Return

This lesson focuses on the April 30, 2008, report on Real Gross Domestic Product (Real GDP), produced 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 Focus on Economic Data will also raise questions the impact of the current level of growth on the economy and individuals.

KEY CONCEPTS

Business Cycles, Economic Growth, Gross Domestic Product (GDP), Macroeconomic Indicators, Nominal Gross Domestic Product (GDP), Per Capita Gross Domestic Product (GDP), Potential Gross Domestic Product (GDP), Real Gross Domestic Product (GDP), Real vs. Nominal

STUDENTS WILL

  • 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.
  • Determine the difference between nominal and real gross domestic product.
  • Speculate about the nature and impact of current economic conditions and implications for the future.

Current Key Economic Indicators

as of November 10, 2014

Inflation

The Consumer Price Index for All Urban Consumers increased 0.1 percent in October on a seasonally adjusted basis. The core inflation rate increased the same amount. For the previous 12 months, the index increased 1.7%, the same rate as reported in the September report.

Employment and Unemployment

According to the October report of the Bureau of Labor Statistics, the unemployment rate fell from 5.9% to 5.8%, and the number of individuals unemployed also decreased. Total nonfarm employment rose by 214,000 in October. Employment gains were concentrated in retail trade, food services and health care.

Real GDP

The advance estimate for real GDP growth in the third quarter of 2014 was 3.5%, a decrease from the revised second quarter growth of 4.6%. Inventory investment reduced third quarter growth, while it added to second quarter growth. In addition, consumer spending increased at a lower rate in the third quarter, compared to the second. Finally, business investment increased in the third quarter, but at a lower rate than in the second quarter.

Federal Reserve

The FOMC believes that the labor market has shown considerable improvement and the risks of inflation rising above its 2% target are low. Therefore, the Federal Reserve announced plans to end its purchase of financial assets. In addition, the federal funds rate will remain at its current low level. However, the FOMC has signaled its willingness to increase the federal funds rate if inflation shows signs of rising above the 2% target.

INTRODUCTION

This lesson focuses on the April 30, 2008, advance estimates of Real Gross Domestic Product (Real GDP)for the first quarter of 2008, produced 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 Focus on Economic Data will also raise questions about the potential for a recession in the United States in 2008.

The Bureau of Economic Analysis (BEA) announcement: April 30, 2008. GROSS DOMESTIC PRODUCT: FIRST QUARTER 2008 (ADVANCE)

'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 0.6 percent in the first quarter of 2008, according to advance estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP also increased 0.6 percent.

The Bureau emphasized that the first-quarter 'advance' estimates are based on source data that are incomplete or subject to further revision by the source agency. The first-quarter 'preliminary' estimates, based on more comprehensive data, will be released on May 29, 2008.

The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE) for services, private inventory investment, exports of goods and services, and federal government spending that were partly offset by negative contributions from residential fixed investment and PCE for durable goods. Imports, which are a subtraction in the calculation of GDP, increased.

The increase in real GDP is the same as in the fourth quarter, reflecting an upturn in inventory investment that was offset by an upturn in imports, and downturns in nonresidential structures, in PCE for durable goods, and in PCE for nondurable goods.

Final sales of computers contributed 0.12 percentage point to the first-quarter growth in real GDP after contributing 0.16 percentage point to the fourth-quarter growth. Motor vehicle output subtracted 0.30 percentage point from the first-quarter growth in real GDP after subtracting 0.86 percentage point from the fourth-quarter growth.'

What is the Bureau of Economic Analysis (BEA)?

'BEA is an agency of the Department of Commerce. Along with the Census Bureau and STAT-USA, BEA is part of the Department's Economics and Statistics Administration.

BEA produces economic accounts statistics that enable government and business decision-makers, researchers, and the American public to follow and understand the performance of the Nation's economy. To do this, BEA collects source data, conducts research and analysis, develops and implements estimation methodologies, and disseminates statistics to the public.'

Source: www.bea.gov/about/mission.htm

RESOURCES


Key Economic Indicators

as of April 30, 2008

Inflation

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9% in March, 2008.

Employment and Unemployment

The U.S. Unemployment Rate was 5.0% in April, 2008.

Real GDP

U.S. Real GDP increased at an annual rate of 0.6 percent in the first quarter of 2008.

Federal Reserve

The Federal Reserve FOMC lowered the target federal funds rate by 25 basis points to 2.0 percent on April 30, 2008.

PROCESS

U.S. Department of Commerce: Bureau of Economic Analysis: April 30, 2008: The announcement:

GROSS DOMESTIC PRODUCT: FIRST QUARTER 2008 (ADVANCE)


'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 0.6 percent in the first quarter of 2008, according to advance estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP also increased 0.6 percent.

The Bureau emphasized that the first-quarter 'advance' estimates are based on source data that are incomplete or subject to further revision by the source agency. The first-quarter 'preliminary' estimates, based on more comprehensive data, will be released on May 29, 2008.

The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE) for services, private inventory investment, exports of goods and services, and federal government spending that were partly offset by negative contributions from residential fixed investment and PCE for durable goods. Imports, which are a subtraction in the calculation of GDP, increased.

The increase in real GDP is the same as in the fourth quarter, reflecting an upturn in inventory investment that was offset by an upturn in imports, and downturns in nonresidential structures, in PCE for durable goods, and in PCE for nondurable goods.

Final sales of computers contributed 0.12 percentage point to the first-quarter growth in real GDP after contributing 0.16 percentage point to the fourth-quarter growth. Motor vehicle output subtracted 0.30 percentage point from the first-quarter growth in real GDP after subtracting 0.86 percentage point from the fourth-quarter growth.'

Measuring the Nation's Output: Gross National Product (GNP) vs. Gross Domestic Product (GDP)

GNP measures the total value of goods and services produced by workers from a country regardless of where they produce them. GNP includes such items as corporate profits that multinational firms earn in overseas markets. If an American firm operates a plant in Mexico, the firm's profits are included in the U.S. GNP.

In comparison, GDP measures the total amount of goods and services that are produced within a country's borders. The production of the American company's plant in Mexico is included in Mexico's GDP.

Current-dollar or Nominal GDP in the First Quarter or 2008

Current-dollar or Nominal GDP, the market value of the nation's output of goods and services, increased 3.2 percent, or $111.0 billion, in the first quarter to a level of $14,185.2 billion.

Real or Chained GDP in the First Quarter or 2008

Real GDP, adjusted for the effect of inflation increased 0.6 percent in the first quarter to a level of $11,693.1 billion. This figure is 'chained' to 2000 dollars to counter the effects of inflation in the price level.

How is GDP Measured?

Is the economy growing? How fast is the economy growing? Is it speeding up or slowing down?

The Bureau of Economic Analysis produces the national income and product accounts (NIPAs), several measurements of the growth of the economy. The primary measurement 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. It is one of the most comprehensive and closely watched economic statistics.

What does the BEA measure?

'GDP includes market production and some non-market production. GDP is composed of goods and services that are produced for sale in the 'market,' the generic term referring to the forum for economic transactions, and of nonmarket goods and services, those that are not sold in the market, such as the goods and services provided by the governments, services provided by nonprofit institutions serving households and housing services provided by and for persons who own and live in their home.

Not all productive activity is included in GDP. Some activities, such as the care of one's own children, unpaid volunteer work for charities, or illegal or black-market activities, are not included because they are difficult to accurately measure and value.' (Source: BEA)

Market Prices

'Whenever possible, GDP is valued at market prices. The NIPAs value market goods and services using prices set by the market. Using market values also facilitates the analysis of the impacts on the economy of events such as the implementation of government programs or the occurrence of natural disasters.

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. Examples of imputed measures in the NIPAs include the value of compensation-in-kind (such as meals provided by employers) and the value of owner-occupied housing.' (Source: BEA)

Current Production

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 inventory.

Final Goods and Services

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 considering the production process for the entire economy, intermediate products, that is, goods and services that are later used as inputs in the production process are excluded, so that the measure of output is not duplicated in the total.

Methods of Measurement

GDP can be measured in three different ways.

First, GDP can be measured as the sum of expenditures, or purchases, by final users. This is known as the expenditures approach, illustrated by the formula GDP = C+I+G+X-M (Consumption + Investment + Government spending + eXports – iMports) and is used to identify the final goods and services purchased by persons, businesses, governments, and foreigners.


U.S. GDP First Quarter 2008 (Current Dollars, Annual Rate)


+ C (Consumption) $10,046.9 (billions)

+ I (Investment) $2,050.8

+ G (Government) $1.799.2

+ X (Exports) $2,824.7

- M (Imports) $2,536.5

= GDP $14,185.2*

*Rounding difference = .1


Second, 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.

Third, 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.

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 (50 states and the District of Columbia). 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.

GDP is a 'Gross' Measurement

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 capital needed to cover the aging, wear and tear, accidental damage, and obsolescence of existing fixed assets.

Net Domestic Product

Subtracting CFC from GDP leaves 'net domestic product.' 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.

Want More Detailed Information?

The Bureau of Economic Analysis publishes an online guide to 'Measuring the Economy: A Primer on GDP and the National Income and Product Accounts: www.bea.gov/national/pdf/nipa_primer.pdf .

What happens to the measurement of real GDP during a quarter?

The April 30, 2008, BEA announcement referred to the 'advance' estimate of real GDP. The BEA online guide refers to the revisions as 'advance' estimates, based on source data that are incomplete or subject to further revision by the source agency, are released near the end of the first month after the end of the quarter; as more detailed and more comprehensive data become available, 'preliminary' and 'final' estimates are released near the end of the second and third months, respectively. The 'latest' estimates reflect the results of both annual and comprehensive revisions.

The components used to determine GDP include:

  • Personal Consumption (C): Durable and nondurable goods, services.
  • Investment Spending (I): Nonresidential, residential, and business inventories
  • Government Expenditures (G): Defense, highways, schools, etc.
  • Net Exports (X): Exports are added to GDP. Imports are subtracted from GDP
  • Formula: GDP = C + I + G + X

Real Per Capita GDP

The meaning of GDP may be more meaningful when expressed relative to nation's population, called Real Per Capita GDP. China, for instance has a large GDP compared to most nations. But, when China's GDP is expressed 'per capita,' it is much smaller than many nations.

For example, the U.S. GDP of $14,185 billion provides about $45,600 per capita (per person). China has a GDP of $2.7 billion, which is only about $2,500 per capital. When viewed only as a total number, GDP have a very different meaning than when measured per person. China's GDP is approximately 19 percent of the U.S. GDP. China's per capital GDP is only 5.5 percent of U.S. per capita GDP.

The chart below shows the nominal and real per capital GDP's of the United States, the European Union, Japan and China. Notice the relationship of nominal GDP to per capital GDP. China, for instance has a large GDP compared to other developing nations. But, when China's GDP is expressed 'per capita,' it is much smaller than many nations. While China's nominal GDP growth is increasing relative to the U.S., it's real per capita GDP as a measure of standard of living may not be as significant.

GDP, Selected Nations (millions), Reported by the World Bank, 2006

Nominal GDP Nominal GDP per capita

United States

$13,201.80

$44,970

European Union

$10,526.50

$34,149

Japan

$4,340.10

$38,410

China

$2,668.10

$2,010

World Total

$48,244.90

$7,439


GDP Data Trends

Following the 2001 recession, growth in real GDP increased by 1.6 percent in 2002, 2.5 percent in 2003, and 3.6 percent in 2004. The annual rate of growth decreased slightly to 3.1 percent in 2005 and 2.9 percent in 2006. Growth in the first quarter of 2007 was very

slow, but increased over the next two quarters to 3.8 and 4.9 percent. The 0.6 percent rate of growth in the fourth quarter of 2007 and the first quarter of 2008 is the lowest since the fourth quarter of 2002.

The reports of the rates of growth over the last twelve months have been erratic, from slightly less than one percent in the first-quarter to 4.9 percent in the third quarter. 2007 ended with the slowest growth of any twelve-month period since 2002-2003. Figure 1 illustrates recent changes in US real GDP growth,1990-2008.

figure1


What sectors of the economy are growing?

According to the April 30, 2008, BEA report:

Real personal consumption expenditures increased 1.0 percent in the first quarter, compared with an increase of 2.3 percent in the fourth. Durable goods decreased 6.1 percent, in contrast to an increase of 2.0 percent. Nondurable goods decreased 1.3 percent, in contrast to an increase of 1.2 percent. Services increased 3.4 percent, compared with an increase of 2.8 percent.

Real nonresidential fixed investment decreased 2.5 percent in the first quarter, in contrast to an increase of 6.0 percent in the fourth. Nonresidential structures decreased 6.2 percent, in contrast to an increase of 12.4 percent. Equipment and software decreased 0.7 percent, in contrast to an increase of 3.1 percent. Real residential fixed investment decreased 26.7 percent, compared with a decrease of 25.2 percent.

Real exports of goods and services increased 5.5 percent in the first quarter, compared with an increase of 6.5 percent in the fourth. Real imports of goods and services increased 2.5 percent, in contrast to a decrease of 1.4 percent.

Real federal government consumption expenditures and gross investment increased 4.6 percent in the first quarter, compared with an increase of 0.5 percent in the fourth. National defense increased 6.0 percent, in contrast to a decrease of 0.5 percent. Nondefense increased 1.8 percent, compared with an increase of 2.8 percent. Real state and local government consumption expenditures and gross investment increased 0.5 percent, compared with an increase of 2.8 percent.

The real change in private inventories added 0.81 percentage point to the first-quarter change in real GDP after subtracting 1.79 percentage points from the fourth-quarter change. Private businesses increased inventories $1.8 billion in the first quarter, following a decrease of $18.3 billion in the fourth and an increase of $30.6 billion in the third.

Real final sales of domestic product -- GDP less change in private inventories -- decreased 0.2 percent in the first quarter, in contrast to an increase of 2.4 percent in the fourth.'

Why are Changes in Real Gross Domestic Product Important?

The measurement of the production of goods and services produced each year permits us to evaluate our monetary and fiscal policies, our investment and saving patterns, the quality of our technological advances, and our material well-being. Changes in real GDP per capita provide our best measures of changes in our material standards of living.

While rates of inflation and unemployment and changes in our income distribution provide us additional measures of the successes and weaknesses of our economy, none is a more important indicator of our economy's health than rates of change in real GDP.

Changes in real GDP are discussed in the press and on the nightly news after every monthly announcement of the latest quarter's data or revision. This current increase in real GDP will be discussed in news reports as a positive sign of the strength of the current economy.

Real GDP trends are prominently included in discussions of potential slowdowns and economic booms. They are featured in many discussions of trends in stock prices. Economic commentators use decreases in real GDP as indicators of recessions. A popular definition of a recession is at least two consecutive quarters of declining real GDP.

Long-term Trends

Economic growth, as measured by average annual changes in real GDP, was 4.4 percent in the 1960s. Average rates of growth decreased during the 1970s (3.3%), the 1980s (3.0%), and the first half of the 1990s (2.2%). In the last five years of the 1990s, the rate of growth in real UGDP increased to 3.8 percent, with the last three years of the 1990s being at or over 4.1 percent per year. Growth slowed in the beginning of the 2000s, but rebounded and averaged 3.5 percent on an annual basis. for the 2003 through 2006 period. The rate of growth declined in 2007.

The upward trend in economic growth over the past decade has been accompanied by increases in the rates of growth of consumption spending, investment spending, and exports. Productivity increases, expansions in the labor force, decreases in unemployment, and increases in the amount of capital have allowed real GDP to grow at the faster rates. Figure 2 shows the history of growth since the 1970s. Figure 2 also shows the average annual rate of growth of 3.1 percent since 1970. Note the recent downturn in the growth rate.

figure2

The longer run rate of growth of 3.1 percent has most recently been caused by a one percent increase in the number of people working and about a two percent increase in productivity of each worker. During the periods prior to the 1990s, the productivity increase contribution was slightly less than two percent and the labor force growth part slightly higher than one percent.

What is the relationship between GDP and Unemployment?

Full employment real GDP

Economists define the approximate unemployment rate, at which there are not upward or downward pressures on wages and price, as full employment rate of unemployment. If unemployment falls to level below the full employment rate, there will be upward pressure on wages and prices. If unemployment rises to a very high rate, there will downward pressure on wages and prices or wages and prices will remain steady. In the middle is a level, or more likely a range, where there is not pressure on wages and prices to rise or fall.

The level of real GDP that can be produced at that rate of unemployment is described at the full employment level of real GDP. Sometimes it is described as the potential level of real GDP. It is the highest level that an economy can produce at any given time without causing significant inflation.

The potential output or potential gross domestic product of a nation is the highest level of real GDP output that can be achieved with the nation's productive resources. One constraint on output is the level of employment. If the nation's economy is at its full potential, the unemployment rate is the NAIRU or the 'natural rate of unemployment.' Unemployment above this natural level will reduce output.

The relationship of unemployment and GDP growth is often identified by the statistical relationship known as 'Okun’s law.' Developed by economist Arthur Okun in 1962, the 'law' relates a decrease in the unemployment rate to increases in output growth and an increase in the unemployment rate to a decrease in output.

Professor Okun theorized that a 1 percentage point decline in the unemployment rate was, on average, associated with additional output growth of about 3 percentage points. Okun’s law is now commonly stated that a 1 percentage point decrease in the unemployment rate means additional output growth of about 2 percent.

Look at past and watch for the future EconEdLink lessons on employment and GDP to track this relationship.

How can we stimulate growth?

Economic Policy Options

There are two type of policies government can use to stimulate the economy (or slow it down). Policy actions to stimulate growth are referred to a 'expansionary' policies. Policy actions to slow the economy are referred to a 'contractionary' policies.

Monetary Policies

Monetary policies are those that influence the supply of money or interest rates in the economy. These policies are tools of the Federal Reserve System. The Federal Reserve determines policies through the Federal Open Marker Committee (FOMC). The FOMC consists of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.

The FOMC holds eight regularly scheduled meetings per year. At these meetings, the Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.

Open Market Operations- the buying or selling of government securities in the 'open market.'

Discount Rate- the interest rate charged by the Federal Reserve Banks to member banks.

Reserve Requirements- The percentage of deposits banks must keep on reserve in their vaults or in accounts in the federal Reserve Banks. A banks ability to make loans is increases when it has more excess reserves.

A Note on the Federal Funds Rate

In the news, you will read that the Federal Reserve has set a target for the federal funds rate or desired quantity of reserves.

Using its monetary policy tools, the Federal Reserve can influence the demand and supply of balances that depository institutions hold at Federal Reserve Banks. This will alter the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.

Changes in the federal funds rate affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services.

Fiscal Policies

Fiscal policies are the use of government revenues (spending or taxes) to expand or contract the economy.

Spending- The Federal government can increase spending to stimulate the economy or decrease spending to slow it down.*

Taxes- The federal government can increase taxes to slow the economy or decrease taxes to stimulate the economy.

What Can be done?

In a time when the economy is slow, the Federal Reserve can:

  • Buy securities to expand the money supply
  • Lower the discount rate to increase banks' excess reserves
  • Decrease reserve requirements to increase banks' excess reserves

The federal government can:

  • Spend more money to increase aggregate demand and create jobs
  • Lower taxes to leave more money in the hands of people or businesses to spend

*This is the intent of the tax rebate passed by Congress in early 2008

ASSESSMENT ACTIVITY

Use the this table to complete the following questions.
Consumption spending $7,000
Social security payments $500
Income tax receipts $1,000
Exports $1,100
Business purchases of new factories and equipment and changes in inventories $1,800
Federal government spending on goods and services $550
Construction of new homes $200
State and local spending on goods and services $1,300
Changes in inventories $-300
Imports $1,500
Wages $6,000
Answer the following questions based on this economic data ($ billions).

1. Given the data ($ billions) what is the level of government spending in the calculation of GDP?

[Government spending equals $1,850, $550 plus $1,300. Government spending is equal to the sum of federal spending on goods and services and state and local spending on goods and services. Social security payments are transfers of income from tax payers to social security recipients and do not represent the production of goods and services.]

2. What is the level of investment?

[Investment equals $1,700 $1,800 + 200 - 300. New factories and equipment and construction of new homes are included in investment. However, since business inventories fell, we subtract $300 billion from investment in structures, equipment, and residential housing to get the investment portion of GDP.]


3. What is the level of net exports?

{Net exports equal a minus $400, $1,100 - 1,500. Net exports are exports minus imports. In this case, the economy has a balance of trade deficit.]

4. Calculate the level of gross domestic product.

[GDP equals $10,150 billion ($7,000 + 1,850 + 1,700 - 400). GDP equals consumption spending plus government spending on goods and services plus investment spending plus net exports.]

5. If GDP has increased by 4 percent and inflation is 1 percent, what has happened to real GDP?

[If nominal GDP has increased by 4 percent and inflation was 1 percent, the amount of output has increased by 3 percent. The remaining (after inflation) increase in nominal GDP must be due to real output increases.]


6. If GDP increases by 5 percent and real GDP increased by 4 percent, what has happened to the average price level?

[If nominal GDP increases by 5 percent and the amount of output increases by 4 percent, then prices must have increased by 1 percent.]

7. If productivity rise by less than real GDP, what is likely to have happened to employment? Increase? Decrease? Cannot determine?

[Increase. Because output increased by more than the output per worker, it must take more workers to produce the increased output.]


8. If real GDP increased by 4 percent and employment increased by 3 percent, what is likely to have happened to productivity?

[Increase. If real GDP increases by more than the rate of increase in the number of workers, than output per worker must have increased.]

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

[Perhaps we are better off. Part of 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.

10. If consumers begin to purchase automobiles manufactured abroad instead of those manufactured in the U.S., what will happen to real GDP? Will the answer be different if consumers are simply increasing their spending and those purchases are of automobiles manufactured abroad?

[Consumption spending will remain the same; however, imports will increase. Real GDP in the U.S. will decrease. In the second instance, consumption spending increased, but imports increased by an equal amount. Real GDP does not change. The components do change.]

CONCLUSION

A Recession in 2008?

Real GDP trends are prominently included in discussions of potential slowdowns and economic booms. They are featured in many discussions of trends in stock prices. Economic commentators use decreases in real GDP as indicators of recessions. A popular definition of a recession is at least two consecutive quarters of declining real GDP.

The National Bureau of Economic Research Business Cycle Dating Committee determines and reports on U.S. business cycles. The NBER identifies the dates of peaks and troughs that identify economic recessions or expansions.

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 real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.'

To identify trends, the NBER committee looks closely at two monthly measures of economic activity:

Personal income less transfer payments, in real term, employment. In addition, the committee looks at two indicators of manufacturing and goods:

Industrial production, the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes.
How Can We Increase Economic Growth Over Time?

Economic growth is a function of the technological innovation and the amount and quality of labor and capital in the economy.

As more people are employed, the amount of capital increases, education levels increase, the quality of capital changes, or the technology increases, the productive capacity of the economy increases. Therefore, the economy can increase its output giving consumers more disposable income, promoting an increase in consumption spending, and providing resources for business to use for further investment and government to use to provide public goods and services.

Increased labor force participation increases output. Expanded, improved education creates more productive workers. Business and government spending on research and development enhance our abilities to produce and allow each worker to become more productive, increasing incomes for all.

To achieve a higher level of GDP in the future, consumers should limit consumption spending and increase savings, permitting businesses to invest more in capital goods. If resources are invested into building an economy now, future generations will enjoy a higher level of economic growth; our businesses will produce more goods and consumers can purchase more goods. Expansion of output at rates faster than our population growth is what gives us the opportunity to enjoy higher standards of living.

[Note to teacher: Ask students to identify signs they see that growth is slowing or negative.

Answers: The signs can be: falling housing prices; higher unemployment; reduced investment; government policies to stimulate growth; changes in consumer behavior.

Are there signs that there is growth in some sectors of the economy?

Answers will vary. Stock market prices improved somewhat in late March. In some areas, commercial construction continues. Prices are increasing - normally not a feature of a slowing economy - but may be a result of global demand for commodities (oil, grains, metals).]

EXTENSION ACTIVITY

Go to the BEA Interactive Tables at www.bea.gov/interactive.htm

Compare the growth rate of your city, region or state with other cities, regions or states.

  • What might be the reasons for regional differences?
  • What characteristics of your region impact it's potential for growth?