This lesson focuses on the February 25, 2011, second estimate of U.S. real gross domestic product (real GDP) growth for the fourth quarter (Q4) of 2010, as 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.
- 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.
On September 29, 2011, the U.S. Bureau of Economic Analysis announced the third (final) estimate of U.S. real gross domestic product growth for the second quarter (April-June) of 2011. The BEA’s final estimate of 1.3 percent growth for Q2 2011 was slightly higher than the previous estimate (August) of 1.0 percent. Consumer spending and exports were more than previously estimated.
National Income and Product Accounts
Gross Domestic Product, 2nd quarter 2011 (third estimate)
Released: September 29, 2011
“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 1.3 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent.”
Read more of the September 29, 2011, BEA announcement to learn more about recent U.S. real GDP growth. Remember, the BEA releases the estimate for each quarter three times. This was the final estimate for Q2 2011.
Was the previous estimate “wrong”?
The BEA explains the difference. “The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, the increase in real GDP was 1.0 percent.”
“The increase in real GDP in the second quarter primarily reflected positive contributions from nonresidential fixed investment, personal consumption expenditures (PCE), exports, and federal government spending that were partly offset by negative contributions from state and local government spending and private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased.”
“The acceleration in real GDP in the second quarter primarily reflected a deceleration in imports, an upturn in federal government spending, and an acceleration in nonresidential fixed investment that were partly offset by a deceleration in PCE, a downturn in private inventory investment, and a deceleration in exports.”
Figure 1, below, shows graphically the U.S. quarterly real GDP growth rates from 1999 through Q2 2011. Note the real GDP negative growth in late 2008 and early 2009. This is the period that looks like the traditional definition of a recession. According to the National Bureau of Economic Research (NBER), the recession began in December, 2007, and ended in June, 2009 (http://www.nber.org/cycles.html
Can you identify the periods of recession?
Remember, the formula to determine GDP (Y) is to add personal consumption expenditures (C), net private investment (I), government spending (G) and Net exports (X).
C + I + G + X = Y
Read the full September 29, 2011, BEA announcement of U.S. real GDP growth at: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm . The BEA breaks down the quarterly growth or decline by sector - personal consumption expenditures (PCE), private investment, government spending, and net exports.
Discussion: What sectors declined in Q2 2011? What sectors grew in Q2 2011?
The BEA also breaks down the GDP data by key industry groups. Go to http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_3rd.pdf Scroll down to Table 3 to see industry group GDP data and the change for the previous quarter.
- Read gross domestic product increased 1.3 percent.
- Real personal consumption expenditures increased 0.7 percent.
- Real gross private fixed investment increased 6.4 percent
- Real exports of goods and services increased 3.6 percent.
- Government consumption expenditures/gross investment decreased 0.9 percent
Which industries in the U.S. grew in Q2 2011? Which industries declined?
What was the current-dollar GDP in Q2 2011?
“Current-dollar GDP...increased 4.0 percent, or $145.0 billion, in the second quarter to a level of just over $15 trillion. In the first quarter, current-dollar GDP increased 3.1 percent, or $112.8 billion.”
Note that the current dollar GDP estimate of 4.0 percent growth for Q2 2011 is greater than the reported real growth rate of 1.3 percent. What's the difference?
The BEA explains, “Current dollar estimates are expressed in current prices. Chained dollar (real) estimates are adjusted for inflation using the price index for gross domestic purchases.”
Current dollar GDP was $15,012,800,000 in Q2, and real GDP was $13,271,800,000. This tells us that almost $2 trillion of the growth since 1983-85 has resulted from an increase in the price level (inflation).
Can you explain the difference between nominal (constant dollar) GDP and real (current dollar GDP?
GDP Per Capita
The U.S. population was estimated to be approximately 312.3 million at the beginning of October, 2011. (http://www.census.gov/population/www/popclockus.html ) To determine the U.S. per capita (per person) GDP, simply divide the nominal (current) GDP by the population - 312 million.
What was the approximate U.S. per capita GDP in October, 2011? $15,012,800,000 divided by 312 million equals $48,118 per capita. Adjusted for inflation since 1983-85, U.S. real per capita GDP in October, 2011, was $13,271,800,000 divided by 312 million = $42,538 per capita.
Quarterly GDP Estimate Revisions
There are the revisions of the quarterly estimates made three times for each quarter. For Q2 2011, the first estimate, made in July, 2011, was a 1.3 percent rate of real GDP growth. The second monthly estimate, made in August, was a 1.0 percent growth rate. This month, the final estimate is, again, a 1.3 percent growth rate of real GDP.
The BEA explained the change: "The third estimate of the second-quarter increase in real GDP is 0.3 percentage point, or $11.3 billion, higher than the second estimate issued last month, primarily reflecting an upward revision to personal consumption expenditures, a downward revision to imports, and an upward revision to exports.”
Annual GDP Estimate Revisions
According to the BEA annual revisions to GDP estimates are made each year in order to:
Incorporate most complete and reliable source data.
Provide a more detailed picture of the economy.
Make improvements to methods used for preparing the estimates.
In August, 2011, revisions were made to 2003-2010 annual GDP data. The changes reflected new definitions of concepts or categories, changes in how the data is organized in the presentation, changes in the benchmark data, and improved methodologies. http://www.bea.gov/scb/pdf/2011/08%20August/0811_nipa_annual_article.pdf
Figure 2, below, shows the U.S. current dollar and real GDP for the years 2000 through 2010. Note the years when the GDP adjustment was significant and when the adjustment was small (compare the difference between the growth of the nominal and real GDP numbers.
Quarterly GDP data is seasonally adjusted to remove variations that normally
occur at about the same time and in about the same magnitude each year—for example, weather, holidays, and tax payment dates. After seasonal adjustment, cyclical and other short-term changes in the economy stand out more clearly. Annual data is not seasonally adjusted.
What is the BEA?
The Bureau of Economic Analysis (BEA), an agency of the U.S. Department of Commerce, “prepares national, regional, industry, and international accounts that present essential information on such key issues as economic growth, regional economic development, inter-industry relationships, and the Nation's position in the world economy.” Source: BEA Mission Statement
"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 2.8 percent in the fourth quarter of 2010, (that is, from the third quarter to the fourth quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.6 percent." (U.S. Bureau of Economic Analysis, Gross Domestic Product: Fourth Quarter 2010 (second estimate), February 25, 2011.)
The economy is growing at a modest - almost average - pace. Unfortunately, this growth has not resulted in the creation of enough new jobs to reduce the unemployment rate to anywhere near a normal level. The U.S. unemployment rate remains at 9 percent (as of January, 2011).
It is generally clear that if unemployment is high, the economy will not be producing at its full or normal output. Since people who are not working, their labor resources are not being used effectively. What is the relationship between unemployment and output?
In 1962, economist Arthur Okun theorized that there is a predictable relationship between unemployment and national output (GDP). Okun's Law correlates changes in real GDP and changes in the unemployment rate. He said that real GDP grows at about 3% per year when unemployment is normal.
For every point above 3.0 percent unemployment, the nation’s GDP decreases by 2%. And, it also works in reverse – each percentage point under 3.0 results in an additional 2 percent in GDP growth. For example, if the U.S. unemployment rate is 9.0 percent, 6.0 percent over the 3.0 average, GDP is reduced by 12 percent.
Many suggest that this historic relationship between unemployment and the “GDP gap” no longer exists – at least to the degree that Professor Okun suggested. The economy grew at a greater rate in late 2009, despite an even higher unemployment rate. The new concept is the “jobless recovery,” made possible by technology and greatly improved productivity.
Are we in a "new economy," one where the relationship between employment and output has changed?
Keep an eye on the employment and GDP data for the rest of the school year.
Short Answer Essay Question:
1. If gross domestic product increases by 10 percent over a year, are we better off? Why or why not?
The U.S. Central Intelligence Agency (CIA) “World Factbook” ranks the nations of the by various economic measures, including gross domestic product. The “top ten” nations in the current edition are listed below.
NOTE: The CIA GDP data is reported using “purchasing power parity” a process that determines the relative values of two currencies. It equates the purchasing power of various nations’ currencies and lists them as equivalent to U.S. dollars.
Rank Country Per Capita GDP Year
1 Qatar $145,300 2010 est.
2 Liechtenstein $122,100 2007 est.
3 Luxembourg $81,800 2010 est.
4 Bermuda $69,900 2004 est.
5 Norway $59,100 2010 est.
6 Singapore $57,200 2010 est.
7 Jersey $57,000 2005 est.
8 Kuwait $57,100 2010 est.
9 Brunei $50,300 2010 est.
10 United States $47,400 2010 est.
In terms of total size of GDP, the U.S. ranks second, just behind the European Union nations’ total (all estimates are 2010):
Rank Country GDP (current dollar)
1 European Union $14,890,000,000,000
2 United States $14,720,000,000,000
3 China $9,872,000,000,000
4 Japan $4,338,000,000,000
5 India $4,046,000,000,000
6 Germany $2,951,000,000,000
7 Russia $2,229,000,000,000
8 Brazil $2,194,000,000,000
9 United Kingdom $2,189,000,000,000
10 France $2,160,000,000,000
Take a look at the economic data for the world’s nations available from the CIA World Factbook. What does the data tell you about the various nations?
Choose one nation. Summarize what you perceive is that nation’s “standard of living,” according to its per capita GDP and other measures of social welfare.