This lesson focuses on the September 30, 2009, third estimate of U.S. real gross domestic product (Real GDP) for the second quarter of 2009, reported by the U.S. Bureau of Economic Analysis (BEA). The current data and historical data are explained. The meaning of GDP and potential impacts of changes of GDP are explored. This lesson will also raise questions about the impact of the current level of growth on the U.S. economy and individuals.
Aggregate Demand (AD), Aggregate Supply (AS), Business Cycles, Economic Growth, Gross Domestic Product (GDP), Macroeconomic Indicators, Nominal Gross Domestic Product (GDP), Per Capita Gross Domestic Product (GDP), Real Gross Domestic Product (GDP)
- 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 Indicatorsas of May 5, 2013
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.
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 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.
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...
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 lesson focuses on the BEA's "third estimate" of real GDP released on September 30, 2009, for the second quarter (April, May and June) of 2009. 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 first half of the 2009-2010 school year (September-December), 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 Q3 2009, the first estimate is made in October, the second estimate is made in November, and the third estimate for Q3 is made in December.
Note that the GDP data reports lag the reporting period - fiscal quarter. The current estimate is for Q2 (April-June, 2009). 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:
- September (third estimate for Q2 2009): How to read the data, real vs. nominal, and how the data is collected
- October (first estimate for Q3 2009): Factors influencing the change in GDP, revisions, and seasonal adjustments
- November (second estimate for Q3 2009): Business cycles and indicators of future growth (decline)
- December (third estimate for Q3 2009): Year-end summary and GDP-related current issues
BEA Third Estimate US GDP 2nd Quarter 2009: This website is the news release of the third estimate of U.S. gross domestic product for the second quarter, 2009.
Measuring the Economy: A Primer on GDP and the National Income and Product Accounts: This BEA article introduces new users to the basics of U.S. national income and product accounts.
Taking the Pulse of the Economy: Measuring GDP: This article discusses the importance of measuring GDP.
Overview of the U.S. Economy: Perspective from the BEA Accounts: This page provides an overview of current economic data.
Global Business Cycle Indicators: This site produced by The Conference Board, provides business cycle indicators for 11 countries around the world.
Determination of the December 2008 Peak in Economic Activity: This is a NBER recession announcement made on December 1, 2008.
Nominal GDP: This page provides an accurate description of Nominal GDP.
Real GDP: This page provides an accurate description of Real GDP.
Price Indexes: This page provides an accurate description of Price Indexes.
Market Basket: This page provides an accurate description of a Market Basket.
Assessment Activity: This interactive quiz tests students' understanding of the GDP lesson.
Net Corporate Dividend Payments by Industry: This table allows the reader to look at net corporate dividends over any selected period of time.
Key Economic Indicatorsas of October 2, 2009
The U.S. Consumer Price Index for all Urban Consumers (CPI-U) rose 0.4 percent in August, 2009. The index has decreased 1.5 percent over the last 12 months on a not seasonally adjusted basis.
U.S. nonfarm payroll employment declined by 263,000 jobs in September and the U.S. unemployment rate increased to 9.8 percent. The largest job losses were in construction, manufacturing, retail trade, and government.
U.S Real gross domestic product decreased at an annual rate of 0.7 percent in the second quarter of 2009. In the first quarter of 2009, real GDP decreased 6.4 percent.
The Federal Reserve's Federal Open Market Committee maintained the target range for the federal funds rate at 0 to 1/4 percent.
Bureau of Economics Analysis: Gross Domestic Product: Second Quarter 2009 (Third Estimate)
Announcement date: September 30, 2009
"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 0.7 percent in the second quarter of 2009, (that is, from the first quarter to the second quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP decreased 6.4 percent."
Real GDP decreased at an annual rate of 0.7 percent in April, May and June. Does this mean that our real GDP is still decreasing? Not necessarily. GDP figures are reported three times monthly after the reporting period - in this case, three months later. Because these estimates lag the current period, they may not accurately reflect current conditions. As a matter of fact, the "third" estimate reported in September was a smaller loss than the "second" estimate of -1.0 percent for Q2 reported in August. The BEA announcement explains the change.
"The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, the decrease in real GDP was 1.0 percent."
The report commented on the GDP data by sector:
The decrease in real GDP in the second quarter primarily reflected negative contributions from private inventory investment, nonresidential fixed investment, residential fixed investment, personal consumption expenditures (PCE), and exports that were partly offset by positive contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased."
The BEA report then commented on the changes from the second to the third estimates for Q2 2009.
"The much smaller decrease in real GDP in the second quarter than in the first primarily reflected much smaller decreases in nonresidential fixed investment and in exports, an upturn in federal government spending, a smaller decrease in private inventory investment, an upturn in state and local government spending, and a smaller decrease in residential fixed investment that were partly offset by a much smaller decrease in imports and a downturn in PCE."
The 2008-2009 Recession
In December 2008, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) declared that a recession had begun in the U.S. economy in December 2007. At that time, U.S. output had slowed considerably from the previous quarters. More serious slowing (negative growth) accelerated in Q4 of 2008. Although the NBER's declaration that a recession had begun did not fit the commonly held definition of a recession - two consecutive quarters or negative or no growth - overall economic conditions had deteriorated enough for the NBER to make the decision that a recession had begun. The Q3 and Q4 GDP data bears out the NBER's decision to call a business cycle peak and the beginning of a recession. In addition, the U.S. unemployment rate doubled between January 2008 and August 2009 (4.9 percent to 9.8 percent.
Figure 1 shows the rates of change of real GDP from 2007 to the present. If you refer back to the real GDP data reported in January of 2009 (January 30, 2009) "Focus on Economic Data" Lesson), you will see that these figures have been adjusted by the BEA to reflect slower growth in 2007 than had been reported earlier. According to the BEA revised data, the real decline - negative growth - began in Q1 of 2008. The third estimate for Q2 of 2009 shows a dramatic reversal from the trend of bigger decreases in 2008 and Q1 of 2009.
|Figure 1: U.S. Real GDP Growth Rate
|*Note: The 2007 and 2008 Real GDP estimates have been adjusted since their original publication to reflect analysis of more accurate and detailed lagging economic data.|
Figure 2 shows the changes in U.S. real GDP growth from 1990 through Q2 2009. Note the "business cycles" or periodic fluctuations in the growth rate. The times when growth has been negative for two or more quarters (1990-91 and 2001) have typically been declared recessions by the National bureau of Economic Research (NBER).
A recession is often the downward or declining segment of the business cycle. Cycles are measured from peak (top) to peak or trough (bottom) to trough. The upward segment of the cycle is a period of expansion. Figure 2 shows a typical business cycle: expansion (growth) - peak (top) - contraction (slowing or recession) - trough (bottom).
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 production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion." A decline in growth of, say, 5 percent to 2 percent will not be identified as a recession. It is only the slowing growth period of a normal business cycle. Figure 3 is an illustration of the concept of the business cycle.
National Income and Product Accounts (NIPAs)
[The following definitions and examples are summarized or quoted from "Measuring the Economy: A Primer on GDP and the National Income and Product Accounts ," an online BEA publication.]
The Bureau of Economic Analysis produces the national income and product accounts (NIPAs), a set of economic measurements that provide information on the value and composition of output produced in the United States during a given period, and on the distribution and uses of the income generated by that production.
The primary measurement of the NIPAs 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. Thus, while GDP is the primary and most commonly used measurement of the economy’s output, it is only one of the BEA's measurements. Other NIPA's include personal income, corporate profits, and government spending.
The NIPAs help to answer questions such as: How fast is the economy growing or slowing? What industries are growing or slowing down? How does the trade deficit affect economic growth? How is the pattern of spending on goods and services in the economy changing?
Gross Domestic Product
GDP measures "the value of final goods and services produced in the United States in a given period of time. While GDP is used as an indicator of economic progress, it is not necessarily a measure of well-being or quality of life. It does not account for rates of poverty, crime, or literacy. The determination of GDP is not simply measuring production or sales." Measurement of GDP is base on these constraints:
"Measurement of GDP includes market production, goods and services that are produced for sale in private sector and sold through markets, and some non-market production, such as defense services provided by the Federal Government, education services provided by local governments, emergency housing or health care services provided by nonprofit institutions serving households, such as the Red Cross, and housing for persons who own and live in their home." "Not all "productive" activities are included in GDP. Some activities, such as caring for your own children, unpaid volunteer work for charities, or illegal or black-market activities, are not included. It is difficult to measure the value of these kinds of services."
"GDP is valued at market prices. The NIPAs value market goods and services using prices set by the market. This provides a common unit of measurement (dollars) that facilitates comparisons of the various goods and services that make up economic activity.
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. Imputations measure the value of goods and services that are not fully reflected in market prices, such as the value of compensation-in-kind, such as meals provided by employers, and the value of owner-occupied housing."
"GDP is a measure of current production, 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 inventories."
"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 measuring the production of the whole economy, intermediate products, that is, goods and services that are used as inputs in the production process and will not contribute to future production, are excluded, so that the measure of output is an unduplicated total. The value of inputs is included in the price of the final good or service.
"GDP captures 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 (in the NIPAs, the United States comprises the 50 states and the District of Columbia). Thus, 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. This treatment aligns GDP with other key U.S. statistics associated with the domestic economy, such as population and employment."
"GDP is a “gross” measure. 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 amount that would need to be “set aside” to cover the aging, wear and tear, accidental damage, and obsolescence of existing fixed assets."
Subtracting CFC from GDP leaves “net domestic product,” which is a measure of current production that excludes the investment that is necessary to replace fixed assets as they wear out. Thus, 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.
GDP Can Be Measured in Three Ways.
Expenditure Approach: "GDP can be measured as the sum of expenditures, or purchases, by final users. This is known as the expenditures approach (and is illustrated by the formula familiar to students of economics: GDP = Consumption + Investment + Government spending + eXports – iMports) and is used to identify the final goods and services purchased by persons, businesses, governments, and foreigners."
Income Approach: "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."
Value Added 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. 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."
GDP is the Sum of Four Basic Components
Personal consumption expenditures consist of purchases of goods and services by households and by nonprofit institutions serving households (NPISHs). These goods and services include imputed expenditures on items such as the services of housing by a homeowner (the equivalent of rent), financial and insurance services for which there is no explicit charge, and medical care provided to individuals and financed by government or by private insurance.
Gross private domestic investment consists of purchases of fixed assets (equipment, software, and structures) by private businesses that contribute to production and have a useful life of more than one year, of purchases of homes by households, and of private business investment in inventories. Inventory investment, which is shown as “change in private inventories,” includes the value of goods produced during a period but not sold, less sales of goods from inventories that were produced in previous periods. It is measured as ending period less beginning period inventories valued at current prices (and is equivalent to additions to, less withdrawals from, inventories), Intermediate inputs, which become an integral part of the final product and do not contribute to future production, are not included in investment.
Exports consists of goods and services that are sold or transferred by U.S. residents to residents of the rest of the world.
Imports, which is deducted in the calculation of GDP, consists of goods and services that are sold or transferred by the rest of the world to U.S. residents. The value of imports is already included in the other expenditure components of GDP, because market transactions do not distinguish the source of the goods and services. Therefore, imports must be deducted in order to derive a measure of total domestic output. Deducting total imports purchased by all sectors from total exports, rather than deducting each sector’s imports from its total expenditures, provides an analytically useful measurement of net exports that enables one to examine the effects of foreign trade on the economy.
"Government consumption expenditures and gross investment” consists of government purchases of investment measures final expenditures by Federal,state, and local governments. “Government consumption expenditures” represents the value of goods and services provided to the public by governments (such as defense or education). “Gross investment” consists of government purchases of equipment, software, and structures to use in producing those goods and services. These expenditures do not include government spending for social benefit programs (such as Medicaid), interest payments, and subsidies.
GDP = C + I + G + X
C = Personal Consumption Expenditures
I = Gross Private Domestic Investment
G = Government Consumption Expenditures
X = Net Exports (Exports minus Imports)
The September BEA announcement detailed the GDP data by industry group:
Motor vehicle output added 0.19 percentage point to the second-quarter change in real GDP after subtracting 1.69 percentage points from the first-quarter change. Final sales of computers subtracted 0.04 percentage point from the second-quarter change in real GDP after adding 0.06 percentage point to the first-quarter change.
The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 0.5 percent in the second quarter, the same increase as in the second estimate; this index decreased 1.4 percent in the first quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 0.8 percent in the second quarter, compared with an increase of 0.2 percent in the first.
Real personal consumption expenditures decreased 0.9 percent in the second quarter, in contrast to an increase of 0.6 percent in the first. Real nonresidential fixed investment decreased 9.6 percent, compared with a decrease of 39.2 percent. Nonresidential structures decreased 17.3 percent, compared with a decrease of 43.6 percent. Equipment and software decreased 4.9 percent, compared with a decrease of 36.4 percent. Real residential fixed investment decreased 23.3 percent, compared with a decrease of 38.2 percent.
Real exports of goods and services decreased 4.1 percent in the second quarter, compared with a decrease of 29.9 percent in the first. Real imports of goods and services decreased 14.7 percent, compared with a decrease of 36.4 percent.
Real federal government consumption expenditures and gross investment increased 11.4 percent in the second quarter, in contrast to a decrease of 4.3 percent in the first. National defense increased 14.0 percent, in contrast to a decrease of 5.1 percent. Nondefense increased 6.1 percent, in contrast to a decrease of 2.5 percent. Real state and local government consumption expenditures and gross investment increased 3.9 percent, in contrast to a decrease of 1.5 percent.
The change in real private inventories subtracted 1.42 percentage points from the second-quarter change in real GDP, after subtracting 2.36 percentage points from the first-quarter change. Private businesses decreased inventories $160.2 billion in the second quarter, following a decrease of $113.9 billion in the first quarter and a decrease of $37.4 billion in the fourth.
Real final sales of domestic product -- GDP less change in private inventories -- increased 0.7 percent in the second quarter, in contrast to a decrease of 4.1 percent in the first.
The BEA reports the level and growth rate of "current" GDP, expressed in the current prices in the period being measured - 2009 Q2 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.
What is the Real GDP?
In Q2 2009, current dollar, or "nominal" GDP, decreased 0.8 percent or $26.8 billion, to a level of $14,151.2 billion. The BEA also reported that the Q2 real GDP (chained dollars) was $12,901.5 billion and the decrease in real GDP was 0.7%. The difference is the rate of inflation from the preceding year.. Figure 4, below, shows the reported GDP in current and in chained or real (adjusted for inflation) dollars. To adjust for inflation, the BEA uses the "GDP deflator." The GDP deflator, also called the implicit price deflator for GDP, is a measurement of the level of prices of all new, domestically produced, final goods and services in the economy.
|Figure 4: U.S. GDP and Real GDP
|Year||GDP in current $
|GDP in chained 2005 $
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, any increase in output is less "per capita. There are more people to consume the output, so the increase in output must exceed the growth of the population for there to be an increase in per-capita GDP. U.S. per capita real GDP reached a high of $38,413 in Q3 of 2008 and is now slightly less than $38,000 in 2009. The chart below shows the growth and then decline of nominal and per capita real GDP over the last three years. Note that while nominal GDP continued to increase in 2008, real growth was negative, -3.8 percent.
|U.S. Per Capita Nominal and Real GDP, 2006-2008|
|Year (Q4)||Nominal GDP||Real GDP|
It is often useful to consider implicit price deflators for certain subcategories of GDP, such as computer hardware. In this case, it is useful to think of the price deflator as the ratio of the current-year price of a good to its price in some base year. The price in the base year is normalized to 100. For example, for computer hardware, we could define a "unit" to be a computer with a specific level of processing power, memory, hard drive space and so on. A price deflator of 200 means that the current-year price of this computing power is twice its base-year price - price inflation. A price deflator of 50 means that the current-year price is half the base year price - price deflation.
According to the BEA, U.S. real gross domestic product "decreased at an annual rate of 0.7 percent in the second quarter of 2009." In the first quarter, real GDP decreased had 6.4 percent."
By the commonly accepted definition and by the NBER's criteria, the U.S. recession that began in December 2007 continues. Output (GDP) continues to fall and unemployment continues to increase.
The $787 billion federal economic stimulus package has not yet turned the tide. The decrease in GDP has slowed considerably. U.S. job losses in July and August (over 260,000) were large, but not nearly the huge losses reported in previous months.
When gross domestic product decreases, many people are simply consuming fewer goods and services. For the unemployed, the change in :standard of living" may be dramatic. Mortgage and credit card defaults are increasing. Many families are losing their homes. For others who remain employed, the biggest effect may be the fear of job loss. For many, the recession has not changed their lives. Local and state governments face budget deficits as tax revenues fall. The recession's effects are not evenly (fairly) distributed.
Will the Q3 report in October show an increase in real GDP? Keep an eye out. The BEA will release its first Q3 real GDP estimate on October 29, 2009.
Short Answer Questions:
1. How is a nation's real per capita GDP determined?
[Real per capita GDP is the nation's real GDP divided by the nation's population.]
2. What data from the BEA announcement supports the NBER decision that the U.S. is in a recession?
[The NBER decided that a recession began because GDP growth slowed dramatically and that unemployment had increased significantly throughout 2008 and mid-2009. The BEA reports on real GDP since January 2008 have shown a pattern of decreases. In addition, the unemployment rate has doubled since that time.]
Table 1 is a breakdown of U.S. gross domestic product growth by quarter in 2008 and the first half of 2009. Take a good look at the data. What are the areas of growth and decline? Was the data (growth rates) consistent throughout the period of time? Summarize your interpretation of the data in Table 1.
|U.S. Gross Domestic Product Growth by Quarter
|Gross Domestic product (total)||0.9||2.8||-0.5||-3.8||-6.4||-0.7|
|Personal consumption expenditures||0.9||1.2||-3.8||-3.5||0.6||-0.9|
|Gross Private Domestic Investment||-5.8||-11.5||0.4||-12.3||-50.5||-23.7|
|Equipment and Software||-0.6||-5.0||-7.5||-27.8||-36.4||-4.9|
|Net Exports of Goods and Services|
|Government Consumption and
|State and Local Governments||-0.3||2.5||1.3||-0.5||-1.8||3.9|
The data in Table 1 is from the BEA web page, "National Income and Product Accounts Table, Table 7.1., Selected Per Capita Product and Income Series in Current and Chained Dollars." You can use this page to look at changes in GDP over any selected period of time. There are links to other NIPA data, such as Net Corporate Dividend Payments by Industry .
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