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.
GDP data is announced three times for each fiscal quarter. For Q4 2011, the first estimate is made in January, 2012 (this lesson), the second estimate is made in February, and the third (final) estimate for Q4 2011 is made in March.
GDP data reports lag the reporting period - fiscal quarter. The current estimate is for Q4 2011 (October-December). Each of the three estimates for a quarter will be based on more complete and comprehensive data, and may modify the growth rate reported previously.
- 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 on consumers and producers, and implications for the future.
How Big is the U.S. Economy?
For a variety of reasons, the size and growth of the size of the U.S. economy is helpful to know. Measuring the size and growth of employment and output helps planners and policy makers. Measuring growth over time can help to assess the health of the economy and the development of growth strategies. Knowing the size and growth of the economy is important when developing budgets and tax policies. In the U.S. the primary measurement of the economy's output is the nation's gross domestic product or GDP.
What are GDP and Real GDP?
Simply put, gross domestic product measures "the value of final goods and services produced in the United States in a given period of time." Add the value of all of the final goods and services produced by businesses and governments within the U.S. in one year, including investment, and accounting for inventory changes and net exports, and you get the value of the nation's output - GDP.
The key to the definition of GDP is that it measures "final" goods and services that are produced within the U.S. and exchanged within markets over a specific time period (usually one year), at their market value.
Real GDP, also in simple terms, is GDP adjusted for the effect of a change in the price level - thus, a measure of "real" growth without inflation. Subtract any inflation during the year to measure only the "real" increase in output - not including increased (or decreased) prices.
While GDP is considered an indicator of economic progress, it is not necessarily a true measure of well-being, quality of life or standard of living, because it does not account for such factors as income distribution, health, quality, rates of poverty, crime, or literacy. GDP measures the nation's output of goods and services - and is generally related to levels of employment, and income - so it does give us a picture of the health of the overall economy.
Another way to look at GDP as a measure of well-being is to determine the nations' per capita GDP or per person. Divide the GDP by the population and you get per capita GDP. Per capital GDP is often used to compare the well-being and growth of different nations. Again, even per capita GDP does not account for many qualitative factors or income distribution.
Students: Can you explain the difference between the current measurement of GDP and real GDP.
Students: Is GDP is a good measure of people's well-being or standard of living? What about per capita GDP as an alternative - GDP divided by the population?
U.S. Bureau of Economic Analysis
Gross Domestic Product: Fourth Quarter 2011 (Advance Estimate)
Announcement date: January 27, 2012
"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 2011 (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 1.8 percent."
Note: Unless otherwise cited, the quoted materials in the lesson are taken from the January 27, 2012, BEA real GDP announcement.
The BEA's advance (initial or first) estimate of 2.8 percent Q4 (October-December) real GDP growth is much better than the rate of 1.8 percent estimated for Q3 (July-September). The U.S. economy may be finally growing at a significant rate. Q4 2011 also saw a significant increase in job creation - 683,000 new jobs, after creating 722,000 new jobs in Q3.
This was the first (advance) of three estimates of GDP growth for Q4 2011. The BEA announcement cautioned that, "the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 4). The "second" estimate for the fourth quarter, based on more complete data, will be released on February 29, 2012."
For Q3 2011, the three GDP growth estimates varied significantly. Examples: For the third quarter of 2100, the advance estimate made in October was a 2.5 percent growth rate. In November, the estimate was decreased to 2.0 percent. The final estimate for Q3, made in December, was a real GDP growth rate of 1.8 percent. In Q3, the new and better data resulted in a lower growth estimate.
A Note About Measuring U.S. GDP at the End of 2011
If you look at the BEA’s history of the annual and quarterly levels of GDP, both in current dollars and chained dollars, you may be a bit confused. This data can be found on the BEA website at www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm .
The BEA's list of annual GDP figures indicates that the 2011 current dollar U.S. GDP was $15.088 trillion. It also indicates that the 2011 U.S. GDP in chained (adjusted for inflation) dollars was $13.313 trillion.
The list of GDP figures by quarter indicates that the 2011 Q4 current dollar U.S. GDP was $15.294 trillion. It indicates that the 2011 Q4 U.S. GDP in constant dollars was $13.422 trillion. While not a huge difference, the current dollar GDP estimates for Q4 and for the full year differ by $206 billion.
What’s the Difference?
The Quarterly GDP data is the most recent measurement. $14.3826 was the GDP for Q4, and thus the most recent estimate. The “annual” figures are the four quarterly estimates added together and divided by four – resulting in the average of the four quarters.
To determine the GDP for a year, is it best to use the GDP at the end of the year or use the average GDP for the whole year? The BEA methodology is to use the average of the four quarters and provide a figure that represents size of the economy over the full year period. If the GDP estimate for Q4 was higher than the three previous quarters, it increases the annual average. And, if the GDP decreased in Q4, it reduces the annual average.
How Big Was the U.S. Economy in 2011?
• $15,087,700,000,000 in current dollars
• $13.313,400,000,000 in constant (chained 2005) dollars.
Students: How many zeros are in a trillion dollars?
Figure 1, below, shows the quarterly growth rates of U.S. real gross domestic product from 2001 through 2011. Note the period of the recession, December 2007 through June, 2009 and the low or negative growth rates reported for Q1 2008 through Q2 2009. Real GDP growth is just one of the key data points used by the National Bureau of Economic Research (NBER) Business Cycle Dating Committee to identify recessions.
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 between January 2008 and mid 2009 have shown a pattern of decreases. The U.S. unemployment rate more than doubled during the recession.
For more about the NBER business cycle web page: www.nber.org/cycles/main.html
Students: Can you identify the 2008-2009 recession in the graph?
Where Did Q4 2011 Real GDP Growth Come From?
The BEA announcements typically identify two sets of trends. One is the "increase" in real GDP. What sectors added to or reduced the nominal level of GDP? This reflects the simple measurement of the output for each sector. For Q4 2011, the BEA provided this summary:
"The increase in real GDP in the fourth quarter reflected positive contributions from private inventory investment, personal consumption expenditures (PCE), exports, residential fixed investment, and nonresidential fixed investment that were partly offset by negative contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased."
The second set of trends are the sectors that added to the rate of growth or decline in GDP. For instance, imports decreased at a greater rate than the previous month and personal consumption expenditures increased at a greater rate. This added more to the rate of growth.
"The acceleration in real GDP in the fourth quarter primarily reflected an upturn in private inventory investment and accelerations in PCE and in residential fixed investment that were partly offset by a deceleration in nonresidential fixed investment, a downturn in federal government spending, an acceleration in imports, and a larger decrease in state and local government spending."
Key Industries: Computers and Automobiles
The BEA announcement typically identifies two key industries that are of particular concern to those who use the real GDP data. In recent years, these have been computer and motor vehicle sales. For Q4, the BEA reported that computer sales increased at a similar rate, but automobile output fell significantly.
"Final sales of computers added 0.18 percentage point to the fourth-quarter change in real GDP after adding 0.22 percentage point to the third-quarter change. Motor vehicle output added 0.30 percentage point to the fourth-quarter change in real GDP after adding 0.12 percentage point to the third-quarter change."
Students: Why do you think the BEA specifically reports data about computers and automobile sales? Are computer sales a good indicator of economic growth? What about automobile sales? Are they a good indicator?
Students: What products do you think are good indicators of economic growth?
GDP Growth in the 2000s
Figure 2, below, shows the sizes of the U.S. GDP - current dollar and constant - for the years 2000 through 2011. The decrease in real GDP in 2008 and 2009 illustrates the recession.
Note: The 2011 annual GDP in the Figure 2 differs somewhat from the GDP level reported for Q4 2011, due to differences in computing methods for the quarterly and annual GDP data. This difference was explained earlier in the lesson.
Link to the NBER "Business Cycles" web page. www.nber.org/cycles/main.html .
What is the U.S. Potential GDP?
A nation’s maximum or potential GDP or its potential output is the highest level of output that can be maintained over the long term, given any constraints on the nation’s productive resources. A limited supply of labor, capital, or natural resources creates a limit to potential output of goods and services, investment or government spending. Another interpretation of this concept is that it is the output that can be achieved with no increase in inflation. This potential output can be illustrated through the production possibilities frontier. The difference between a nation’s potential GDP and actual GDP is the called the “output gap” or “recessionary gap.”
If an economy is at full employment (the natural rate of unemployment (NAIRU), no more workers can be hired to use the available capital and other resources to produce. Given the currently high U.S. unemployment rate, the U.S. GDP maybe far below its potential. A change in technology or some other improvement in productivity can increase the actual and potential GDP.
Economist Arthur Okun proposed in 1962 that a 1 percent change in unemployment results in a 2 to 2 ½ percent change in output. “Okun’s law” is a general “rule of thumb” subject many variables. Other have suggest similar relationships. This is, perhaps, as close as is possible to measure the real recessionary gap.
How is GDP Measured?
There are two basic ways to determine a nation’s GDP.
The Expenditure Approach
This method of determining GDP adds up the market value of all domestic expenditures made on final goods and services in a single year, including consumption expenditures, investment expenditures, government expenditures, and net exports. Add all of the expenditures together and you determine GDP.
The Income Approach
This method of determining GDP is to add up all the income earned by households and firms in the year. The total expenditures on all of the final goods and services are also income received as wages, profits, rents, and interest income. By adding together all of the wages, profits, rents, and interest income, you determine GDP.
Note: The two methods of measuring GDP should result in the same number, with some possible difference caused by statistical and rounding differences.
What are the Components of GDP?
GDP is generally reported as the sum of four components . The formula for determining GDP is: C + I + G + X = Y (GDP)
- C = Personal Consumption Expenditures
- I = Gross Private Fixed Investment
- G = Government Expenditures and Investment
- X = Net Exports (Exports minus Imports)
The January 27, 2012, BEA announcement for Q4 2011 reported:
- "Real personal consumption expenditures (PCE) increased 2.0 percent in the fourth quarter, compared with an increase of 1.7 percent in the third. Durable goods increased 14.8 percent, compared with an increase of 5.7 percent. Nondurable goods increased 1.7 percent, in contrast to a decrease of 0.5 percent. Services increased 0.2 percent, compared with an increase of 1.9 percent." PCE represents about 70 percent of the total GDP.
- "Real nonresidential fixed investment increased 1.7 percent in the fourth quarter, compared with an increase of 15.7 percent in the third. Nonresidential structures decreased 7.2 percent, in contrast to an increase of 14.4 percent. Equipment and software increased 5.2 percent, compared with an increase of 16.2 percent. Real residential fixed investment increased 10.9 percent, compared with an increase of 1.3 percent." Although business investment was down in Q4, investment in housing picked up.
- "Real exports of goods and services increased 4.7 percent in the fourth quarter, the same increase as in the third. Real imports of goods and services increased 4.4 percent in the fourth quarter, compared with an increase of 1.2 percent in the third." Remember, a trade deficit will reduce the measurement of GDP.
- "Real federal government consumption expenditures and gross investment decreased 7.3 percent in the fourth quarter, in contrast to an increase of 2.1 percent in the third. National defense decreased 12.5 percent, in contrast to an increase of 5.0 percent. Nondefense increased 4.2 percent, in contrast to a decrease of 3.8 percent. Real state and local government consumption expenditures and gross investment decreased 2.6 percent, compared with a decrease of 1.6 percent." One drag on GDP growth during the recovery has been the real decrease in government spending at all levels.
Students: One result of the recent economic downturn has been reduced spending by governments. The size and scope of government activities is a major issue in the 2012 presidential election. Can increasing the size of government stimulate the economy? If so, what are the pros and cons?
Students: What percentage of your spending is for imported goods? Although imports are only 16 percent of our goods and services, many lower-priced consumer goods are made in China and other nations. What is your experience?
Want to know more about the economies of nations where our imported goods are produced? Go to the CIA World Factbook "Guide to Country Comparisons ."
The Impact of Inflation and Measuring Real GDP
To adjust for inflation, the BEA uses the percent change in the price index for gross domestic purchases. The BEA defines this as the change in the "prices of goods and services purchased by U.S. residents, regardless of where the goods and services are produced. The gross domestic purchases price index is derived from the prices of personal consumption expenditures, gross private domestic investment, and government consumption expenditures and gross investment. Thus, for example, an increase in the price of imported cars would raise the prices paid by U.S. residents and thereby directly raise the price index for gross domestic purchases."
The BEA announcement for Q4 2011 added, "The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 0.8 percent in the fourth quarter, compared with an increase of 2.0 percent in the third. Excluding food and energy prices, the price index for gross domestic purchases increased 1.0 percent in the fourth quarter, compared with an increase of 1.8 percent in the third."
Students: How did inflation affect you in the past few months? Did you notice any price changes?
The Impact of Inventories
Inventory consists of the raw materials, intermediate goods, and finished goods that are ready for sale. Inventories represent one of the most important assets of a business. The turnover of inventory represents a sources of revenue generation and subsequent earnings for a company.
Holding a large amount of inventory over time is not usually good for a business. Holding inventory means that the business has paid the costs to produce good that have not been sold. Holding too little inventory may be bad because the business risks of losing potential sales and potential market share.
The BEA identifies the impact of changes in inventories - "Changes in inventories are the smallest component of the GDP, usually less than 1% of GDP but they are much more important than their absolute size. In fact, large changes in inventories signal changes in aggregate demand and, thus, are indicators of future economic activity. As the change in inventories is a flow equal to the change in the stock of unsold goods, they are a form of investment, often referred to as involuntary investment."
The BEA mentions the impact of inventory increase or decline in the final determination of the nation's GDP. "The change in real private inventories added 1.94 percentage points to the fourth-quarter change in real GDP after subtracting 1.35 percentage points from the third-quarter change. Private businesses increased inventories $56.0 billion in the fourth quarter, following a decrease of $2.0 billion in the third quarter and an increase of $39.1 billion in the second."
Good Bye Gross National Product!
In 1991, the United States switched from using gross national product (GNP) to gross domestic product (GDP) as the primary measurement of production or output GDP is product produced within a country's borders. GNP is product produced by enterprises owned by a country's citizens. Using GDP essentially factors out the production from firms outside the US and the impact of trade. In Q4 U.S. GNP was $15.443 trillion. The BEA did not specifically mention the GNP in this announcement, as it did previously. This will be the last mention of GNP in the "Focus on Economic Data" lessons. GNP data can be found in the announcement, Table 9.
What Happened to GDP in 2011?
According to the BEA, "Real GDP increased 1.7 percent in 2011 (that is, from the 2010 annual level to the 2011 annual level), compared with an increase of 3.0 percent in 2010."
"Current-dollar GDP increased 3.9 percent, or $561.2 billion, in 2011, compared with an increase of 4.2 percent, or $587.5 billion, in 2010."
"The increase in real GDP in 2011 primarily reflected positive contributions from personal consumption expenditures (PCE), exports, and nonresidential fixed investment that were partly offset by negative contributions from state and local government spending, private inventory investment, and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased."
"The deceleration in real GDP in 2011 primarily reflected downturns in private inventory investment and in federal government spending and a deceleration in exports that were partly offset by a deceleration in imports and an acceleration in nonresidential fixed investment."
Some Key GDP Definitions (from the BEA Glossary)
Gross domestic product (GDP). The market value of goods and services produced by labor and property in the United States, regardless of nationality.
Real gross domestic product (real GDP). GDP adjusted for the effect of a change in the price level.
Gross national product (GNP). The market value of goods and services produced by labor and property supplied by U.S. residents, regardless of where they are located.
Full Employment GDP. The nation's potential output when all of the nation's productive resources (natural, human, and capital resources) are fully utilized. If all of the nation's factories were working at full capacity and there was full employment, what would the GDP be?
Potential GDP: The highest level of real gross domestic product that could be reached without putting pressure on the price level - inflation.
Per Capita GDP. The nation's nominal - current dollar - GDP divided by its population.
- Real Per Capita GDP: The nation's real GDP divided by its population.
U.S. real GDP increased by 2.8 percent in Q4 2011, according to the first of the three estimates that will be made by the Bureau of Economic Analysis. If history as a guide, the "advance" estimate will be adjusted in the February and March, 2011, announcements.
A consensus among many economists has been that a 3 percent annual increase in GDP is "normal" and what it takes to keep the economy growing enough to provide jobs to new entrants and not put too much pressure on the price level. 2.8 percent is just below that threshold.
The average annual U.S. GDP growth rate over the last 20 years has been about 2.6 percent, including the GDP decreases in 2008 and 2009. (Without the recession years, growth years have averaged 2.79 percent.) Taking a longer look, since 1948, the U.S. GDP growth rate has averaged about 3.25 percent.
Some suggest that there will be a "new normal" in the relationship between GDP and employment, and that output increases will be more and more the result of productivity increases.
The question that many Americans ask is, "when will we be back to normal - with steady growth and full employment?
What do you think?
Next, answer the questions on the interactive notepad below.
The BEA provides a history of U.S. gross domestic product (nominal GDP and real GDP) growth annually since 1930 and by quarter since 1947, to the present year.
Take a good look at the GDP data over the time period. Gross Domestic Product: Percent Change From Preceding Period, www.bea.gov/national/index.htm#gdp
What are the periods of growth and decline? Was the data (growth rates) consistent throughout the period of time?
Can you identify the periods of the recessions (and the Great Depression)?
- Compare the nominal growth rates and the real growth rates. Can you find periods of high inflation?