This lesson focuses on the February 27, 2009, preliminary announcement of U.S. real gross domestic product (Real GDP) for the fourth quarter of 2008, 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.
Aggregate Demand (AD), Aggregate Supply (AS), Business Cycles, 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)
- 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 Indicatorsas of November 10, 2014
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.
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.
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.
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.
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 "Focus on Economic Data" lesson focuses on the BEA “preliminary” estimates released February 27, 2009, for the fourth quarter (October, November and December) of 2008. Understanding the level and rate of growth of the economy's output (GDP) helps to better understand employment trends, the health of businesses, and consumer well-being.
[Note to teachers: During the second half of the school year (January-June), EconEdLink will publish four Focus on Economic Data lessons on "U.S. Real GDP Growth." Real GDP data is announced three times for each fiscal quarter. For Q4 2008, the advance announcement is made in January, the preliminary report (this lesson) is made in February, and the final Q4 2008 report is made in March. The advance report for Q1 of 2009 will be made in April.
Note that the GDP data reports lag the reporting period. Each of the three announcements for a quarter will include more comprehensive data and may modify the growth rate reported earlier. Each Real GDP lesson will provide the most up-to-date data and focus on some specific topics or issues related to GDP:
- January (advance Q4 2008): How to read the data, real vs. nominal, and how the data is collected.
- February (preliminary Q4 2008): Factors influencing the change in GDP, revisions, and seasonal adjustments.
- March (final Q4 2008): Business cycles and indicators of future growth (decline).
- April (advance Q1 2009): Year-end summary and current issues]
BEA News Release of the Preliminary Estimate of U.S. GDP, Fourth Quarter, 2008: This February 27, 2009 article gives a primary estimate of U.S. GDP.
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.
Determination of the December 2008 Peak in Economic Activity: This is a NBER recession announcement made on December 1, 2008.
Who Uses BEA Measures?: This article summarizes who uses the BEA statistics.
Assessment Activity: This interactive quiz tests students' understanding of the GDP lesson.
The World Factbook: This CIA site provides economic data from a large number of nations in the world.
Key Economic Indicatorsas of February 27, 2009
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in January, before seasonal adjustment. The January level of 211.143 was virtually unchanged from January 2008.
Nonfarm payroll employment decreased by 598,000 in January and the unemployment rate rose from 7.2 to 7.6 percent.
Real gross domestic product decreased at an annual rate of 6.2 percent in the fourth quarter of 2008, (that is, from the third quarter to the fourth quarter). In the third quarter of 2008, real GDP decreased 0.5 percent.
Federal Reserve Policy: At its January 28, 2009 meeting, the Federal Open Market Committee decided to keep its target range for the federal funds rate at 0 to 1/4 percent.
The United States is in the middle (Or, is it the beginning? Or, is it toward the end?) of a recession that began in December, 2007. The National Bureau of Economic Research "Business Cycle Dating Committee" declared that economic conditions at that time warranted the designation of a peak in economic activity (a recession). Although the U.S. economy had not yet met the generally accepted criteria of negative growth for two consecutive quarters, conditions at the time seemed to be leading ot the GDP declines in 2008. In 2008, unemployment increased significantly and the crisis in financial and credit markets was taking its toll.
NBER Recession Announcement: "Determination of the December 2007 Peak in Economic Activity "
The February 27, 2009, BEA announcement of the Gross Domestic Product: Fourth Quarter 2008 (Preliminary) supports the NBER's designation of a recession:
"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 6.2 percent in the fourth quarter of 2008, (that is, from the third quarter to the fourth quarter), according to preliminary estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP decreased 0.5 percent. The GDP estimates released today are based on more complete source data than were available for the advance estimates issued last month. In the advance estimates, the decrease in real GDP was 3.8 percent."
The February 27 estimate of a 6.2 percent decline was almost double the previous Q4 2008 estimate released in January. This points out the importance of the BEA's practice of revising the quarterly GDP data over three monthly reports based on additional data and more complete information. In this case, the revision was significantly greater than previous quarterly revisions.
The BEA announcement highlighted some of the significant factors impacting the new Q4 data:
"The decrease in real GDP in the fourth quarter primarily reflected negative contributions from exports, personal consumption expenditures, equipment and software, and residential fixed investment that were partly offset by a positive contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, decreased."
"Most of the major components contributed to the much larger decrease in real GDP in the fourth quarter than in the third. The largest contributors were a downturn in exports and a much larger decrease in equipment and software. The most notable offset was a much larger decrease in imports."
"Final sales of computers subtracted 0.01 percentage point from the fourth-quarter change in real GDP, the same contribution as in the third quarter. Motor vehicle output subtracted 2.04 percentage points from the fourth-quarter change in real GDP after adding 0.16 percentage point to the third-quarter change."
Note from the BEA: "Quarterly estimates are expressed at seasonally adjusted annual rates, unless otherwise specified. Quarter-to-quarter dollar changes are differences between these published estimates. Percent changes are calculated from unrounded data and are annualized. “Real” estimates are in chained (2000) dollars. Price indexes are chain-type measures."
"The price index for gross domestic purchases, which measures prices paid by U.S. residents, decreased 4.1 percent in the fourth quarter, 0.5 percentage point less of a decrease than in the advance estimate; this index increased 4.5 percent in the third quarter. 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 2.8 percent in the third."
The determination of real GDP from the current dollar GDP was impacted by a drop in the price level - as measured by the price index for gross domestic product. During the quarter, the price level declined. The reported change in the measurement of output produced at the lower price level has to be increased to reflect constant prices.
This illustrates the difference between nominal (current dollar) and real (constant dollar) GDP. In a period of inflation, the nominal GDP figure may overstate the level of output. It may be that the same number of goods were produced, but at higher prices. Thus, the basic GDP measurement, number of goods times their prices, would show a bigger GDP number. In this case, the price level dropped. Even if the same number of goods and services had been produced, the nominal GDP measurement would have decreased. The change in GDP measurement has to be adjusted upward to represent constant prices.
Q4 Current-dollar GDP (from the February 27 BEA announcement)
"Current-dollar GDP -- the market value of the nation's output of goods and services -- decreased 5.8 percent, or $212.5 billion, in the fourth quarter to a level of $14,200.3 billion. In the third quarter, current-dollar GDP increased 3.4 percent, or $118.3 billion."
Revisions from the "Advance" to "Preliminary" Estimates for Q4
The preliminary estimate of the fourth-quarter change in real GDP is 2.4 percentage points, or $74.4 billion, lower than the advance estimate issued last month. The downward revision to the percent change in real GDP was widespread; the largest contributors were downward revisions to private inventory investment, to exports, and to personal consumption expenditures for nondurable goods."
|Advance and Preliminary Estimates
(Percent change from preceding quarter)
|Gross Domestic Purchases Price Index||-4.6||-4.1||.5|
Recent Nominal (current dollar) and Real (constant dollar) U.S. GDP Growth
The chart below shows U.S. GDP growth from 2000 through 2008. Notice that the annual rates of change of GDP, both nominal and real, vary greatly. Growth slowed in 2001 and 2002 and gradually increased through 2004, then leveling off through 2006. Slow declines in 2007 and early 2008 led to the sharp downturn that resulted in the current recession.
Of course, the decline in 2008 cannot be simply compared to previous business cycle declines. In 2008, falling housing prices (the bursting of the housing bubble) and frozen credit markets contributed significantly to the steep decline in economic activity and increased unemployment in Q4.
|Year||Current GDP||Percent Change||Real GDP||Percent Change|
It is important to note that although there was a large drop in output in Q4, the GDP growth for all of 2008 was still positive, a 1.1 percent increase. If there is another revision of the Q4 data in the final estimate in March, 2009, the whole year may be revised downward to a negative growth figure. This means that most (all but 1.1 percent) of the real U.S. GDP growth in the first nine months of 2008 was offset by the decline in Q4.
Figure 1 shows the U.S. real GDP changes since 1080. Note the "business cycles" of growth and decline.
How Do We Measuring Output?(Summarized from BEA Publications)
The most common method of measurement of gross domestic product (GDP) is the sum of personal consumption expenditures, gross private domestic investment, government consumption expenditures and gross investment, and net exports of goods and services. This is known as the “expenditures” or “product side” approach to measuring GDP.
Another way to measure GDP is as the sum of the charges generated in the production of the final goods and services. Because the market price of a final good or service reflects all the charges associated with producing that good or service, an “income-side” measure of output, gross domestic income (GDI), can be derived as the sum of the charges against production. Specifically, GDI is measured as the sum of compensation of employees (the return to labor), taxes on production less subsidies (a nonincome charge against production), net operating surplus (the net return to capital and entrepreneurship), and consumption of fixed capital (the using up of capital).
In theory, GDP and GDI are equal. In practice, the differences in the data used to derive the two measures lead to a discrepancy. This “statistical discrepancy” is defined in the NIPAs as GDP less GDI. Because the source data used to derive product-side measures of output are based on more comprehensive surveys and censuses, BEA considers them more reliable. Therefore, the statistical discrepancy appears as a component on the income side of the account.
Another way to measure output used by BEA is known as the “value added” approach. In these accounts, value added is defined as the difference between an industry’s total output—that is, its sales plus the change in inventories arising from production — and its intermediate purchases from other industries. When value added is aggregated across all industries in the economy, industry sales to and purchases from each other cancel out, and the remainder is industry sales to final users, or GDP.
What About Gross National Product?
Beginning in 1991, the BEA began using gross domestic product (GDP), rather than gross national product (GNP), as the primary measurement of U.S. production. This change recognized that GDP is more appropriate for many purposes for which an aggregate measure of the Nation’s production is used.
How do GDP and GNP differ?
Both GDP and GNP are defined in terms of goods and services produced, but they use different criteria for coverage. GDP covers the goods and services produced by labor and property located in the United States. As long as the labor and property are located in the United States, the suppliers (that is, the workers and, for property, the owners) may be either U.S. residents or residents of the rest of the world. GNP covers the goods and services produced by labor and property supplied by U.S. residents. As long as the labor and property are supplied by U.S. residents, they may be located either in the United States or abroad.
To change the measurement from GNP to GDP one must subtract income from foreigners, which represent the goods and services produced abroad using the labor and property supplied by U.S. residents, and add factor income payments to foreigners, which represent the goods and services produced in the United States using the labor and property supplied by foreigners. Factor incomes are measured as compensation of employees, corporate profits and net interest.
Why Focus on GDP?
GDP refers to production taking place in the United States. It is, therefore, the appropriate measure for much of the short-term monitoring and analysis of the U.S. economy. In particular, GDP is consistent in coverage with indicators such as employment, productivity, industry output, and investment in equipment and structures.
In addition, the use of GDP facilitates comparisons of economic activity in the United States with that in other countries. GDP is the primary measure of production in the System of National Accounts, the set of international guidelines for economic accounting that the U.S. economic accounts began using in the 1990’s. In addition, GNP is better than GDP for analysis that focus on the availability of resources, such as the nation’s ability to finance expenditures on education.
How much do the estimates of GDP and GNP differ?
For the United States, the dollar levels of GDP and GNP differ little—that is, the net receipts (receipts from foreigners less payments to foreigners) of factor income have been small (tables 1 and 2). The main reason is that the value of the property owned abroad by U.S. residents (U.S. investment abroad) less the value of the property owned by foreigners in the United States (foreign investment in the United States) has been small relative to the size of the U.S. economy. In some countries, the difference between GDP and GNP is much larger. For example, there is much more foreign investment in Canada than Canadian divestment abroad; consequently, its GNP was 3.6 percent smaller than its GDP in 1990. However, the difference in France, Japan, the United Kingdom, and several other industrialized countries is now similar, at 1 percent or less, to that in the United States.
The BEA reports the level and growth rate of "current" GDP, expressed in the current prices in the period being measured - Q4 in this announcement. This is also referred to as "nominal GDP." To factor out the effect of inflation, growth in the dollar amount that does not reflect additional output or "real" growth, GDP can be adjusted for inflation to result in real GDP. To factor out inflation, the growth rate is "chained" to prices in a base year. Calculating real GDP growth allows economists and planners to determine if production actually increased or decreased, without the impact of a change in the purchasing power of the dollar. If GDP increased by five percent and the rate of inflation was also five percent, "real" GDP growth was actually zero.
Per Capita Real GDP
Even real GDP doesn’t adequately measure what happened to each individual's share of the economic output. A more meaningful measurement for individuals may be “per capita real GDP,” or the real GDP divided by the nation's population. Given that the population has increased, the decline in per capita real GDP was actually greater than the reported 3.8 percent decline in real GDP. If the U.S. population increased by 1.2 percent over the past year, the actual decline in per capita real GDP was about 5 percent. Per capita real GDP reached a high of $38,413 in Q3 2008 and is now slightly less than $38,000 (Q4).
Q4 GDP by Expenditure Component (from the BEA Announcement)
Using the more typical expenditure approach to determine GDP, there are four component groups
GDP = C + I + G + X
C = Real personal consumption expenditures
I = Real residential and nonresidential fixed investment
G = Real federal government consumption expenditures and gross investment
X = net exports(imports minus exports)
- Real personal consumption expenditures decreased 4.3 percent in the fourth quarter, compared with a decrease of 3.8 percent in the third.
- Real nonresidential fixed investment decreased 21.1 percent, compared with a decrease of 1.7 percent. Nonresidential structures decreased 5.9 percent, in contrast to an increase of 9.7 percent. Equipment and software decreased 28.8 percent, compared with a decrease of 7.5 percent.
- Real residential fixed investment decreased 22.2 percent, compared with a decrease of 16.0 percent.
- Real exports of goods and services decreased 23.6 percent in the fourth quarter, in contrast to an increase of 3.0 percent in the third. Real imports of goods and services decreased 16.0 percent, compared with a decrease of 3.5 percent.
- Real federal government consumption expenditures and gross investment increased 6.7 percent in the fourth quarter, compared with an increase of 13.8 percent in the third. National defense increased 3.1 percent, compared with an increase of 18.0 percent. Nondefense increased 15.1 percent, compared with an increase of 5.1 percent. Real state and local government consumption expenditures and gross investment decreased 1.4 percent, in contrast to an increase of 1.3 percent.
For a complete and detailed breakdown of the Q4 data by sector, go the BEA News Release of the Preliminary Estimate of U.S. GDP, Fourth Quarter, 2008 .
Domestic Product, Gross National Product, and National Income, Q4 2008 (preliminary)
|Gross Domestic Product||14,200.3|
|Plus: Income receipts the rest of the world||815.6|
|Less: Income payments to the rest of the world||688.7|
|Equals: Gross National Product||14,539.6|
|Less: Consumption of Fixed Capital||1,849.8|
|Less: Statistical Discrepancy||150.2|
|Equals: National Income||12,491.4|
Short Answer Essay Question:
If gross domestic product increases by 10 percent over a year, are we better off? Why or why not? [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 caapita GDP increases, we may be "better off."]