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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 lesson focuses on the BEA's third (final) estimate of real GDP growth released on December 22, 2010, for the third quarter of 2010 (July-September.)  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.

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 continues to grow slowly, according to the latest estimate of real GDP growth by the Bureau of Economic Analysis. Despite the hundreds of billions of dollars of economic stimulus spending and Federal Reserve policies to keep interest rates very low, the economy's output remains below the desired level and unemployment remains very high, at 8.6 percent in November.

Take a look at the most recent estimate of U.S. real GDP growth to better understand the pattern of growth in the economy and how the current conditions impact you and others.

U.S. Bureau of Economic Analysis
National Income and Product Accounts
Gross Domestic Product, 3rd quarter 2011 (third estimate)

Released December 22, 2011

"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 1.8 percent in the third quarter of 2011 (that is, from the second quarter to the third quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent."

Real GDP growth has improved slowly since the second quarter, but still not enough to put the millions of unemployed workers back on the payrolls. Congress and the Obama administration continue to debate proposals to further stimulate the economy, including extensions of tax cuts that are set to expire. 

This estimate of Q3 growth is further evidence that some additional monetary and/or fiscal policy actions may be needed. The third estimate of 1.8 percent growth was less than the previous estimate of 2.0 percent growth made in November.  Remember, each quarterly estimate is made three times over three months. Each estimate is based on more complete or new data.

"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 increase in real GDP was 2.0 percent."

Students: What do you think should be done to help the economy grow?  How are policies that increase spending and borrowing intended to stimulate the economy?

Where did the Q3 Growth Come From?

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

"The acceleration in real GDP in the third quarter primarily reflected accelerations in PCE, in nonresidential fixed investment, and in exports, and a smaller decrease in state and local government spending that were partly offset by a larger decrease in private inventory investment."

Key Industries - Computers and Motor Vehicles

"Final sales of computers added 0.22 percentage point to the third-quarter change in real GDP after adding 0.07 percentage point to the second-quarter change. Motor vehicle output added 0.12 percentage point to the third-quarter change in real GDP after subtracting 0.10 percentage point from the second-quarter change."

Students:  What role does business investment play in future production?.   How should businesses use their profits?  Capital investment?  Hiring new workers?  Lowering prices? 

Students: Why does the BEA specifically mention motor vehicle and computer sales? 

Growth by Sector

"Real personal consumption expenditures increased 1.7 percent in the third quarter, compared with an increase of 0.7 percent in the second. Durable goods increased 5.7 percent, in contrast to a decrease of 5.3 percent. Nondurable goods decreased 0.5 percent, in contrast to an increase of 0.2 percent. Services increased 1.9 percent, the same increase as in the second." 

 

Students:  Consumption expenditures make-up about 70 percent of the total GDP.  Is it good that consumer spending is up?

"Real nonresidential fixed investment increased 15.7 percent, compared with an increase of 10.3 percent. Nonresidential structures increased 14.4 percent, compared with an increase of 22.6 percent. Equipment and software increased 16.2 percent, compared with an increase of 6.2 percent. Real residential fixed investment increased 1.3 percent, compared with an increase of 4.2 percent."

"Real exports of goods and services increased 4.7 percent in the third quarter, compared with an increase of 3.6 percent in the second. Real imports of goods and services increased 1.2 percent, compared with an increase of 1.4 percent."

"Real federal government consumption expenditures and gross investment increased 2.1 percent in the third quarter, compared with an increase of 1.9 percent in the second. National defense increased 5.0 percent, compared with an increase of 7.0 percent. Nondefense decreased 3.8 percent, compared with a decrease of 7.6 percent. Real state and local government consumption expenditures and gross investment decreased 1.6 percent, compared with a decrease of 2.8 percent."

"The change in real private inventories subtracted 1.35 percentage points from the third-quarter change in real GDP, after subtracting 0.28 percentage point from the second-quarter change. Private businesses decreased inventories $2.0 billion in the third quarter, following increases of $39.1 billion in the second quarter and $49.1 billion in the first."

BEA Footnote: “Quarterly estimates are expressed at seasonally adjusted annual rates, unless otherwise specified… Real estimates are chained (2005) dollars.”

Recent Real GDP Growth

The history of real GDP growth over the past several years. Figure 1 below, shows the business cycles of expansion, peak, decline and trough. Note the period of late 2008 and early 2009, the most recent recession. The National Bureau of Economic Research (NBER) announced that the recession began (a peak in the business cycle) in December, 2007, and ended (a trough in the business cycle) in June, 2009.

figure 1

Students:  Do you understand the concept of business cycles?  For information about business cycles, go to the National Bureau of Economic Research (NBER) website: http://www.nber.org/cycles/main.html .

Students: Can you identify the periods of the recent recessions?

Figure 2, below, shows the current dollar and constant dollar figures for U.S. gross domestic product for the past decade. Note that the both constant dollar and real GDP decreased from 2008 to 2009 – the recession. Also notice the long period of steady economic expansion between the years 2000 and 2008, leading up to the recession.

Compare the dollar measurements in Figure 2 with the graph in Figure 1 to see how the graphic representation of GDP growth was determined. Note: The graph shows only real GDP.

Students:  What is the difference between nominal (current-dollar) and real (constant or chained dollar) GDP measurements?

figure 2

GDP vs. GNP

You may hear references to gross national product (GNP) and gross domestic product (GDP).  What is the difference?

The U.S. current-dollar GDP in Q3 2011 (annualized) was $15,176.1 billion. When adjusted for inflation in chained 2005 dollars, the real Q3 annualized GDP was $13,278.5. Current-dollar GDP increased 4.4 percent, or $163.3 billion, in Q3 2011, after increasing 4.0 percent, or $145.0 billion in Q2.”

Note:  Prior to 1991, the BEA used gross national product (GNP) as the primary measurement of production output. The difference is that GDP is a measurement of production within a country's borders and GNP is a measurement of production by enterprises owned by a country's citizens. Production within a country's borders, but by an enterprise owned by someone from outside the country, counts as part of the country’s GDP. The BEA switched to GDP primarily because most of the other developed nations used GDP at that time, and it made international production output comparisons easier.

Figure 3, below, shows the primary (National Product and Income Accounts (NIPA) components of U.S. national income, gross national product and gross domestic product for Q3 2011. Note that the largest component of GDP, by far, is employee compensation (salaries and wages).

figure 3

Measuring National Income, GNP, and GDP:GDP and Other Macroeconomic Data

It is sometimes instructive to find relationships between various macroeconomic data.  These relationships may sometimes give us a broader picture of the economy. For instance, there is a general relationship between output (GDP) and employment. As GDP increases, employment tends to increase.  In the past several months, as real GDP has decreased, the unemployment rate has increased. One piece of data confirms the meaning of the other.

Figure 4 illustrates four sets of macroeconomic data - CPI, unemployment, real GDP growth and the federal funds rate. Notice the long term relationship of periods of output growth and decline with the changes in the unemployment rate. This relationship makes sense as the number of employed is directly related to output. Some increase in output can be attributed to improvements in productivity, but growth is very much dependent on labor force growth and employment. In late 2008 and 2009, as U.S. real GDP declined, the unemployment rate increased substantially.

figure 4

Business Cycles

Business cycles or periodic fluctuations in growth and employment illustrate the relationships of some data (see Figure 3). When the National Bureau of Economic Research (NBER) tracks cycles in order to identify recessions, they use the combination of employment, GDP growth and other factors. How do consumer prices fit into this analysis? The NBER uses real GDP growth and real personal income as primary factors identifying business cycles. Using employment and income data adjusted for inflation allows the NBER to make more accurate comparisons from one data period to the next.

Students:  Are we still in the "trough" of the recession despite the NBER announcement of the end of the recession?

Inflation and GDP

Accurate measurement of gross domestic product or GDP growth is also dependent on the accurate measurement of inflation. A rise in the price level "inflates" the measurement of GDP growth - miscalculating real growth in the economy. A more meaningful measurement of the growth of output is real GDP - the nominal GDP measurement adjusted for the impact of inflation.  Although CPI is the most common measurement of inflation for many uses, the adjustment of GDP uses a process based on the GDP deflator. Both the CPI and the GDP deflator are measurements of average prices, but the GDP deflator includes all of the goods and services produced in the economy, not just the CPI market basket.

CPI vs. GDP Deflator as Measures of Inflation

The rate of inflation rate determined by the CPI and GDP deflator are normally quite similar.  Since the CPI uses a fixed market basket of goods and services, it assumes a fairly constant pattern of consumer purchases. Over time, the market basket may be changed, based on changes in consumer behavior. The GDP deflator uses a flexible basket of goods and services based on the actual quantities of goods and services produced in a year, while the prices of the goods and services are fixed. The GDP deflator uses a much larger quantity of goods and services.

The CPI does not take into account substitution - the tendency of consumers to choose lower priced goods in place of more expensive ones. Just the opposite sometimes happens, as consumers may choose to purchase more expensive goods as their incomes increase. The GDP deflator can take these substitutions into account.  Because the GDP deflator assumes substitutions, it may underestimate the impact of inflation when consumers do not (are not able to) substitute. The CPI may overestimate the impact of inflation when consumers do substitute.

Most government agencies and many private contracts use the CPI to determine a cost of living adjustments (COLA).  The Social Security Administration added a 5.8 percent COLA to Social Security benefits and SSI payments in January 2009, based on  the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of 2007 to the third quarter of 2008.  If there had been no increase in the CPI in that time period, there would have been no increase in benefits.

Inflation and Unemployment

Long-standing economic theory had assumed that there is a predictable trade-off between the impact of public policy decisions and economic change on inflation and unemployment. This theory, developed by New Zealand Economist William Phillips in 1958, was based on his observation of an inverse relationship between money wage changes (inflation) and unemployment in the British economy over a period of time. The "Phillips Curve" proposed that when unemployment is low, inflation tends to be high and when unemployment is high, inflation tends to be low.

The implication for policy makers was that "Keynesian" policies could be used to control unemployment and inflation. Increased spending can lower unemployment with the risk of a high rate of inflation.  Policy makers face the Phillips Curve trade-off. Today, policy makers who propose to use monetary policy (lower interest rates) or fiscal policy (deficit spending) to stimulate the economy, and increase GDP and employment, are aware of its potential inflationary effect. The Phillips Cure theory lost favor in the late 1980s when there were periods of both high unemployment and high inflation, followed in the 1990s by periods of low unemployment and low inflation.

The Federal Reserve recognized this potential trade-off in its most recent monetary policy statement when it justified an aggressive stimulatory policy by saying that the current conditions did not include an inflationary threat. Low inflation provides room for aggressive policies to stimulate the economy. Should inflation become a real threat, the Fed may slow down growth of the money supply.

Students:  Does the concept of the Phillips Curve make sense?  Does it apply in this period of time?

Look again at the data in Figure 4 about the recent performance of the U.S. economy. Notice the relationships of real GDP growth, payroll employment (the NBER's key data) and the unemployment rate. CPI data has been included because it is also the subject of monthly "Focus on Economic Data" lessons.

  • What trends do you see in the four data sets?
  • What generalizations can you make about the trends of the four data sets?
  • Are the real GDP growth and payroll employment trends related?
  • Are the real GDP growth and unemployment rate trends related?
  • Are the payroll employment and unemployment rate trends related?
  • Is the trend of the CPI-U related to the real GDP growth and payroll employment data?
  • Is the trend of the CPI-U related to the real GDP growth and payroll employment data?
  • If you were a member of the NBER "Business Cycle Dating Committee, would you argue that we are still in a recession? 

 

  1. Data for real GDP growth, employment and unemployment rate significantly worsened (almost continually) from December 2007 until the second half of 2009. There has been modest improvement since that time.
  2. As payroll employment decreased, the unemployment rate increased (with few minor) exceptions).
  3. As GDP growth slowed and turned negative, the unemployment rate increased and payroll employment decreased.
  4. As payroll employment decreased and real GDP decreased, there was little inflation and, at times, short periods of deflation in consumer prices. (Remember, more volatile energy prices are a significant variable in the CPI data.)]

U.S. State Real and Metropolitan Area GDP Data

Every six months, the BEA releases annual GDP data for the fifty states and for metropolitan areas. The most recent data was released in September, 2011. The current state and metropolitan area GDP release is for the year 2010.

"Real gross domestic product (GDP) increased in 48 states and the District of Columbia in 2010, according to new statistics released today by the U.S. Bureau of Economic Analysis that breakdown GDP by state. Durable–goods manufacturing, retail trade, and finance and insurance were leading contributors to the upturn in U.S. economic growth. U.S. real GDP by state grew 2.6 percent in 2010 after declining 2.5 percent in 2009."

Source: http://www.bea.gov/newsreleases/regional/gdp_state/gsp_newsrelease.htm

"Real U.S. GDP by metropolitan area increased 2.5 percent in 2010 after declining 2.5 percent in 2009, according to new statistics released today by the U.S. Bureau of Economic Analysis. The economic growth was widespread as real GDP increased in 304 of 366 (83 percent) metropolitan areas, led by national growth in durable-goods manufacturing, trade, and financial activities."

Source: http://www.bea.gov/newsreleases/regional/gdp_metro/gdp_metro_newsrelease.

GDP and Per Capita GDP by Region, 2010

Figure 5, below, lists the gross domestic product of the eight U.S. regions and their regional per capita GDP. Note the significant differences between the regions.

figure 5

Figure 6, below, illustrates the real GDP growth rates of the 50 states and the 8 regions in 2010. Note the areas of relatively high (blue) and relatively low (beige) growth rates.

figure 6

Link: www.bea.gov/newsreleases/regional/gdp_state/gsp_newsrelease.htm

[Teacher Note: Students can compare their state or region to other states and regions. What factors may have influenced the pace or growth in their state or region? What industries are growing or declining in their state or region?]

NOTE: Unless otherwise cited, all quoted materials in this lesson are from the BEA, National Income and Product Accounts, Gross Domestic Product, 3rd quarter 2011 (third estimate) news release. December 22, 2011.

CONCLUSION

Once again:

"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 1.8 percent in the third quarter of 2011 (that is, from the second quarter to the third quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent."

U.S. economic growth was slower than desired in Q3 2011, but, still positive growth.  The ongoing debate is over whether or not the government should take further stimulatory actions or let the economy recover on it own?  Ask the almost 14 million workers who continue to be unemployed. 

Watch the continuing discussion about how the most recent stimulus funds should be spent.

ASSESSMENT ACTIVITY

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

 
Short Answer Essay Question:

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

[Possible Answer: Perhaps we are better off. Maybe not. 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. If the nation's real per capita GDP increases, we may be "better off."]

EXTENSION ACTIVITY

The U.S. Central Intelligence Agency (CIA) “World Factbook” ranks the world's 228 nations by various economic measures, including gross domestic product. The  largest of the national economies in the current edition are listed below, in Figure 7.  All data in this figure are for 2010.

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.

figure 7

In terms of total size of GDP, the U.S. ranks second, just behind the European Union nations’ total.  In terms of real GDP growth rate, the U.S. ranks 127th among the worlds' nations. See Figure 8, below.

figure 8

In the ranking for GDP per capita, the U.S. ranks 11th among the 228 nations.  See Figure 9, below.  The country rankings may be a bit deceiving, due to great differences in income distribution, price levels, qualitative differences, data collection methodology, etc.

figure 9

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?

Students: 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.

 Other ranking of the world's national economies may differ from those estimated by the CIA World Factbook.  For instance, the World Bank estimates the U.S GDP in 2010 as $13,336,200,000,000. (http://data.worldbank.org/indicator/NY.GDP.MKTP.CD?order=wbapi_data_value_2010+wbapi_data_value+wbapi_data_value-last&sort=desc)   The CIA's 2010 estimate of U.S. GDP is $14,660,000,000,000.