This lesson focuses on the September 26, 2008, report on Real Gross Domestic Product (Real GDP), produced 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 the impact of the current level of growth on the economy and individuals.

KEY CONCEPTS

Business, Business Cycles, Demand, Determinants of Demand, Determinants of Supply, Economic Growth, Factor Endowments, Intermediate Good, Macroeconomic Indicators, Productivity, Real vs. Nominal, Standard of Living, Supply

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.

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

This lesson focuses on the September 26, 2008, final estimates of Real Gross Domestic Product (Real GDP)for the second quarter (April-June) of 2008, produced 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 potential for a recession in the United States in late 2008.

Bureau of Economics Analysis, September 26, 2008 announcement:

Gross Domestic Product: Second Quarter 2008 (Final) "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 second quarter of 2008, (that is, from the first quarter to the second quarter), according to final estimates released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.9 percent.

The (final) GDP estimates released today are based on more complete source data than were available for the preliminary estimates issued last month. In the preliminary estimates, the increase in real GDP was 3.3 percent.

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

The acceleration in real GDP growth in the second quarter primarily reflected a larger decrease in imports than in the first quarter, an acceleration in exports, a smaller decrease in residential fixed investment, an acceleration in nonresidential structures, an upturn in state and local government spending, and an acceleration in PCE that were partly offset by larger decreases in inventory investment and in equipment and software."

MATERIALS


Key Economic Indicators

as of September 26, 2008

Inflation

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.4 percent in August, 2008, before seasonal adjustment. The August level of 219.086 was 5.4 percent higher than in August 2007.

Employment and Unemployment

The number of unemployed persons in the U.S. rose by 592,000 to 9.4 million in August, and the unemployment rate increased by 0.4 percentage point to 6.1 percent. Over the past 12 months, the number of unemployed persons has increased by 2.2 million and the unemployment rate has risen by 1.4 percentage points, with most of the increase occurring over the past 4 months.

Real GDP

U.S. real gross domestic product increased at an annual rate of 2.8 percent in the second quarter of 2008.

Federal Reserve

At its September 16 meeting, the Federal Open Market Committee decided to keep its target for the federal funds rate at 2 percent.

PROCESS

U.S. Department of Commerce, Bureau of Economic Analysis announcement, September 26, 2008.

Gross Domestic Product: Second Quarter 2008 (Final)

"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 second quarter of 2008, (that is, from the first quarter to the second quarter), according to final estimates released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.9 percent.

The GDP estimates released today are based on more complete source data than were available for the preliminary estimates issued last month. In the preliminary estimates, the increase in real GDP was 3.3 percent.

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

The acceleration in real GDP growth in the second quarter primarily reflected a larger decrease in imports than in the first quarter, an acceleration in exports, a smaller decrease in residential fixed investment, an acceleration in nonresidential structures, an upturn in state and local government spending, and an acceleration in PCE that were partly offset by larger decreases in inventory investment and in equipment and software."

Measuring the Nation's Output: Gross National Product (GNP) vs. Gross Domestic Product (GDP)

Gross National Product (GNP) measures the total value of goods and services produced by workers from a country regardless of where they produce them. GNP includes such items as corporate profits that multinational firms earn in overseas markets. If an American firm operates a plant in Mexico, the firm's profits are included in the U.S. GNP.

In comparison, Gross Domestic Product (GDP) measures the total amount of goods and services that are produced within a country's borders. The production of the American company's plant in Mexico is included in Mexico's GDP.

U.S. Output and Consumption in Q2 2008

Gross Domestic Purchases in the Second Quarter of 2008

Real gross domestic purchases, purchases by U.S. residents of goods and services wherever produced, decreased 0.1 percent in the second quarter, in contrast to an increase of 0.1 percent in the first quarter.

Gross National Product in the Second Quarter of 2008

Real gross national product increased 2.1 percent in the second quarter, compared with an increase of 0.1 percent in the first. GNP includes, and GDP excludes net receipts of income from the rest of the world, which decreased $20.2 billion in the second quarter after decreasing $22.6 billion in the first; in the second quarter, receipts decreased $23.7 billion, and payments decreased $3.6 billion.

Current Dollar or "Nominal" Gross Domestic Product in the Second Quarter 2008

Current-dollar GDP increased 4.1 percent, or $143.7 billion, in the second quarter to a level of $14,294.5 billion. In the first quarter, current-dollar GDP increased 3.5 percent, or $119.6 billion.

Real Gross Domestic Product in the Second Quarter of 2008

Real gross domestic product adjusts the measurement of output for the effects of a change in the price level (inflation or deflation.) In the second quarter, a rise in the price level reduced the reported GDP figure (4.1 percent) to the reported real GDP figure.

Real gross domestic product increased at an annual rate of 2.8 percent in the second quarter of 2008 according to the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.9 percent.

How is GDP Measured? National Income and Product Accounts (NIPAs)

Is the economy growing? How fast is the economy growing? Is it speeding up or slowing down?

The Bureau of Economic Analysis produces the national income and product accounts (NIPAs), several measurements of the growth of the economy. The primary measurement 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. It is one of the most comprehensive and closely watched economic statistics.

What does the BEA measure?

"GDP includes market production and some non-market production. GDP is composed of goods and services that are produced for sale in the 'market,' the generic term referring to the forum for economic transactions, and of non-market goods and services, those that are not sold in the market, such as the goods and services provided by the governments, services provided by nonprofit institutions serving households and housing services provided by and for persons who own and live in their home.

Not all productive activity is included in GDP. Some activities, such as the care of one's own children, unpaid volunteer work for charities, or illegal or black-market activities, are not included because they are difficult to accurately measure and value." (Source:  BEA, Measuring the Economy )

Market Prices

"Whenever possible, GDP is valued at market prices. The NIPAs value market goods and services using prices set by the market. Using market values also facilitates the analysis of the impacts on the economy of events such as the implementation of government programs or the occurrence of natural disasters.

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. Examples of imputed measures in the NIPAs include the value of compensation-in-kind (such as meals provided by employers) and the value of owner-occupied housing." (Source: BEA, Measuring the Economy )

Current Production

GDP is a measure of current production (output), 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 inventory.

Final Goods and Services

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 considering the production process for the entire economy, intermediate products, that is, goods and services that are later used as inputs in the production process are excluded, so that the measure of output is not duplicated in the total.

Methods of Measurement

GDP can be measured in three different ways.

First, GDP can be measured as the sum of expenditures, or purchases, by final users. This is known as the expenditures approach, illustrated by the formula GDP = C+I+G+X-M (Consumption + Investment + Government spending + eXports – iMports) and is used to identify the final goods and services purchased by persons, businesses, governments, and foreigners. See Table 1 for 2008 U.S. GDP by expenditure category.

U.S. GDP Second Quarter 2008 (Current Dollars, Annual Rate)

+C (Consumption)

$10,138.5 (billions)

+I (Investment) $2,000.9
+G (Government) $2,873.7
+X (Exports) $1,923.2
-M (Imports) $2,641.4
  (Net) (-718.2)
= GDP $14,294.5*

* Rounding difference = .4

Source: BEA GDP News Release Second Quarter, 2008

Second, 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.

Third, 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.

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 (50 states and the District of Columbia). 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.

GDP is a 'Gross' Measurement

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 capital needed to cover the aging, wear and tear, accidental damage, and obsolescence of existing fixed assets.

Net Domestic

Product Subtracting capital consumption (CFC) from GDP leaves 'net domestic product.'   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.

[Note to teachers: Want more information about measuring the economy? The Bureau of Economic Analysis publishes an online guide to 'Measuring the Economy: A Primer on GDP and the National Income and Product Accounts located at BEA, Measuring the Economy .]

What happens to the measurement of real GDP during a quarter?

The September 26, 2008, BEA announcement referred to the 'final' estimate of real GDP. The BEA online guide refers to the revisions as 'advance' estimates, based on source data that are incomplete or subject to further revision by the source agency, are released near the end of the first month after the end of the quarter; as more detailed and more comprehensive data become available, 'preliminary' and 'final' estimates are released near the end of the second and third months, respectively. The 'latest' estimates reflect the results of both annual and comprehensive revisions.

The components used to determine GDP include:

  • Personal Consumption (C): Durable and non-durable goods, services.
  •  Investment Spending (I): Nonresidential, residential, and business inventories
  • Government Expenditures (G): Defense, highways, schools, etc.
  • Net Exports (X): Exports are added to GDP. Imports are subtracted from GDP

Formula: GDP = C + I + G + X

Real Per Capita GDP

The meaning of GDP may be more meaningful when expressed relative to nation's population, called Real Per Capita GDP. China, for instance has a large GDP compared to most nations. But, when China's GDP is expressed 'per capita,' it is much smaller than many nations.

For example, the U.S. GDP of $14,294 billion provides about $46,040 per capita (per person). China has a GDP of $3.28 billion, which is only about $2,360 per capita. When viewed only as a total number, GDP have a very different meaning than when measured per person. China's GDP is approximately 20 percent of the U.S. GDP. China's per capita GDP is only 5-6 percent of U.S. per capita GDP.

Table 2, below, shows the nominal GDP, population and real per capita GDP of the United States, Germany, United Kingdom, Japan and China. Notice the relationship of nominal GDP to per capita GDP. China, for instance has a large GDP compared to other developing nations. But, when China's GDP is expressed 'per capita,' it is much smaller than many nations. While China's nominal GDP growth is increasing relative to the U.S., it's real per capita GDP as a measure of standard of living may not be as significant. There is a wide disparity of income between the regions of China.

GDP, Population and Per Capita GDP, Selected Nations
Reported by the World Bank, 2007

Country

Nominal GDP
(millions, US $

Population Nominal GDP
Per capita
United States

$13,811,200

301,621 $46,040
United Kingdom $2,727,802 61,034 $42,740
Germany $3,297,233 82,268 $38,860
Japan $4,387,705 127,771

 $37,670

China $3,280,053 1,319,983 $2,360
Word Total $54,347,038 6,612,040 $7,958

Source: World Bank Data Catalog

[Note to teachers: You can access economics data about all of the world's nations through the World Bank Web Site .  Click here to access National Economic Data .]

Recent U.S. GDP Data Trends

Following the 2001 recession, growth in real GDP increased by 1.6 percent in 2002, 2.5 percent in 2003, and 3.6 percent in 2004. The annual rate of growth decreased slightly to 3.1 percent in 2005 and 2.9 percent in 2006. Growth in the first quarter of 2007 was very slow, but increased over the next two quarters to 3.8 and 4.9 percent. The 0.6 percent rate of growth in the fourth quarter of 2007 and the first quarter of 2008 is the lowest since the fourth quarter of 2002.

The reports of the rates of growth over the last twelve months have been erratic, from slightly less than one percent in the first-quarter to 4.9 percent in the third quarter. 2007 ended with the slowest growth of any twelve-month period since 2002-2003. Figure 1 illustrates recent changes in US real GDP growth,1990-2008.

Figure 1

What Sectors of the U.S. Economy are Growing?

According to the September 26, 2008, BEA report:

"Final sales of computers contributed 0.17 percentage point to the second-quarter growth in real GDP after contributing 0.05 percentage point to the first-quarter growth. Motor vehicle output subtracted 1.01 percentage points from the second-quarter growth in real GDP after subtracting 0.41 percentage point from the first-quarter growth.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 4.2 percent in the second quarter, the same as in the preliminary estimate; this index increased 3.5 percent in the first quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 2.2 percent in the second quarter, the same increase as in the first quarter.

Real personal consumption expenditures increased 1.2 percent in the second quarter, compared with an increase of 0.9 percent in the first. Real nonresidential fixed investment increased 2.5 percent, compared with an increase of 2.4 percent. Nonresidential structures increased 18.5 percent, compared with an increase of 8.6 percent. Equipment and software decreased 5.0 percent, compared with a decrease of 0.6 percent. Real residential fixed investment decreased 13.3 percent, compared with a decrease of 25.1 percent.

Real exports of goods and services increased 12.3 percent in the second quarter, compared with anincrease of 5.1 percent in the first. Real imports of goods and services decreased 7.3 percent, compared with a decrease of 0.8 percent.

Real federal government consumption expenditures and gross investment increased 6.6 percent in the second quarter, compared with an increase of 5.8 percent in the first. National defense increased 7.3 percent, the same increase as in the first. Nondefense increased 5.0 percent, compared with an increase of 2.9 percent. Real state and local government consumption expenditures and gross investment increased 2.5 percent, in contrast to a decrease of 0.3 percent.

The real change in private inventories subtracted 1.50 percentage points from the second-quarter change in real GDP, after subtracting 0.02 percentage point from the first-quarter change. Private businesses decreased inventories $50.6 billion in the second quarter, following a decrease of $10.2 billion in the first quarter and a decrease of $8.1 billion in the fourth.

Real final sales of domestic product, GDP less change in private inventories, increased 4.4 percent in the second quarter, compared with an increase of 0.9 percent in the first."

Why are Changes in Real Gross Domestic Product Important?

The measurement of the production of goods and services produced each year allows us to evaluate our monetary and fiscal policies, our investment and saving patterns, the quality of our technological advances, and our material well-being. Changes in real GDP per capita provide our best measures of changes in our material "standards of living."

While rates of inflation and unemployment and changes in our income distribution provide us additional measures of the successes and weaknesses of our economy, none is a more important indicator of our economy's health than rates of change in real GDP.

Changes in real GDP are discussed in the press and on the nightly news after every monthly announcement of the latest quarter's data or revision. This current increase in real GDP will be discussed in news reports as a positive sign of the strength of the current economy.

Real GDP trends are prominently included in discussions of potential slowdowns and economic booms. They are featured in many discussions of trends in stock prices. Economic commentators use decreases in real GDP as indicators of recessions. A popular definition of a recession is at least two consecutive quarters of declining real GDP.

Long-term Trends

Economic growth, as measured by average annual changes in real GDP, averaged 4.4 percent in the 1960s. Average rates of growth decreased during the 1970s (3.3%), the 1980s (3.0%), and the first half of the 1990s (2.2%). In the last five years of the 1990s, the rate of growth in real UGDP increased to 3.8 percent, with the last three years of the 1990s being at or over 4.1 percent per year. Growth slowed in the beginning of the 2000s, but rebounded and averaged 3.5 percent on an annual basis. for the 2003 through 2006 period. The rate of growth declined in 2007.

The upward trend in economic growth over the past decade has been accompanied by increases in the rates of growth of consumption spending, investment spending, and exports. Productivity increases, expansions in the labor force, decreases in unemployment, and increases in the amount of capital have allowed real GDP to grow at the faster rates. Figure 2 shows the history of growth since the 1970s. Figure 2 also shows the average annual rate of growth of 3.1 percent since 1970. Note the recent downturn in the growth rate.

Figure 2

The longer run rate of growth of 3.1 percent has most recently been caused by a 1 percent increase in the number of people working and about a 2 percent increase in productivity of each worker. During the periods prior to the 1990s, the productivity increase contribution was slightly less than 2 percent and the labor force growth part slightly higher than 1 percent. What is the relationship between GDP, Employment and Unemployment?

Full Employment Real GDP

Economists define the approximate unemployment rate at which there are not upward or downward pressures on wages and price as "full employment" rate of unemployment. If unemployment falls to level below the full employment rate, there will be upward pressure on wages and prices. If unemployment rises to a very high rate, there will downward pressure on wages and prices or wages and prices will remain steady. In the middle is a level, or more likely a range, where there is not pressure on wages and prices to rise or fall.

The level of real GDP that can be produced at that rate of unemployment is described at the full employment level of real GDP. Sometimes it is described as the potential level of real GDP. It is the highest level that an economy can produce at any given time without causing significant inflation.

The potential output or potential gross domestic product of a nation is the highest level of real GDP output that can be achieved with the nation's productive resources. One constraint on output is the level of employment. If the nation's economy is at its full potential, the unemployment rate is the NAIRU or the 'natural rate of unemployment.' Unemployment above this natural level will reduce output.

The relationship of unemployment and GDP growth is often identified by the statistical relationship known as 'Okun’s law.' Developed by economist Arthur Okun in 1962, the 'law' relates a decrease in the unemployment rate to increases in output growth and an increase in the unemployment rate to a decrease in output.

Professor Okun theorized that a 1 percentage point decline in the unemployment rate was, on average, associated with additional output growth of about 3 percentage points. Of course, the opposite is also true. An increase in unemployment reflects a decrease in GDP. Okun’s law is now commonly stated that a 1 percentage point decrease in the unemployment rate means additional output growth of about 2 percent.

Look at past and watch for the future EconEdLink lessons on employment and GDP to track this relationship.

How can we stimulate growth?

Economic Policy Options

There are two type of policies government can use to stimulate the economy (or slow it down). Policy actions to stimulate growth are referred to a 'expansionary' policies. Policy actions to slow the economy are referred to a 'contractionary' policies.

Monetary Policies

Monetary policies are those that influence the supply of money or interest rates in the economy. These policies are tools of the Federal Reserve System. The Federal Reserve determines policies through the Federal Open Market Committee (FOMC).

The FOMC holds eight regularly scheduled meetings per year. At these meetings, the Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth. The FOMC has kept the federal funds rate steady at 2.0 percent for the last three meetings.

  • Open Market Operations- the buying or selling of government securities in the 'open market.' This implements the strategy to set the federal funds rate.
  • Discount Rate- the interest rate charged by the Federal Reserve Banks to member banks.
  • Reserve Requirements- The percentage of deposits banks must keep on reserve in their vaults or in accounts in the federal Reserve Banks. A banks ability to make loans is increases when it has more excess reserves.

A Note on the Federal Funds Rate

In the news, you will read that the Federal Reserve has set a target for the federal funds rate or desired quantity of reserves.

Using its monetary policy tools, the Federal Reserve can influence the demand and supply of balances that depository institutions hold at Federal Reserve Banks. This will alter the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.

Changes in the federal funds rate affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services.

Fiscal Policies

  • Fiscal policies are the use of government revenues (spending or taxes) to expand or contract the economy. -
  • Spending- The Federal government can increase spending to stimulate the economy or decrease spending to slow it down.*
  • Taxes- The federal government can increase taxes to slow the economy or decrease taxes to stimulate the economy.

The 2008 federal tax rebate "economics stimulus" program was intended to increase consumer spending that, in turn, would stimulate employment and output. It is too early to tell if the program achieved it's desired effect.

What Can be done?

In a time when the economy is slow, the Federal Reserve can:

  • Buy securities to expand the money supply
  • Lower the discount rate to increase banks' excess reserves
  • Decrease reserve requirements to increase banks' excess reserves

The federal government can:

  • Spend more money to increase aggregate demand and create jobs
  • Lower taxes to leave more money in the hands of people or businesses to spend

ASSESSMENT ACTIVITY

Use the this economic data to complete the following questions.

  • Consumption spending $7,000 (billions)
  • Social security payments $500
  • Income tax receipts $1,000
  • Exports $1,100 Business purchases of new factories and equipment and changes in inventories $1,800
  • Federal government spending on goods and services $550
  • Construction of new homes $200
  • State and local spending on goods and services $1,300
  • Changes in inventories $-300
  • Imports $1,500 Wages $6,000

Answer the following questions based on this economic data ($ billions).

1. Given the data ($ billions) what is the level of government spending in the calculation of GDP?

[Government spending equals $1,850, $550 plus $1,300. Government spending is equal to the sum of federal spending on goods and services and state and local spending on goods and services. Social security payments are transfers of income from tax payers to social security recipients and do not represent the production of goods and services.]

2. What is the level of investment?

[Investment equals $1,700 $1,800 + 200 - 300. New factories and equipment and construction of new homes are included in investment. However, since business inventories fell, we subtract $300 billion from investment in structures, equipment, and residential housing to get the investment portion of GDP.]

3. What is the level of net exports?

[Net exports equal a minus $400, $1,100 - 1,500. Net exports are exports minus imports. In this case, the economy has a balance of trade deficit.]

4. Calculate the gross domestic product.

[GDP equals $10,150 billion ($7,000 + 1,850 + 1,700 - 400). GDP equals consumption spending plus government spending on goods and services plus investment spending plus net exports.]

5. If GDP has increased by 4 percent and inflation is 1 percent, what has happened to real GDP?

[If nominal GDP has increased by 4 percent and inflation was 1 percent, the amount of output has increased by 3 percent. The remaining (after inflation) increase in nominal GDP must be due to real output increases.]

6. If GDP increases by 5 percent and real GDP increased by 4 percent, what has happened to the average price level?

[If nominal GDP increases by 5 percent and the amount of output increases by 4 percent, then prices must have increased by 1 percent.]

7. If productivity rise by less than real GDP, what is likely to have happened to employment?

a. Increase - CORRECT
b. Decrease
c. Cannot determine

[Because output increased by more than the output per worker, it must take more workers to produce the increased output.]

8. If real GDP increased by 4 percent and employment increased by 3 percent, what is likely to have happened to productivity?

[Increase. If real GDP increases by more than the rate of increase in the number of workers, than output per worker must have increased.]

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

[Perhaps we are better off. Part of 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.]

10. If consumers begin to purchase automobiles manufactured abroad instead of those manufactured in the U.S., what will happen to real GDP? Will the answer be different if consumers are simply increasing their spending and those purchases are of automobiles manufactured abroad?

[Consumption spending will remain the same; however, imports will increase. Real GDP in the U.S. will decrease. In the second instance, consumption spending increased, but imports increased by an equal amount. Real GDP does not change. The components do change.]

CONCLUSION

NOTE: At the time this focus on economic data was written, the U.S. financial markets were in turmoil. Uncertainty over the value of large quantities of mortgage-backed securities and other assets have frozen credit markets. A rise in unemployment, high energy prices and other economic data presented a bleak picture of the immediate future of the U.S. economy possibly a recession. Congress was debating a $700 billion emergency "bailout" plan to stabilize financial markets.

Recession?

Although real gross domestic product growth has been somewhat positive, many economists have argued that the U.S has been in a recession (generally, two quarters of negative GDP growth) or has just begun a recession. The technical definition of a recession is determined by the National Bureau of Economic Research (NBER). The NBER Business Cycle Dating Committee determines and reports on U.S. business cycles. The NBER identifies the dates of peaks and troughs that identify economic recessions or expansions.

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 real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.'

To identify trends, the NBER committee looks closely at two monthly measures of economic activity:

Personal income less transfer payments, in real term, employment. In addition, the committee looks at two indicators of manufacturing and goods:

Industrial production, the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. How Can We Increase Economic Growth Over Time?

Economic growth is a function of the technological innovation and the amount and quality of labor and capital in the economy. As more people are employed, the amount of capital increases, education levels increase, the quality of capital changes, or the technology increases, the productive capacity of the economy increases. Therefore, the economy can increase its output giving consumers more disposable income, promoting an increase in consumption spending, and providing resources for business to use for further investment and government to use to provide public goods and services.

Increased labor force participation increases output. Expanded, improved education creates more productive workers. Business and government spending on research and development enhance our abilities to produce and allow each worker to become more productive, increasing incomes for all.

To achieve a higher level of GDP in the future, consumers should limit consumption spending and increase savings, permitting businesses to invest more in capital goods. If resources are invested into building an economy now, future generations will enjoy a higher level of economic growth; our businesses will produce more goods and consumers can purchase more goods. Expansion of output at rates faster than our population growth is what gives us the opportunity to enjoy higher standards of living.

Ask students to identify signs they see that growth will slow or become negative. [The signs can be: falling housing prices; higher unemployment; reduced investment; government policies to stimulate growth; changes in consumer behavior.]

Are there signs that there is growth in some sectors of the economy? [Answers will vary. In some areas, commercial construction continues. Prices are increasing - normally not a feature of a slowing economy - but may be a result of global demand for commodities (oil, grains, metals).]

EXTENSION ACTIVITY

Go to the BEA News Release: Gross Domestic Product (GDP) by State , 2007 (released June 5, 2008)

The report states that economic growth slowed in most states and regions of the U.S. in 2007. Real GDP growth slowed in 36 states, with declines in construction and finance and insurance restraining growth in many states. Nationally, real economic growth slowed from 3.1 percent in 2006 to 2.0 percent in 2007, one percentage point below the average growth of 3.0 percent for 2002–2006.

Compare the growth of GDP in your state to neighboring states?

Did your state do better or worse than neighboring states?

Did your region do better or worse than other regions?

How do you think your state and region has done since these data were released?