INTRODUCTION

This lesson focuses on the February 25, 2011, second estimate of U.S. real gross domestic product (real GDP) growth for the fourth quarter (Q4) of 2010, as 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.

TASK

  • 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.

PROCESS

The U.S. economy grew in the fourth quarter of 2010, but not quite at the rate of growth that was first reported by the BEA in January, 2011. Remember, real GDP is reported three times for each quarter, with the later estimates based on additional and more complete information.  Read the February 25,2011, BEA news release for details about Q4 2010 real GDP growth.

U.S. Bureau of Economic Analysis
Gross Domestic Product: Fourth Quarter 2010 (second estimate)

"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 fourth quarter of 2010, (that is, from the third quarter to the fourth quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.6 percent."

"The GDP estimates released today are based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 3.2 percent."

Q4 2010 real GDP growth was 2.8 percent, which is below the recent historical average growth rate.  U.S. real GDP growth has averaged 3.3 percent since 1947, with a high quarterly rate of 17.2 percent in Q1 of 1950 and a quarterly low rate of -10.40 percent in Q1 of 1958.  More recently, the U.S. real GDP growth rate was at a low of minus 6.8 percent in Q4 of 2008, and up 5.0 percent in Q4 of 2009. (Note: The growth rate for each quarter is reported as an annual rate.)

Figure 1, below, shows graphically the U.S. quarterly real GDP growth rates from 1999 through Q4 of 2010.   Note the real GDP negative growth in 2008 and the first half of 2009.   This is the period that looks like the traditional definition of a recession.  According to the National Bureau of Economic Research (NBER), the recession ended in June of 2009 (http://www.nber.org/cycles.html .]

GDP Figure 1

Can you identify the periods of growth and recession?

Read the full February 25, 2011, BEA announcement of U.S. real GDP growth at: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm .  The BEA breaks down the quarterly growth or decline by sector - personal consumption expenditures (PCE), private investment, government spending, and net exports.

  • What sectors grew in Q4 2010?
  • What sectors declined in Q4 2010?

What was the Current-dollar GDP in Q4?

"Current-dollar GDP -- the market value of the nation's output of goods and services -- increased 3.2 percent, or $115.9 billion, in the fourth quarter to a level of $14,861.0 billion. In the third quarter, current-dollar GDP increased 4.6 percent, or $166.4 billion."

$14,861,000,000,000

The U.S. current dollar GDP growth rate was slower in Q4 2010 than the rate reported in Q3 2010.  The Q3 growth rate was 4.6 percent.

The real growth rate of GDP in Q4 was 2.8 percent and the real GDP growth rate for Q3 was 2.6 percent.  When looking at the real rates of growth, the rate increased from Q3 to Q4.

Note that the current dollar GDP estimate of 3.2 percent growth for Q4 2010 (reported February 25, 2011) is greater than the reported real growth rate of 2.8 percent.   What's the difference?

The U.S. population was estimated to be approximately 310 million at the end of 2010.  To determine the U.S. per capita (per person) GDP, simply divide the nominal GDP by the population - 310 million.  What was the approximate U.S. per capita GDP at the end of 2010? [$47,358.  $47,358 x 310 million = $14.861 trillion]

How many zeros are there in 14 trillion?

GDP Estimate Revisions

GDP estimates are found in two forms.

1.  Quarterly Estimate Revisions

First, there are the revisions of the quarterly estimates made three times for each quarter.  For Q4 2010, the first estimate was made in January.  It was a 3.2 percent rate of real GDP growth.  This month, the estimate was reduced to just 2.8 percent.

The BEA explained the change: "The downward revision to the percent change in real GDP primarily reflected an upward revision to imports and downward revisions to state and local government spending and to personal consumption expenditures (PCE) that were partly offset by an upward revision to exports."

An increase in imports and a smaller increase in exports resulted in a reduction of GDP (lower net exports).  Government spending and personal consumption expenditures were lower than originally estimated.  A change in the estimate of the GDP price index can also impact the revision.  This month, there was no change in the GDP price index.

The Q4 estimate is subject one more change when the final estimate is made on March 25, 2011.  Additional data and revisions of other data may increase or decrease the final estimate.

2.  Annual Revisions

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

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

In 2010, revisions were made to 2007-2009 data.  The changes reflected new definitions of concepts or categories, changes in how the data is organized in the presentation, changes in the benchmark data, and improved methodologies.

The 2010 revisions reduced the previous estimates of U.S. GDP for the three-year period of 2007 - 2009.  The revised estimate of GDP at the end of 2009 was reduced by $119 billion to $14.119 trillion.  The largest portion of the GDP total to be reduced was the personal consumption expenditures sector – down by $87.8 billion in 2009.

Figure 2, below, shows the growth of U.S. gross domestic product from 2000 through 2010, as annual data.  Note the periods of recession - very slow or negative growth.

U.S. Current and Constant Dollar GDP
Annual Rates
2000-2010
Year Current Dollar
GDP
Constant Dollar
"Real" GDP
2000 9,951.5 11,226.0
2001 10,286.2 11,347.2
2002 10,642.3 11,553.0
2003 11,142.1 11,840.7
2004 11,867.8 12,263.8
2005 12,638.4 12,638.4
2006 13,398.9 12,976.2
2007 14,061.8 13,228.9
2008 14,369.1 13,228.8
2009 14,119.0 12,880.6
2010 14,657.8 13,245.6

 
2010 End-of-Year GDP Data

The BEA added to the Q4 2010 GDP announcement an estimate for the final 2010 GDP data.  For the year...

"Real GDP increased 2.8 percent in 2010 (that is, from the 2009 annual level to the 2010 annual level), in contrast to a decrease of 2.6 percent in 2009."  GDP growth in 2010 reversed the decrease in GDP in 2009.  In 2010, the U.S. economy grew at a rate slightly more than the loss in 2009 and essentially flat growth in 2008.  Ending 2998 at $14.369 trillion, the economy's output shrunk to $14.119 trillion in 2009, a loss of $250 trillion.  By the end of 2010, the economy's annual output grew by almost $539 trillion.

"The increase in real GDP in 2010 primarily reflected positive contributions from private inventory investment, exports, PCE, nonresidential fixed investment, and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased."  All sectors, except imports, contributed to the 2010 GDP growth.

"The price index for gross domestic purchases increased 1.3 percent in 2010, in contrast to a decrease of 0.2 percent in 2009."  There was little inflationary impact on the GDP data in 2010.

Note:  The level of real GDP reported for Q4 and that reported for the year 2010 differ slightly, due to the way the quarterly data is adjusted to determine an annualized rate of growth for the quarter.

Quarterly GDP data is seasonally adjusted to remove variations that normally
occur at about the same time and in about the same magnitude each year—for example, weather, holidays, and tax payment dates. After seasonal adjustment, cyclical and other short-term changes in the economy stand out more clearly.  Annual data is not seasonally adjusted.

Does 2010 seem like it was a good year for the economy? 

What is the BEA?

The Bureau of Economic Analysis (BEA), an agency of the U.S. Department of Commerce, “prepares national, regional, industry, and international accounts that present essential information on such key issues as economic growth, regional economic development, inter-industry relationships, and the Nation's position in the world economy.” Source: BEA Mission Statement

CONCLUSION

"Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.8 percent in the fourth quarter of 2010, (that is, from the third quarter to the fourth quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.6 percent." (U.S. Bureau of Economic Analysis, Gross Domestic Product: Fourth Quarter 2010 (second estimate), February 25, 2011.)

The economy is growing at a modest - almost average - pace.  Unfortunately, this growth has not resulted in the creation of enough new jobs to reduce the unemployment rate to anywhere near a normal level.  The U.S. unemployment rate remains at 9 percent (as of January, 2011).

It is generally clear that if unemployment is high, the economy will not be producing at its full or normal output. Since people who are not working, their labor resources are not being used effectively. What is the relationship between unemployment and output?

Okun’s Law

In 1962, economist Arthur Okun theorized that there is a predictable relationship between unemployment and national output (GDP). Okun's Law correlates changes in real GDP and changes in the unemployment rate. He said that real GDP grows at about 3% per year when unemployment is normal.

For every point above 3.0 percent unemployment, the nation’s GDP decreases by 2%. And, it also works in reverse – each percentage point under 3.0 results in an additional 2 percent in GDP growth. For example, if the U.S. unemployment rate is 9.0 percent, 6.0 percent over the 3.0 average, GDP is reduced by 12 percent.

Many suggest that this historic relationship between unemployment and the “GDP gap” no longer exists – at least to the degree that Professor Okun suggested. The economy grew at a greater rate in late 2009, despite an even higher unemployment rate. The new concept is the “jobless recovery,” made possible by technology and greatly improved productivity.

Are we in a "new economy," one where the relationship between employment and output has changed?  Keep an eye on the employment and GDP data for the rest of the school year.
 

ASSESSMENT ACTIVITY

Next, complete the essay question below on the interactive notepad.


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

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 and lists them as equivalent to U.S. dollars.

Rank    Country                     Per Capita GDP                 Year
1           Qatar                          $145,300                             2010 est.
2           Liechtenstein           $122,100                             2007 est.
3           Luxembourg               $81,800                             2010 est.
4           Bermuda                     $69,900                             2004 est.
5           Norway                        $59,100                             2010 est.
6           Singapore                   $57,200                             2010 est.
7           Jersey                          $57,000                             2005 est.
8           Kuwait                          $57,100                             2010 est.
9           Brunei                          $50,300                             2010 est.
10         United States             $47,400                             2010 est.

In terms of total size of GDP, the U.S. ranks second, just behind the European Union nations’ total (all estimates are 2010):

Rank  Country                      GDP (current dollar)
1         European Union      $14,890,000,000,000
2         United States           $14,720,000,000,000
3         China                           $9,872,000,000,000
4         Japan                           $4,338,000,000,000
5         India                             $4,046,000,000,000
6         Germany                     $2,951,000,000,000
7         Russia                         $2,229,000,000,000
8         Brazil                            $2,194,000,000,000
9         United Kingdom        $2,189,000,000,000
10       France                         $2,160,000,000,000

Take a look at the economic data for the world’s nations available from the CIA World Factbook. What does the data tell you about the various nations?

Choose one nation. Summarize what you perceive is that nation’s “standard of living,” according to its per capita GDP and other measures of social welfare.