INTRODUCTION

Each month, the Bureau of Economic Analysis (BEA), an agency of the U.S. Department of Commerce, releases an estimate of the level and growth of U.S. gross domestic product (GDP), the output of goods and services produced by labor and property located in the United States. This "Focus on Economic Data" lesson focuses on the BEA “preliminary” estimates released February 27, 2009, for the fourth quarter (October, November and December) of 2008.

Understanding the level and rate of growth of the economy's output (GDP) helps to better understand employment trends, the health of businesses, and consumer well-being.

[Note that the GDP data reports lag the reporting period. Each of the three announcements for a quarter will include more comprehensive data and may modify the growth rate reported earlier.]

TASK

  • Identify the rate of real GDP growth in the U.S. in the fourth quarter of 2008.
  • Analyze and compare various measurements of growth, including GDP.
  • Identify the factors that influenced the rate of GDP growth in the fourth quarter of 2008.
  • Describe how the rate of GDP growth impacts individuals, families, and different groups in the economy.

PROCESS

The United States is in the middle (Or, Is it the beginning? Or, is it toward the end?) of a recession that began in December, 2007. The National Bureau of Economic Research "Business Cycle Dating Committee" declared that economic conditions at that time warranted the designation of a peak in economic activity (a recession). Although the U.S. economy had not yet met the generally accepted criteria of negative growth for two consecutive quarters, conditions at the time seemed to be leading to the GDP declines in 2008. In 2008, unemployment increased significantly and the crisis in financial and credit markets was taking its toll.

NBER Recession Announcement: "Determination of the December 2007 Peak in Economic Activity "

The February 27, 2009, BEA announcement of the Gross Domestic Product: Fourth Quarter 2008 (Preliminary) supports the NBER's designation of a recession:

"Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 6.2 percent in the fourth quarter of 2008, (that is, from the third quarter to the fourth quarter), according to preliminary estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP decreased 0.5 percent. The GDP estimates released today are based on more complete source data than were available for the advance estimates issued last month. In the advance estimates, the decrease in real GDP was 3.8 percent."

The February 27 estimate of a 6.2 percent decline was almost double the previous Q4 2008 estimate released in January. This points out the importance of the BEA's practice of revising the quarterly GDP data over three monthly reports based on additional data and more complete information. In this case, the revision was significantly greater than previous quarterly revisions.

The BEA announcement highlighted some of the significant factors impacting the rew Q4 data:

"The decrease in real GDP in the fourth quarter primarily reflected negative contributions from exports, personal consumption expenditures, equipment and software, and residential fixed investment that were partly offset by a positive contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, decreased."

"Most of the major components contributed to the much larger decrease in real GDP in the fourth quarter than in the third. The largest contributors were a downturn in exports and a much larger decrease in equipment and software. The most notable offset was a much larger decrease in imports."

"Final sales of computers subtracted 0.01 percentage point from the fourth-quarter change in real GDP, the same contribution as in the third quarter. Motor vehicle output subtracted 2.04 percentage points from the fourth-quarter change in real GDP after adding 0.16 percentage point to the third-quarter change."


Note from the BEA: "Quarterly estimates are expressed at seasonally adjusted annual rates, unless otherwise specified. Quarter-to-quarter dollar changes are differences between these published estimates. Percent changes are calculated from unrounded data and are annualized. “Real” estimates are in chained (2000) dollars. Price indexes are chain-type measures."

"The price index for gross domestic purchases, which measures prices paid by U.S. residents, decreased 4.1 percent in the fourth quarter, 0.5 percentage point less of a decrease than in the advance estimate; this index increased 4.5 percent in the third quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 1.1 percent in the fourth quarter, compared with an increase of 2.8 percent in the third."


The determination of real GDP from the current dollar GDP was impacted by a drop in the price level - as measured by the price index for gross domestic product. During the quarter, the price level declined. The reported change in the measurement of output produced at the lower price level has to be increased to reflect constant prices.

This illustrates the difference between nominal (current dollar) and real (constant dollar) GDP. In a period of inflation, the nominal GDP figure may overstate the level of output. It may be that the same number of goods were produced, but at higher prices. Thus, the basic GDP measurement, number of goods times their prices, would show a bigger GDP number. In this case, the price level dropped. Even if the same number of goods and services had been produced, the nominal GDP measurement would have decreased. The change in GDP measurement has to be adjusted upward to represent constant prices.

Q4 Current-dollar GDP (from the February 27 BEA announcement)

"Current-dollar GDP -- the market value of the nation's output of goods and services -- decreased 5.8 percent, or $212.5 billion, in the fourth quarter to a level of $14,200.3 billion. In the third quarter, current-dollar GDP increased 3.4 percent, or $118.3 billion."

Revisions from the "Advance" to "Preliminary" Estimates for Q4

The preliminary estimate of the fourth-quarter change in real GDP is 2.4 percentage points, or $74.4 billion, lower than the advance estimate issued last month. The downward revision to the percent change in real GDP was widespread; the largest contributors were downward revisions to private inventory investment, to exports, and to personal consumption expenditures for nondurable goods."

Advance and Preliminary Estimates
(Percent change from preceding quarter)
Advance Preliminary Difference
Real GDP -3.8 -6.2 2.4
Current Dollar GDP -4.1 -5.8 1.7
Gross Domestic Purchases Price Index -4.6 -4.1 .5

Recent Nominal (current dollar) and Real (constant dollar) U.S. GDP Growth

The chart below shows U.S. GDP growth from 2000 through 2008. Notice that the annual rates of change of GDP, both nominal and real, vary greatly. Growth slowed in 2001 and 2002 and gradually increased through 2004, then levelling off through 2006. Slow declines in 2007 and early 2008 led to the sharp downturn that resulted in the current recession.

Of course, the decline in 2008 cannot be simply compared to previous business cycle declines. In 2008, falling housing prices (the bursting of the housing bubble) and frozen credit markets contributed significantly to the steep decline in economic activity and increased unemployment in Q4.

Year Current GDP Percent Change Real GDP Percent Change

2000

9,817.0

5.9

9,817.0

3.7

2001

10,128.0

3.2

9,890.7

0.8

2002

10,469.6

3.4

10,048.8

1.6

2003

10,960.8

4.7

10,301.0

2.5

2004

11,685.9

6.6

10,675.8

3.6

2005

12,421.9

6.3

10,989.5

2.9

2006

13,178.4

6.1

11,294.8

2.8

2007

13,807.5

4.8

11,523.9

2.0

2008

14,200.3

3.3

11,525.0

1.1

It is important to note that although there was a large drop in output in Q4, the GDP growth for all of 2008 was still positive, a 1.1 percent increase. If there is another revision of the Q4 data in the final estimate in March, 2009, the whole year may be revised downwrd to a negative growth figure. This means that most (all but 1.1 percent) of the real U.S. GDP growth in the first nine months of 2008 was offset by the decline in Q4.

Figure 1 shows the U.S. real GDP changes since 1080. Note the "business cycles" of growth and decline.

 

GDP Figure 1

 

How Do We Measuring Output? (Summarized from BEA Publications)

The most common method of measurement of gross domestic product (GDP) is the sum of personal consumption expenditures, gross private domestic investment, government consumption expenditures and gross investment, and net exports of goods and services. This is known as the “expenditures” or “product side” approach to measuring GDP.

Another way to measure GDP is as the sum of the charges generated in the production of the final goods and services. Because the market price of a final good or service reflects all the charges associated with producing that good or service, an “income-side” measure of output, gross domestic income (GDI), can be derived as the sum of the charges against production. Specifically, GDI is measured as the sum of compensation of employees (the return to labor), taxes on production less subsidies (a nonincome charge against production), net operating surplus (the net return to capital and entrepreneurship), and consumption of fixed capital (the using up of capital).

In theory, GDP and GDI are equal. In practice, the differences in the data used to derive the two measures lead to a discrepancy. This “statistical discrepancy” is defined in the NIPAs as GDP less GDI. Because the source data used to derive product-side measures of output are based on more comprehensive surveys and censuses, BEA considers them more reliable. Therefore, the statistical discrepancy appears as a component on the income side of the account.

Another way to measure output used by BEA is known as the “value added” approach. In these accounts, value added is defined as the difference between an industry’s total output—that is, its sales plus the change in inventories arising from production — and its intermediate purchases from other industries. When value added is aggregated across all industries in the economy, industry sales to and purchases from each other cancel out, and the remainder is industry sales to final users, or GDP.

What About Gross National Product?

Beginning in 1991, the BEA began using gross domestic product (GDP), rather than gross national product (GNP), as the primary measurement of U.S. production. This change recognized that GDP is more appropriate for many purposes for which an aggregate measure of the Nation’s production is used.

How do GDP and GNP differ?

Both GDP and GNP are defined in terms of goods and services produced, but they use different criteria for coverage. GDP covers the goods and services produced by labor and property located in the United States. As long as the labor and property are located in the United States, the suppliers (that is, the workers and, for property, the owners) may be either U.S. residents or residents of the rest of the world. GNP covers the goods and services produced by labor and property supplied by U.S. residents. As long as the labor and property are supplied by U.S. residents, they may be located either in the United States or abroad.

To change the measurement from GNP to GDP one must subtract income from foreigners, which represent the goods and services produced abroad using the labor and property supplied by U.S. residents, and add factor income payments to foreigners, which represent the goods and services produced in the United States using the labor and property supplied by foreigners. Factor incomes are measured as compensation of employees, corporate profits and net interest.

Why Focus on GDP?

GDP refers to production taking place in the United States. It is, therefore, the appropriate measure for much of the short-term monitoring and analysis of the U.S. economy. In particular, GDP is consistent in coverage with indicators such as employment, productivity, industry output, and investment in equipment and structures.

In addition, the use of GDP facilitates comparisons of economic activity in the United States with that in other countries. GDP is the primary measure of production in the System of National Accounts, the set of international guidelines for economic accounting that the U.S. economic accounts began using in the 1990’s. In addition, GNP is better than GDP for analyses that focus on the availability of resources, such as the nation’s ability to finance expenditures on education.

How much do the estimates of GDP and GNP differ?

For the United States, the dollar levels of GDP and GNP differ little—that is, the net receipts (receipts from foreigners less payments to foreigners) of factor income have been small (tables 1 and 2). The main reason is that the value of the property owned abroad by U.S. residents (U.S. investment abroad) less the value of the property owned by foreigners in the United States (foreign investment in the United States) has been small relative to the size of the U.S. economy. In some countries, the difference between GDP and GNP is much larger. For example, there is much more foreign investment in Canada than Canadian divestment abroad; consequently, its GNP was 3.6 percent smaller than its GDP in 1990. However, the difference in France, Japan, the United Kingdom, and several other industrialized countries is now similar, at 1 percent or less, to that in the United States.

Real GDP

The BEA reports the level and growth rate of "current" GDP, expressed in the current prices in the period being measured - Q4 in this announcement. This is also referred to as "nominal GDP." To factor out the effect of inflation, growth in the dollar amount that does not reflect additional output or "real" growth, GDP can be adjusted for inflation to result in real GDP. To factor out inflation, the growth rate is "chained" to prices in a base year. Calculating real GDP growth allows economists and planners to determine if production actually increased or decreased, without the impact of a change in the purchasing power of the dollar. If GDP increased by five percent and the rate of inflation was also five percent, "real" GDP growth was actually zero.

Per Capita Real GDP

Even real GDP doesn’t adequately measure what happened to each individual's share of the economic output. A more meaningful measurement for individuals may be “per capita real GDP,” or the real GDP divided by the nation's population. Given that the U.S. population has increased, the decline in per capita real GDP was actually greater than the reported 3.8 percent decline in real GDP. If the U.S. population increased by 1.2 percent over the past year, the actual decline in per capita real GDP was about 5 percent. Per capita real GDP reached a high of $38,413 in Q3 2008 and is now slightly less than $38,000 (Q4).

Q4 GDP by Expenditure Component (from the BEA Announcement)

Using the more typical expenditure approach to determine GDP, there are four component groups

GDP = C + I + G + X

C = Real personal consumption expenditures
I = Real residential and nonresidential fixed investment
G = Real federal government consumption expenditures and gross investment
X = net exports(imports minus exports)

  • Real personal consumption expenditures decreased 4.3 percent in the fourth quarter, compared with a decrease of 3.8 percent in the third.
     
  • Real nonresidential fixed investment decreased 21.1 percent, compared with a decrease of 1.7 percent. Nonresidential structures decreased 5.9 percent, in contrast to an increase of 9.7 percent. Equipment and software decreased 28.8 percent, compared with a decrease of 7.5 percent.
     
  • Real residential fixed investment decreased 22.2 percent, compared with a decrease of 16.0 percent.
     
  • Real exports of goods and services decreased 23.6 percent in the fourth quarter, in contrast to an increase of 3.0 percent in the third.
     
  • Real imports of goods and services decreased 16.0 percent, compared with a decrease of 3.5 percent.
  • Real federal government consumption expenditures and gross investment increased 6.7 percent in the fourth quarter, compared with an increase of 13.8 percent in the third. National defense increased 3.1 percent, compared with an increase of 18.0 percent. Nondefense increased 15.1 percent, compared with an increase of 5.1 percent. Real state and local government consumption expenditures and gross investment decreased 1.4 percent, in contrast to an increase of 1.3 percent.

For a complete and detailed breakdown of the Q4 data by sector, go the BEA News Release of the Preliminary Estimate of U.S. GDP, Fourth Quarter, 2008 .

Gross Domestic Product, Gross National Product, and National Income, Q4 2008 (preliminary)
Gross Domestic Product 14,200.3
     Plus: Income receipts from the rest of the world 815.6
     Less: Income payments to the rest of the world 688.7
Equals: Gross National Product 14,539.6
     Less: Consumption of fixed capital 1,849.8
     Less: Statistical discrepancy 150.2
Equals: National Income 12,491.4

CONCLUSION

U.S. real gross domestic product, the output of goods and services produced by labor and property located in the United States, decreased at an annual rate of 6.2 percent in the fourth quarter of 2008, This fall in real GDP confirmed the "recession" that was declared by the NBER in December, 2008. Only government spending contributed positively to the change in real GDP for the quarter.

The revised (downward) Q4 real GDP data, along with a significant increase in unemployment shows that the U.S. economy has slowed over the last year. This news, along with the continuing problems in financial and credit markets, most economists suggest that the health of the economy may worsen in the first quarter of 2009. Remember, the 2008 Q4 data will be again revised in March 2009 and may show an even greater decline.

Economic Stimulus - Fighting the Recession

On February 17, 2009, President Obama the $787 billion U.S. economic stimulus plan in Denver, after approval by Congress. He called it, "the most sweeping recovery package in our history". The plan is intended to save or create 3.5 million jobs, boost consumer spending and rebuild U.S. infrastructure. The legislation will begin the flow of federal money toward infrastructure projects, health care, renewable energy development and conservation programs. It includes 36% in tax breaks and 64% in spending. Major components of the stimulus plan include:

  • $240 billion - tax breaks for individuals and businesses
  • $140 billion for health care
  • $100 billion for education
  • $48 billion for transportation projects

ASSESSMENT ACTIVITY

Next, answer the question below on the interactive notepad.

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 “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.

Rank Country Per Capita GDP

  1. Liechtenstein $118,000 (2007 est.)
  2. Qatar $101,000 (2008 est.)
  3. Luxembourg $85,100 (2008 est.)
  4. Bermuda $69,900 (2004 est.)
  5. Kuwait $60,800 (2008 est.)
  6. Norway $57,500 (2008 est.)
  7. Jersey $57,000 (2005 est.)
  8. Brunei $54,100 (2008 est.)
  9. Singapore $52,000 (2008 est.)
  10. United States $48,000 (2008 est.)  

In terms of total size of GDP, the U.S. ranks second, just behind the European Union nations’ total

  1. European Union $14,960,000,000,000 (2008 est.)
  2. China $7,800,000,000,000 (2008 est.)
  3. Japan $4,487,000,000,000 (2008 est.)
  4. India $3,319,000,000,000 (2008 est.)
  5. Germany $2,863,000,000,000 (2008 est.)
  6. United Kingdom $2,281,000,000,000 (2008 est.)
  7. Russia $2,225,000,000,000 (2008 est.)
  8. France $2,097,000,000,000 (2008 est.)
  9. Brazil $2,030,000,000,000 (2008 est.)  

Take a look at the economic data for the world’s nations that is 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.