This lesson focuses on the second estimate of U.S. real gross domestic product for the fourth quarter (Q4) of 2011, as reported by the U.S. Bureau of Economic Analysis (BEA) on February 29, 2012. The current data and historical GDP 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.

KEY CONCEPTS

Business Cycles, Economic Growth, Gross Domestic Product (GDP), Macroeconomic Indicators, Real Gross Domestic Product (GDP)

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.

Current Key Economic Indicators

as of May 5, 2013

Inflation

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers decreased 0.2 percent in March after increasing 0.7 percent in February. The index for all items less food and energy rose 0.1 percent in March after rising 0.2 percent in February.

Employment and Unemployment

Total nonfarm payroll employment rose by 165,000 in April, and the unemployment rate was little changed at 7.5 percent. Employment increased in professional and business services, food services and drinking places, retail trade, and health care.

Real GDP

Real gross domestic product increased at an annual rate of 2.5 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 0.4 percent.

Federal Reserve

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent...

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. GDP is measured quarterly and each quarter's data is reported over the following three months.

This lesson focuses on the BEA's second estimate of real GDP growth for the fourth quarter (Q4) of 2011 (October-December.)  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 2011-2012 school year (January-May), EconEdLink will publish four Focus on Economic Data lessons on "U.S. Real GDP Growth."  Real GDP data is announced three times for each fiscal quarter. For Q4 2011, the first estimate was made in January.  The second estimate was made in February (THIS LESSON).  The third estimate for Q4 will be made in March, 2012. 

[NOTE: GDP data reports lag the reporting period - the fiscal quarter. The current estimate is the second estimate for Q4 2011.  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 2011): How to read the data, real vs. nominal, and how the data is collected
  • February (second estimate for Q4 2011): Factors influencing the change in GDP, revisions, and seasonal adjustment
  • March (third estimate for Q4 2011): Business cycles and indicators of future growth or decline.
  • April (first estimate for Q1 2012): More details of GDP U.S. regional growth and international comparison.  Year-end summary - 2011.

MATERIALS


Key Economic Indicators

as of February 29, 2012

Inflation

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers rose 0.2 percent in January after being unchanged in December. The index for all items less food and energy rose 0.2 percent in January after increasing 0.1 percent in December.

Employment and Unemployment

Nonfarm payroll employment rose by 243,000 in January, and the unemployment rate decreased to 8.3 percent. Job growth was widespread, with large gains in professional and business services, leisure and hospitality, and manufacturing.

Real GDP

Real gross domestic product increased at an annual rate of 3.0 percent in the fourth quarter of 2011 (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 1.8 percent.

Federal Reserve

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014

PROCESS

On February 29, 2012, the U.S. Bureau of Economic Analysis announced the second estimate of U.S. real gross domestic product growth for the fourth quarter (October-December) of 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 3.0 percent in the fourth quarter of 2011 (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 1.8 percent."

Note to Teachers and Students: Unless otherwise cited, the quoted sections of this lesson are from the BEA's February 29, 2012, "Gross Domestic Product, 4th quarter 2011 and annual 2011" announcement.  http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

National Income and Product Accounts
Gross Domestic Product, 4th quarter 2011 and annual 2011 (second estimate)

Released: February 29, 2012

"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 3.0 percent in the fourth quarter of 2011 (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 1.8 percent."

"The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 2.8 percent."

Read the entire text of the February 29, 2012, BEA announcement to learn more details about recent U.S. real GDP growth. Remember, the BEA releases the estimate for each quarter three times.  This was the second estimate for Q4 2011.   The first estimate for Q4 2011 was a growth rate of 2.8 percent.  This was an upward revision of the initial Q4 real GDP growth rate. URL: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Was the First GDP Estimate for Q4 “Wrong”? 

The BEA explains the difference. "The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month."

“The "second" estimate of the fourth-quarter increase in real GDP is 0.2 percentage point, or $7.5 billion, higher than the advance estimate issued last month. The upward revision to the percent change in real GDP primarily reflected an upward revision to nonresidential fixed investment, a downward revision to imports, and an upward revision to personal consumption expenditures (PCE)."

[Note to Teachers: The second estimate for Q4 was slightly higher than the previous estimate made in January.  Ask your students if this seems to be good news.  Remind students that quarterly estimates often vary over the three reporting months.   Example: For Q3 2011, the first estimate was 2.5 percent GDP growth.  The second estimate was 2.0 percent .  The final estimate (still subject to revision) was just 1.8 percent.  You can access past GDP announcements at ' ]

[Note to Teachers:  One benchmark used to assess the "health" of the economy is the annual rate of GDP growth.  The CEE lesson "Economic Misery and Presidential Elections" uses a 3.0 percent growth rate as a determinant of an adequate growth rate that influences voters to feel good or bad about the economy and the current administration.  This is used along with the "misery Index," consisting of the unemployment and inflation rates.  See the lesson in Focus: Understanding Economics in Civics and Government , Council for Economic Education, 2009 (Order # 0662, ISBN: 978-1-56183-662-8)  Lesson 8, page 99.]

Where was the GDP growth in Q4 2011?

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

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

The biggest percentage increase in GDP for Q4 2011 was the increase in private investment - just over 20 percent.   But, since personal consumption expenditures are about 70 percent of total GDP, a smaller percentage increase in PCE may be a larger dollar increase than the bigger increase in investment.   Private investment is typically about 16 percent of GDP.  Government spending is typically about 20 percent of GDP.  Because the U.S. has consistently had a trade deficit, net exports have been a subtraction for GDP.

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 .]

[Note to Teachers:  Students should be able to identify the periods of recession during this time span.) Information on Recessions and Recoveries ]

figure1

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 February 29, 2012, BEA announcement of U.S. real GDP growth at: Real GDP Growth 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.  Recently, the BEA has highlighted the levels of inventories as factors in determining real GDP growth.

[Note to Teachers: Ask you students what sectors declined in Q4 2011.  What sectors grew in Q2 2011?  Any surprises?]

The BEA also breaks down the GDP data by key industry groups.  Go to http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp4q11_2nd.pdf .    Scroll down to the Tables to see recent industry group GDP data.  Table 2 shows the percentage increase by group.  Table 3 shows the Q4 GDP in real dollars.

  • U.S. Real gross domestic product increased 3.0 percent in Q4.
  • Real personal consumption expenditures increased 2.1 percent in Q4.
  • Real gross private fixed investment increased 20.6 percent in Q4.
  • Real Imports of goods and services increased 3.8 percent in Q4.
  • Real exports of goods and services increased 4.3 percent in Q4.
  • Government (all levels) consumption expenditures/gross investment decreased 4.4 percent in Q4.

[Note to Teachers:  Students can also look at the detailed GDP Data by Industries to identify how well the key industries in their city or region are doing.]

 What was the current-dollar GDP in Q4 2012?

"Current-dollar GDP -- the market value of the nation's output of goods and services -- increased 3.9 percent, or $144.7 billion, in the fourth quarter to a level of $15,320.8 billion. In the third quarter, current-dollar GDP increased 4.4 percent, or $163.3 billion."

$15,320,800,000

According to the U.S. Census Bureau, the U.S. resident population in December, 2011, was 312,602.730 (http://www.census.gov/popest/data/national/totals/2011/index.html ).  Given those estimates, the U.S. current dollar per capita real GDP was $49,007.62.  Per capita GDP is the total GDP divided by the population.

Current dollar GDP was $15,320,800,000 in Q4, and real GDP was $13,429.900,000.  This tells us that almost $2 trillion of the growth since 1983-85 has resulted from an increase in the price level (inflation).  The rest was "real" growth.

[Note to teachers:  Make sure your students are clear about the difference between the nominal (current dollar) GDP and the real (chained dollar) GDP measurements.]

[Note to Teachers: To compare the U.S. per capita GDP with the per capita GDPs of other nations, see the CIA World Factbook, https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html .  Remember, a high per capita GDP doesn't necessarily mean that all people in a country have high incomes or a high standard of living. In many instances, GDP figures for a nation do not accurately reflect the well-being of all individuals in that nation. If purchasing power varies among nations, the term “purchasing power parity” (PPP) is used to reflect economic data that has been adjusted by varying national price levels.]

Annual GDP Estimate Revisions

According to the BEA annual revisions to GDP estimates are made each year in order to:

  1. Incorporate most complete and reliable source data.
  2. Provide a more detailed picture of the economy.
  3. Make improvements to methods used for preparing the estimates.

Figure 2, below, shows the U.S. current dollar and real GDP for the years 2000 through 2011. 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.

figure 2

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

[Note to teachers: NIPAs (national income and product accounts) are the BEA's economic measurements that “display the value and composition of national output and the distribution of incomes generated in its production.” Source: BEA Glossary ]

2011 Annual GDP Data

"Real GDP increased 1.7 percent in 2011 (that is, from the 2010 annual level to the 2011 annual level), compared with an increase of 3.0 percent in 2010."

Note; The annual GDP figure differs slightly from the figure for Q4.  The annual figure is the amount of the change over the past 12 months.   The quarterly (three month period) amounts or changes during that 12 month period may have differed greatly.  Thus, the annual change may differ from the change reported for the end of the fourth quarter. 

"The increase in real GDP in 2011 primarily reflected positive contributions from PCE, exports, and nonresidential fixed investment that were partly offset by negative contributions from state and local government spending, private inventory investment, and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased."

"The deceleration in real GDP in 2011 primarily reflected downturns in private inventory investment and in federal government spending and a deceleration in exports that were partly offset by a deceleration in imports and an acceleration in nonresidential fixed investment."

Be careful not to look at one quarterly increase and identify a trend.  Although private investment increased significantly in Q4, investment increased just 0.4 in Q1, 1.3 percent in Q2, and 1.8 percent in Q3.

"The price index for gross domestic purchases increased 2.5 percent in 2011, compared with an increase of 1.5 percent in 2010."

"Current-dollar GDP increased 3.9 percent, or $567.9 billion, in 2011 to a level of $15,094.4 billion. In 2010, current-dollar GDP increased 4.2 percent, or $587.5 billion."

Inflation was not a significant factor in determining the dollar level of GDP in 2011, with just a 2.5 percent increase in the price level over the year.

"During 2011 (that is, measured from the fourth quarter of 2010 to the fourth quarter of 2011), real GDP increased 1.6 percent. Real GDP increased 3.1 percent during 2010. The price index for gross domestic purchases increased 2.6 percent during 2011, compared with an increase of 1.4 percent during 2010."

[Note to Teachers:  Ask your students how they feel about the health of the U.S economy.  Is it getting better?  Worse?  Is 3 percent GDP growth enough when almost 13 million Americans are still unemployed and many more are underemployed?]

ASSESSMENT ACTIVITY

Have your students click the start button below to complete an interactive quiz on the GDP lesson.


Short Answer Essay Question:

1. If gross domestic product increases by 10 percent over a year, are we better off? Why or why not?

[Possible Answer: Perhaps we are better off. Maybe not. The answer depends upon what is happening to prices and what is happening to population. If prices and population together are rising by more than 10 percent per year, than we, on average, are worse off. We have fewer goods and services per person. If the nation's real per capita GDP increases, we may be "better off."]

CONCLUSION

"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 3.0 percent in the fourth quarter of 2011..."  (U.S. Bureau of Economic Analysis, Gross Domestic Product: Fourth Quarter 2011 (second estimate, February 29, 2012.)

The economy is growing at a modest – almost an 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 over 8 percent).

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?

Okun’s Law

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 year.
 

EXTENSION ACTIVITY

The U.S. Central Intelligence Agency (CIA) “World Factbook” ranks the nations of the by various economic measures, including gross domestic product. The largest fifteen nations by GDP are listed below (rankings as of 2011).

Rank    Country                                GDP (millions of US dollars)          

1          European Union                  $15,390        
2         United States                         $15,040*                     
3         China                                      $11,300                      
4         India                                        $4,463 
5         Japan                                      $4,389                          
6         Germany                                $3,085                  
7        Russia                                    $2,373                   
8         Brazil                                       $2,284                  
9         United Kingdom                    $2,250              
10       France                                    $2,214
11        Italy                                         $1,826
12        Mexico                                   $1,651
13        South Korea                         $1,559
14        Spain                                     $1,411
15        Canada                                  $1,389

* This figure differs from the GDP data in the lesson. The CIA uses different methodology to determine GDP.   All figures are equated to U.S. dollars for comparison purposes.

In terms of total size of GDP, the U.S. ranks second, just behind the European Union nations’ total. (Estimates are for year 2011).  See the CIA "Guide to Country Comparisons " webpage.

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.