This lesson focuses on the January 30, 2012, first (advance) estimate of U.S. real gross domestic product (real GDP) growth for the fourth quarter (Q4) of 2011, 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.
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, recent 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.
Current Key Economic Indicatorsas of November 30, -0001
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 advance (first) estimate of real GDP released on January 30, 2013, for the fourth quarter (October-December) of 2012. 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 second semester of the 2012-2013 school year (January-May), EconEdLink will publish four Focus on Economic Data lessons on U.S. Real GDP Growth.
GDP data is announced three times for each fiscal quarter. For Q4 2012, the first estimate is made in January (this lesson). The second estimate is made in February. The third (final) estimate for Q4 is made in March. The first estimate for growth for Q1 2013 is made in April 2013.
GDP data reports lag the reported time period - each fiscal quarter. The current estimate is for Q4 (October-December) 2012. 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.
Spring Semester 2011-2012 Real GDP Lesson Schedule:
Each real GDP lesson will provide the most up-to-date data and focus on some specific topics or issues related to GDP:
- January 30, 2013, first estimate for Q4, 2012: What are GDP, real GDP, per capital GDP, potential GDP. Recent history of real GDP.
- February 28, 2013, second estimate for Q4 2012: GDP and business cycles, indicators of future growth (decline).
- March 28, 2013, third (final) estimate for Q4 2012: Factors influencing the change in GDP, revisions, and seasonal adjustments. How the data is collected.
- April 26, 2013, first estimate for Q1 2013: U.S. regional economic growth comparisons and international GDP growth comparisons, plus a year-end summary.
- Real GDP Growth. BEA first estimate of real GDP growth for Q4 2012. www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp4q12_adv.pdf www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp2q12_3rd.pdf
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.
NBER determination of the December 2008 Peak in Economic Activity: This is the NBER recession announcement made on December 1, 2008.
NBER determination of the trough and the end of the most recent recession in June, 2009.
- Kahn Academy video: "Parsing Gross Domestic Product," www.khanacademy.org/finance-economics/macroeconomics/v/parsing-gross-domestic-product
- Kahn Academy video: "Components of GDP," www.khanacademy.org/finance-economics/macroeconomics/v/components-of-gdp
- Kahn Academy video: "Real GDP and Nominal GDP," www.khanacademy.org/finance-economics/macroeconomics/v/real-gdp-and-nominal-gdp
- Council for Economic Educaiton "Virtual Economics" video: "Gross Domestic Product (GDP)," www.econedlink.org/interactives/index.php?iid=204
Key Economic Indicatorsas of February 1, 2013
On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers was unchanged in December after decreasing 0.3 percent in November. The index for all items less food and energy rose 0.1 percent in December, the same increase as in November.
Total nonfarm payroll employment increased by 157,000 in January, and the unemployment rate was essentially unchanged at 7.9 percent. Retail trade, construction, health care, and wholesale trade added jobs over the month.
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 0.1 percent in the fourth quarter of 2012 (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 3.1 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...
How Big is the U.S. Economy? How Fast is It Growing?
For a variety of reasons, the size and growth rate of the size of the U.S. economy are 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 the nation's 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 nation's 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.
[Teacher Note: Students should be able to explain the difference between the current measurement of GDP and real GDP. The nation's GDP is measured in current dollars. Real GDP is adjusted for inflation.]
[Note to teachers: Ask your students if they think GDP is a good measure of people's well-being or standard of living. Suggest per-capita GDP as an alternative - GDP divided by the population. Even if per-capita GDP is more meaningful, is the GDP evenly divided among the population? See the more comprehensive definitions later in this lesson.]
[Teacher Note: Students may want to know how the U.S. GDP compares to other nations. To learn more about the GDPs and per capita GDPs of the world's nations, go to the CIA World Factbook or the World Bank web pages.]
U.S. Bureau of Economics Analysis
Gross Domestic Product: Fourth Quarter 2012 (Advance Estimate)
Announcement date: January 30, 2013
"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 0.1 percent in the fourth quarter of 2012 (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 3.1 percent."
[Note to Teacher: Unless otherwise cited, the quoted materials in the lesson are taken from the January 30, 2013, BEA real GDP announcement. Citation: U.S. Bureau of Economic Analysis, “National Income and Product Accounts, Gross Domestic Product, 4th quarter and annual 2012,” news release (January 30, 2013), www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp4q12_adv.pdf .]
The January 30, 2013 BEA announcement came as a shock to many. The U.S. economy (by this measurement) contracted in the fourth quarter of 2012.
This was the first (advance) of three estimates of GDP growth for Q4 2012. 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 and the "Comparisons of Revisions to GDP" on page 5). The "second" estimate for the fourth quarter, based on more complete data, will be released on February 28, 2013."
The three GDP growth estimates for a quarter can vary greatly. For example, 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.
Note: A period of no growth or negative growth along with high unemployment over some time period is often called a recession. Do not make the mistake of thinking that one quarter of negative growth is an indicator of a recession.
A Note About Measuring U.S. GDP at the End of 2012
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 2012 current dollar U.S. GDP was $15.676 trillion. It also indicates that the 2012 GDP in chained (adjusted for inflation) dollars was $13.588 trillion.
The list of GDP figures by quarter indicates that the 2012 Q4 current dollar U.S. GDP was $15.829 trillion. It indicates that the 2012 Q4 U.S. GDP in constant dollars was $13.647 trillion. While not a huge difference, the current dollar GDP estimates for Q4 and for the full year differ by $153 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 2012?
- $15,829,700,000,000 in current dollars (end of Q4)
- $13.647,400,000,000 in constant (chained 2005) dollars.
[Teacher Note: Just for fun, ask your students: How many zeros are in a trillion? (1, followed by 12 zeros.) Students should be able to distinguish between millions, billions and trillions when they look at macroeconomic data. One trillion may be reported as 1.0 trillion or 1,000 billion.]
[Note to teachers: This is a good time to talk about interpreting economic data. As an example, us the data for quarterly increases and decreases in GDP (www.bea.gov/national/xls/gdpchg.xls ). Note how the quarterly estimates will vary greatly from one quarter to another. The annual rate may not accurately reflect the volatility in the economy over a year.]
[Note to teachers: The second and third announcements for a quarter are based on more complete or new data. This is a good time to introduce leading, concurrent and lagging indicators. Link to Conference Board indexes of indicators: www.conference-board.org/data/bcicountry.cfm?cid=1 The leading, concurrent, and lagging indicators will be discussed in the next GDP lesson in February, 2012.]
Figure 1, below, shows the quarterly growth rates of U.S. real gross domestic product from 2001 through 2012. 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.
[Teacher Note: Students should be able to 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 change (increase or decrease) 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 2012, the BEA provided this summary:
"The decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased."
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 downturn in real GDP in the fourth quarter primarily reflected downturns in private inventory investment, in federal government spending, in exports, and in state and local government spending that were partly offset by an upturn in nonresidential fixed investment, a larger decrease in imports, and an acceleration in PCE."
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 slightly faster rate, and automobile output increased after a decrease in Q3.
"Final sales of computers added 0.15 percentage point to the fourth-quarter change in real GDP after adding 0.11 percentage point to the third-quarter change. Motor vehicle output added 0.04 percentage point to the fourth-quarter change in real GDP after subtracting 0.25 percentage point from the third-quarter change. ."
[Note to teachers: The BEA regularly reports data on computers and automobiles because this data is commonly requested. Ask your students why this may be important information to large numbers of people. Are computer sales a good indicator of economic growth? What about automobile sales? Are they a good indicator?
Ask your students what products they think are good indicators of economic growth? Their answers may vary greatly, but it may be a good discussion and a way to see if they understand GDP and how economic indicators work.]
GDP Growth in the 2000s
Figure 2, below, shows the size of the U.S. GDP - current dollar and constant dollars - for the years 2000 through 2012. The decrease in real GDP in 2008 and 2009 illustrates the recession. Note the GDP decrease in Q4 2012.
Note: The 2012 annual GDP in the Figure 2 differs somewhat from the GDP level reported for Q4 2012, due to differences in computing methods for the quarterly and annual GDP data. This difference was explained earlier in the lesson.
[Note to teachers: Students may be interested in learning more about the 2007-2009 recession. The BEA provides a quick definition and links to more information. www.bea.gov/faq/index.cfm?faq_id=485 .
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.
[For more information about potential GDP, go to “A Summary of Alternative Methods for Estimating Potential GDP,” Congressional Budget Office (March 2004), page 9. URL: www.cbo.gov/ftpdocs/51xx/doc5191/03-16-GDP.pdf ]
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.
[Teacher Note: Point out that 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)
Per Capita GDP
The nation's GDP divided by the population is the per capita GDP. $15,829,700,000,000 divided by 315,427,320 (resident population and military overseas, December 31, 2012) is $50,184.94. The CIA World Factbook ranked the U.S. as the second largest economy in the world (behind the European Union) and 12th in per capita GDP in 2012.
The January 30, 2013, BEA announcement for Q4 2012 reported:
- Real personal consumption expenditures (PCE) "increased 2.2 percent in the fourth quarter, compared with an increase of 1.6 percent in the third. Durable goods increased 13.9 percent, compared with an increase of 8.9 percent. Nondurable goods increased 0.4 percent, compared with an increase of 1.2 percent. Services increased 0.9 percent, compared with an increase of 0.6 percent." PCE typically represents about 70 percent of GDP in the U.S.
- Real nonresidential fixed investment "increased 8.4 percent in the fourth quarter, in contrast to a decrease of 1.8 percent in the third. Nonresidential structures decreased 1.1 percent; it was unchanged in the third quarter. Equipment and software increased 12.4 percent in the fourth quarter, in contrast to a decrease of 2.6 percent in the third. Real residential fixed investment increased 15.3 percent, compared with an increase of 13.5 percent."
- Real exports of goods and services "decreased 5.7 percent in the fourth quarter, in contrast to an increase of 1.9 percent in the third. Real imports of goods and services decreased 3.2 percent, compared with a decrease of 0.6 percent."
- Real federal government consumption expenditures and gross investment "decreased 15.0 percent in the fourth quarter, in contrast to an increase of 9.5 percent in the third. National defense decreased 22.2 percent, in contrast to an increase of 12.9 percent. Nondefense increased 1.4 percent, compared with an increase of 3.0 percent. Real state and local government consumption expenditures and gross investment decreased 0.7 percent, in contrast to an increase of 0.3 percent.
[Teacher Note: 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?]
[Note to teachers: Ask your 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 2012 added, "The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.3 percent in the fourth quarter, compared with an increase of 1.4 percent in the third. 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 1.2 percent in the third."
[Teacher Note: Discussion Question: How did inflation affect you in the past few months? Did you notice any price changes? For recent inflation data, go to the U.S. Bureau of Labors Statistics website - www.bls.gov .]
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 subtracted 1.27 percentage points from the fourth-quarter change in real GDP after adding 0.73 percentage point to the third-quarter change. Private businesses increased inventories $20.0 billion in the fourth quarter, following increases of $60.3 billion in the third and $41.4 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. The BEA did not specifically mention the GNP in this announcement, as it did previous to 2012. This will be the last mention of GNP in the "Focus on Economic Data" lessons.
Some Key GDP Definitions (from the BEA Glossary)
[Teacher Note: Review these key terms with your students.]
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.
[Note to Teachers: Students should be familiar with these definitions to better understand future BEA real GDP announcements.]
U.S. real GDP decreased by 0.1 percent in Q4 2012, according to the first of the three estimates that will be made by the Bureau of Economic Analysis. If history is a guide, the "advance" estimate will be adjusted in the February and March, 2012, 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. The Q4 advance estimate is well below that level, indicating a significant slowdown from Q3.
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?
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?
[Note to teachers: Assign pairs or small groups to look at different time periods. They can summarize the data and suggest their meanings to the other groups.]