quarter and $160.2 billion in the second."

"Real final sales of domestic product -- GDP less change in private inventories -- increased 2.2 percent in the fourth quarter, compared with an increase of 1.5 percent in the third."

Gross domestic purchases

 "Real gross domestic purchases -- purchases by U.S. residents of goods and services wherever produced -- increased 5.1 percent in the fourth quarter, compared with an increase of 3.0 percent in the third."

Disposition of personal income

"Current-dollar personal income increased $119.2 billion (4.0 percent) in the fourth quarter, compared with an increase of $35.1 billion (1.2 percent) in the third."

"Personal current taxes decreased $11.7 billion in the fourth quarter, in contrast to an increase of $3.5 billion in the third."

"Disposable personal income increased $130.8 billion (4.8 percent) in the fourth quarter, compared with an increase of $31.6 billion (1.2 percent) in the third.  Real disposable personal income increased 2.1 percent, in contrast to a decrease of 1.4 percent."

"Personal outlays increased $109.0 billion (4.2 percent) in the fourth quarter, compared with an increase of $132.3 billion (5.2 percent) in the third.  Personal saving -- disposable personal income less personal outlays -- was $516.9 billion in the fourth quarter, compared with $495.0 billion in the third."

"The personal saving rate -- saving as a percentage of disposable personal income -- was 4.6 percent in the fourth quarter, compared with 4.5 percent in the third.  For a comparison of personal saving in BEA’s national income and product accounts with personal saving in the Federal Reserve Board’s flow of funds accounts and data on changes in net worth, go to BEA GDP Release Fourth Quarter 2009 [5] .

[NOTE: Table's are located at the bottom of the file]

Current-dollar GDP

"Current-dollar GDP -- the market value of the nation's output of goods and services -- increased 6.4 percent, or $221.3 billion, in the fourth quarter to a level of $14,463.4 billion.  In the third quarter, current-dollar GDP increased 2.6 percent, or $90.9 billion."

2009 GDP

"Real GDP decreased 2.4 percent in 2009 (that is, from the 2008 annual level to the 2009 annual level), in contrast to an increase of 0.4 percent in 2008."

"The decrease in real GDP in 2009 primarily reflected negative contributions from nonresidential fixed investment, exports, private inventory investment, residential fixed investment, and personal consumption expenditures (PCE), that were partly offset by positive contributions from federal government spending.  Imports, which are a subtraction in the calculation of GDP, decreased."

"The downturn in real GDP primarily reflected downturns in nonresidential fixed investment and in exports and a larger decrease in private inventory investment that were partly offset by a larger decrease in imports and a smaller decrease in residential fixed investment."

"The price index for gross domestic purchases increased 0.1 percent in 2009, compared with an increase of 3.2 percent in 2008."

"Current-dollar GDP decreased 1.3 percent, or $182.7 billion, in 2009.  Current-dollar GDP increased 2.6 percent, or $363.8 billion, in 2008."

"During 2009 (that is, measured from the fourth quarter of 2008 to the fourth quarter 2009), real GDP increased 0.1 percent.  Real GDP decreased 1.9 percent during 2008.  The price index for gross domestic purchases increased 0.6 percent during 2009, compared with an increase of 1.9 percent during 2008."

Per Capita GDP

Quite often, GDP is used to compare the sizes of national economies around the world - as a measure of standard of living.  One caution about doing this - the real significance of a nation's total output is only meaningful when compared to the nation's population.  By dividing the gross domestic product (current or real) by the population, you can determine the per capita real GDP.

U.S. GDP Q4 2009 (current dollar)                 $14,463.4 (billion)
U.S. Population (2009 est.)                             308,000,000
U.S. Per capita GDP                                     $46,959.09

When comparing the United States to other nations, this country may be larger (GDP) than most countries, but other countries may have a larger per capita GDP.  In other cases, a country such as China may have a large GDP, but it's very large population means that China's per capita GDP is much smaller. 

[Note to Teachers: To look at the data about other nations, go to the CIA World Factbook "Guide to Country Comparisons [6] ."  Click on "Economy."]

Potential GDP  

A nation’s potential GDP is the level of real GDP that the economy can produce with full employment. It is the nation’s capacity if it is using all of its productive resources.

Every quarter, the U.S. Department of Commerce releases an estimate of the nation’s potential GDP.  The estimate is based on the capital stock, projected labor force growth, population trends, productivity, and other variables.  The Commerce Department suggests that potential GDP isn't an absolute limit, but is measure of maximum sustainable output given the currently available resources.

The difference between the actual and potential GDP is often called the “output gap.” During periods of recession, there is a significant output gap, primarily a result of unused labor.  Economist Arthur Okun proposed in 1962 that for every 1% increase in the unemployment rate, a country's GDP will be reduced by about 2 percent – or, 2 percent less than potential GDP. This is known as “Okun’s Law.” Using Okun’s “rule of thumb,” the current 10 percent U.S. unemployment rate may be resulting in a loss of 20 percent of potential output.  Even adjusting the unemployment rate to include only cyclical unemployment, the current GDP gap may be at least be subtracting 10-12 percent of potential output. 10 percent of the U.S. output is somewhere around $1.4 trillion (with GDP at $14.5 trillion.)

Conclusion:

To review:  "Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 5.7 percent in the fourth quarter of 2009, (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis.

Should be singing "Happy Days Are Here Again"? 

Or, is it still "Brother Can You Spare a Dime?" (A song written in 1931 by E.Y. "Yip" Harburg and Jay Gorney)

News reaction to the 5.7 growth rate in Q4 was very positive, but most writers and analysts cautioned that growth will not continue at that rate.  Most writers estimate a growth rate of 2-3 percent in 2010, assuming no critical events or unanticipated economic issues.

A January 30, 2010, New York Times article ("Economy Grew at Vigorous Pace in Last Quarter," by Catherine Rampell) warned about the accuracy of the first GDP estimate. "The latest measure of the nation’s output is a backward-looking figure, providing only clues of where the country may be headed. The number can be subject to major revisions, especially when the economy is at a turning point. The annual growth rate initially reported by the government for the third quarter of 2009 was 3.5 percent, but was later revised to 2.2 percent. The government’s final tally of last quarter’s output will be released in March."

Once I built a railroad, I made it run, made it race against time.

Once I built a railroad; now it's done. Buddy, can you spare a dime?

Once I built a tower, up to the sun, brick, and rivet, and lime;

Once I built a tower, now it's done. Buddy, can you spare a dime?

Assessment Activity:

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

1. According to the first estimate, what was the change in the real GDP growth rate in Q4 2009?

a.  2.2%
b.  4.6%
c.  5.7% [CORRECT]
d. 6.3%

[See the BEA announcement, "Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 5.7 percent in the fourth quarter of 2009, (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis.  In the third quarter, real GDP increased 2.2 percent."] 

2. How did the growth rate of real GDP in Q4 2009 compare to the growth rate in Q3 2009?

a. Same
b. Greater change (CORRECT}
c. Smaller change 

[See the BEA announcement, "Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 5.7 percent in the fourth quarter of 2009, (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis.  In the third quarter, real GDP increased 2.2 percent."

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

a. State government spending
b. Purchases of homes
c. Net 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 2009, personal consumption expenditures were slightly over $10 trillion of the GDP of $14.4 trillion, about 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 approximate U.S. per capital real GDP in Q2 2009?

a. $39,000
b. $42,000
c. $47,000 [CORRECT]

[If current U.S. U.S. GDP is $14,463.4 billion, and the U.S. Population is 308,000,000, the U.S. Per capita GDP is $46,959.09.]

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. 4.76 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 and mid-2009. The  BEA reports on real GDP since January 2008 have shown a pattern of decreases. In addition, the unemployment rate has doubled since that time.]

Extension Activity:

Recent GDP Data in Detail

Table 1 of the BEA GDP Release, Fourth Quarter 2009 [5] estimates is a detailed breakdown of the data by sector and specific types of goods and services, investments, and trade, from 2006 through 2009.

Take a good look at the data. What are the areas of growth and decline? Was the data (growth rates) consistent throughout the period of time? Summarize your interpretation of the data in Table 1.

Go to 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 [11] ." You can use this page to look at changes in GDP over any selected period of time.   Try looking at the changes over the years sine you were born.

There are also links to other NIPA data pages.

[Note to teachers: You can assign groups of students different time periods of data to read, analyze, and summarize for the class.]

Links Used:

1. ^ ^ "Songs of the Great Depression" - (www.library.csi.cuny.edu) This website provides lyrics from a number of Great Depression Era songs that depict the time period accurately.
2. ^ ^ "The 1930's" - (www.pbs.org) This PBS video series discusses the Great Depression Era.
3. ^ ^ "Measuring the Economy: A Primer on GDP and the National Income and Product Accounts" - (www.bea.gov) This BEA article introduces new users to the basics of U.S. national income and product accounts.
4. ^ ^ "Current Dollar and "Real" GDP" - (www.bea.gov) This BEA spreadsheet provides the U.S. current dollar and real GDP figures since 1929.
5. ^ ^ ^ "BEA GDP Release Fourth Quarter 2009" - (www.bea.gov) This website is the news release of the first estimate of U.S. gross domestic product for the fourth quarter, 2009.
6. ^ ^ "CIA World Factbook" - (www.cia.gov) This site ranks the nations of the by various economic measures, including gross domestic product.
7. ^ "Taking the Pulse of the Economy: Measuring GDP" - (www.bea.gov) This BEA article discusses measuring Gross Domestic Product.
8. ^ "Overview of the U.S. Economy: Perspective from the BEA Accounts" - (www.bea.gov) This page provides an overview of current economic data.
9. ^ "Global Business Cycle Indicators" - (www.conference-board.org) This site produced by The Conference Board, provides business cycle indicators for 11 countries around the world.
10. ^ "Determination of the December 2008 Peak in Economic Activity" - (www.nber.org) This is a NBER recession announcement made on December 1, 2008.
11. ^ ^ "National Income and Product Accounts Table, Table 7.1., Selected Per Capita Product and Income Series in Current and Chained Dollars" - (www.bea.gov) This site provides a look at changes in GDP over any selected period of time.

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