This lesson focuses on the October 30, 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 about the impact of the current level of growth on the U.S. economy and individuals.

KEY CONCEPTS

Business, Business Cycles, Economic Growth, Fiscal Policy, Macroeconomic Indicators

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

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

The BEA's mission: "The BEA produces economic accounts statistics that enable government and business decision-makers, researchers, and the American public to follow and understand the performance of the Nation's economy. To do this, the BEA collects source data, conducts research and analysis, develops and implements estimation methodologies, and disseminates statistics to the public."

Bureau of Economic Analysis announcement, October 30, 2008

"Real gross domestic product...decreased at an annual rate of 0.3 percent in the third quarter of 2008, (that is, from the second quarter to the third quarter), according to advance estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.8 percent."

You can use this lesson to better understand the health and dynamics of the U.S. economy. How do current conditions affect you, your family, community and region. What does it have to say about your goals as a consumer, worker and investor?

[Note to teachers:  In the time between the writing of the lessons and publishing them on EconEdLink, some data may be updated.  For the current data on CPI, GDP, unemployment and FOMC/FED funds rates, go to the EconEdLink Current Key Economic Indicators page.]

This lesson was written in the week prior to the 2008 presidential election.  A brief comment about the election has been included in the "conclusion" section.]

MATERIALS


Key Economic Indicators

as of October 30, 2008

Inflation

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.1 percent in September, before seasonal adjustment. The September level of 218.783 was 4.9 percent higher than in September 2007.

Employment and Unemployment

U.S. nonfarm payroll employment declined by 159,000 in September, and the unemployment rate held at 6.1 percent.

Real GDP

U.S. real gross domestic product decreased at an annual rate of 0.3 percent in the third quarter of 2008,(advance estimate). In the second quarter, real GDP increased 2.8 percent.

Federal Reserve

At its October 29 meeting, the Federal Open Market Committee decided to reduce the target for the federal funds rate by 1/2 percent (50 basis points) to 1.0 percent.

PROCESS

On October 30, 2008, the Bureau of Economic Analysis (BEA) estimated that U.S. real GDP decreased in the third quarter (Q3, July through September) of 2008. If the estimate is accurate, it means that the market value of goods and services produced by labor and property in the United States was less than in the previous quarter. This announcement is an "advance" estimate, based on source data that are "incomplete or subject to further revision by the source agency." The third-quarter "preliminary" estimates, based on more comprehensive data, was released on November 25, 2008. 

The announcement went on to breakdown some of the GDP data by sector.

Negative contributions (declines) in Q3 to the GDP included:

  • personal consumption expenditures (PCE)
  • residential fixed investment
  • equipment and software

Positive contributions (growth) in Q3 included:

  • federal government spending
  • exports
  • private inventory investment
  • nonresidential structures
  • state and local government spending

[Note to teachers: Imports, which are a subtraction in the calculation of GDP, decreased.]

The announcement specifically mentioned two industries with significant impact on Q3 GDP.

  • Final sales of computers contributed 0.06 percentage point to the third-quarter change in real GDP after contributing 0.17 percentage point to the second-quarter change.
  • Motor vehicle output contributed 0.09 percentage point to the third-quarter change in real GDP after subtracting 1.01 percentage points from the second-quarter change.

Figure 1 shows the percent change of various spending categories of GDP from the preceding quarter. Note that of the .3 percent decrease in GDP, there was a 2.25 percent decrease in personal consumption expenditures - with the largest decreases in motor vehicles and food.

 GDP Figure 1

Does this mean the U.S. is in a recession?

A recession is generally defined as two consecutive quarters of decline in real GDP. The "official' designation of a U.S. recession is made by the "Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), an independent, non-profit organization. The NBER committee considers indicators such as employment, personal income, and industrial production, as well as quarterly GDP growth.

At this point the U.S. is not in recession by either standard. This is only the first quarter of decline (as reported by the BEA) and the NBER has not officially declared a recession. It is possible that the NBER will meet in the future and declare that the U.S. was in recession at this time, if its indicators point to that conclusion.

To many, the official designation of a recession is a meaningless or "moot" point. If growth is slow, unemployment is high and business investment is slow, the economy is not healthy. When the Federal Reserve is actively pursuing an expansionary monetary policy and Congress has voted for income tax rebates to urge consumer spending, it is further evidence of problems. Are we in recession - maybe it doesn't matter.

[Note to Teachers:  For information on the NBER business cycle dating committee and official designations of U.S. recessions, go to The NBER"s Recession Dating Procedure page.

What is GDP?

The BEA defines gross domestic product as "the market value of goods and services produced by labor and property in the United States." GDP has been the standard measurement in the U.S. since 1991. Prior to 1991, the standard was gross national product, "the market value of goods and services produced by labor and property supplied by U.S. residents, regardless of where they are located."

[Note to Teachers: Definitions of terms used by the BEA are accessible at the BEA Glossary of Terms . ]

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.

Figure 2 shows the changes in U.S. GDP over the last several years. Note the "cycles " of ups and downs.

GDP Figure 2

What is "real" GDP?

Real GDP is an inflation-adjusted measurement reflecting the value of goods and services expressed in base-year prices. It is also referred to as "constant-price", "inflation-corrected," or "constant dollar" GDP. Real GDP can account for changes in the price level, and provide a more accurate figure for year-to-year comparisons.

Consider this example: In 2007, country A's nominal GDP is $200 billion. In the following year, the level of prices (inflation) is ten percent. In 2008, country A's nominal GDP is $210 billion. 10 percent nominal growth and 10 percent inflation means that there was no real growth. Country A's real GDP in 2008 is 200 billion. 

What is "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.

Which measurement is a more meaningful measurement of the health of the U.S. economy and the well-being of U.S. citizens?

  • Nominal GDP
  • Real GDP
  • Real GDP Per Capita

What is "potential" GDP?

A nations' potential or natural gross domestic product is the highest level of output that can be sustained with current productive resources. Potential GDP is limited by the supply of labor, capital equipment, natural resources, technology and management resources. If actual GDP is above potential GDP, then inflation will typically result.

Calculation of the nation's potential GDP is based on "full employment" - when all available resources are being used for the production of goods and services. You may see references to "full employment GDP" or "full employment output."

The "GDP gap" is the difference between the potential GDP and actual GDP of the nation. If GDP fall below potential over some time, it may indicate that the economy is in a recession.

Methods of Measurement

GDP can be measured in three different ways.

  • 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)
  • 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.
  • 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.

 What is 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. If new equipment simply replaces worn-out or less productive equipment, the value of the new equipment is not a real increase in output.

[Note to Teachers:  Want more information about measuring the economy?  The Bureau of Economic Analysis published an online guide titled, " Measuring the Economy : A Primer on GDP and the National Income and Product Accounts." ]

 How does a decrease in real GDP impact spending?

The BEA announcement also includes data on the price level and income. The October 30 report found that "disposable personal income decreased $102.4 billion (3.7 percent) in the third quarter, in contrast to an increase of $409.3 billion (16.7 percent) in the second. Real disposable personal income decreased 8.7 percent, in contrast to an increase of 11.9 percent." In the third quarter, consumers had fewer dollars to demand good and services.

A reversal of inflationary pressures sounds like good news, but in this time of reduced output, falling prices are of some concern. An October 31 New York Times article by Peter S. Goodman, "Fear of Deflation Lurks as Global Demand Drops," lead with this warning, "As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy — the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years."

How to Get More Information

Click on this link if you want to know more detail about the October 30 BEA GDP News Release for the Third Quarter, 2008 .

Do you want to know more about how the BEA measures and tracks GDP changes? Go to: "Measuring the Economy : A Primer on GDP and the National Income Accounts."

ASSESSMENT ACTIVITY

Discussion Questions:

 

  1. How does reduced GDP affect you? [Reduced GDP affects me because employment opportunities may be reduced, the futures of many business firms are in doubt, real incomes may decrease, foreign demand for U.S. goods and services may shrink, possible reduced investment by businesses, increased pressure on government to spend more, reduced tax revenues (and increased national debt), the cost of the continuing wars in Iraq and Afghanistan, and there are similar poor economic conditions in other world regions.]
     
  2. What kinds of policies should President Obama and Congress use to bring growth back to the U.S. economy? [In terms of fiscal policies they should consider decreasing taxes - giving consumer and/or businesses more disposable income to create demand, and also increase government spending - spending creates jobs and workers' incomes. In terms of monetary policies, they should use a stimulatory Federal Reserve policy - using open market operations, etc., to lower interest rates and provide more liquidity in the market, use policies to increase bank stability and lending - changing regulations or providing funds to provide liquidity and confidence in the banking system. In terms of "Moral Suasion" they should provide leadership and vision of a more stable economic system, more faith in the future, incentives to invest and create jobs. The president, the Federal Reserve and Congress can have these powers of influence on people's choices.]

CONCLUSION

In the fall of 2008, the United States economy has substantial economic problems - borne out by recent data announcements - decreased GDP, possible deflation, and loss of hundreds of thousands of jobs. How will this impact you?

  • Employment opportunities may be reduced.
  • The futures of many business firms are in doubt.
  • Real incomes may decrease.
  • Foreign demand for U.S. goods and services may shrink.
  • Possible reduced investment by businesses.
  • Increased pressure on government to spend more.
  • Reduced tax revenues (and increased national debt.
  • The cost of the continuing wars in Iraq and Afghanistan.
  • Similar poor economic conditions in other world regions.

On November 4, 2008, Barack Obama was elected President of the United States. He inherits these economic problems and more. He will be allied with a Democratic Party majority in both house of Congress, but not enough of a majority to prevent opposition to his policy proposals. The president and Congress have a variety of policy options available to them.

Fiscal Policies - increasing or decreasing taxes

  • increasing of decreasing government spending

 Monetary Policies - Federal Reserve open market operations, etc.

  • policies to increase bank stability and lending

Keep an eye on President Obama's economic policy proposals between now and when he takes office in January, 2009.

EXTENSION ACTIVITY

After the BEA's October 30 announcement, the media was filled with commentary and suggestions about how to respond to the shrinking output. The following is a column by Paul Krugman, who was recently awarded the 2008 Nobel Prize in Economic Sciences.

Students can respond to Krugman's suggestion that Federal Reserve rate cuts are now somewhat irrelevant and that additional fiscal policy stimulus is needed.

Student Prompt: Why does Krugman suggest that Federal Reserve monetary policy actions have not worked and that the economy needs a fiscal stimulus (tax cuts or increased government spending)?

THE KRUGMAN OP-ED COLUMN:

"When Consumers Capitulate"

By Paul Krugman

New York Times Op-Ed Page, October 31, 2008

Paul Krugman is a columnist for The New York Times Op-Ed Page and Professor of Economics and International Affairs at Princeton University. He was recently awarded the 2008 Nobel Prize in Economic Science's.

The long-feared capitulation of American consumers has arrived. According to Thursday’s G.D.P. report, real consumer spending fell at an annual rate of 3.1 percent in the third quarter; real spending on durable goods (stuff like cars and TVs) fell at an annual rate of 14 percent.

To appreciate the significance of these numbers, you need to know that American consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even for a single quarter was in 1991, and there hasn’t been a decline this steep since 1980, when the economy was suffering from a severe recession combined with double-digit inflation.

Also, these numbers are from the third quarter — the months of July, August, and September. So these data are basically telling us what happened before confidence collapsed after the fall of Lehman Brothers in mid-September, not to mention before the Dow plunged below 10,000. Nor do the data show the full effects of the sharp cutback in the availability of consumer credit, which is still under way.

So this looks like the beginning of a very big change in consumer behavior. And it couldn’t have come at a worse time.

It’s true that American consumers have long been living beyond their means. In the mid-1980s Americans saved about 10 percent of their income. Lately, however, the savings rate has generally been below 2 percent — sometimes it has even been negative — and consumer debt has risen to 98 percent of G.D.P., twice its level a quarter-century ago.

Some economists told us not to worry because Americans were offsetting their growing debt with the ever-rising values of their homes and stock portfolios. Somehow, though, we’re not hearing that argument much lately.

Sooner or later, then, consumers were going to have to pull in their belts. But the timing of the new sobriety is deeply unfortunate. One is tempted to echo St. Augustine’s plea: “Grant me chastity and continence, but not yet.” For consumers are cutting back just as the U.S. economy has fallen into a liquidity trap — a situation in which the Federal Reserve has lost its grip on the economy.

Some background: one of the high points of the semester, if you’re a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income.

In fact, consumers’ income may actually fall more than their spending, so that their attempt to save more backfires — a possibility known as the paradox of thrift.

At this point, however, the instructor hastens to explain that virtue isn’t really vice: in practice, if consumers were to cut back, the Fed would respond by slashing interest rates, which would help the economy avoid recession and lead to a rise in investment. So virtue is virtue after all, unless for some reason the Fed can’t offset the fall in consumer spending.

I’ll bet you can guess what’s coming next.

For the fact is that we are in a liquidity trap right now: Fed policy has lost most of its traction. It’s true that Ben Bernanke hasn’t yet reduced interest rates all the way to zero, as the Japanese did in the 1990s. But it’s hard to believe that cutting the federal funds rate from 1 percent to nothing would have much positive effect on the economy. In particular, the financial crisis has made Fed policy largely irrelevant for much of the private sector: The Fed has been steadily cutting away, yet mortgage rates and the interest rates many businesses pay are higher than they were early this year.

The capitulation of the American consumer, then, is coming at a particularly bad time. But it’s no use whining. What we need is a policy response.

The ongoing efforts to bail out the financial system, even if they work, won’t do more than slightly mitigate the problem. Maybe some consumers will be able to keep their credit cards, but as we’ve seen, Americans were overextended even before banks started cutting them off.

No, what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend.

Let’s hope, then, that Congress gets to work on a package to rescue the economy as soon as the election is behind us. And let’s also hope that the lame-duck Bush administration doesn’t get in the way.

[NOTE: Paul Krugman is a columnist for The New York Times Op-Ed Page and Professor of Economics and International Affairs at Princeton University. He was recently awarded the 2008 Nobel Prize in Economic Sciences.]

[Note to Teachers:  Krugman's suggestions (and those of many others) seems to echo Keynesian policies (John Maynard Keynes), to replace decreased consumer spending with government spending to create jobs and income.  Click on this link for more information about John Maynard Keynes .]