Return

This lesson focuses on the December 22, 2009, third estimate of U.S. real gross domestic product (Real GDP) for the third quarter of 2009, 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.

KEY CONCEPTS

Business Cycles, Economic Growth, Gross Domestic Product (GDP), Macroeconomic Indicators, Real Gross Domestic Product (GDP)

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.
  • Assess the relationship of real GDP data, the indexes of economic indicators, and business cycles.
  • Speculate about the nature and impact of current economic conditions and implications for the future.

Current Key Economic Indicators

as of May 5, 2013

Inflation

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers decreased 0.2 percent in March after increasing 0.7 percent in February. The index for all items less food and energy rose 0.1 percent in March after rising 0.2 percent in February.

Employment and Unemployment

Total nonfarm payroll employment rose by 165,000 in April, and the unemployment rate was little changed at 7.5 percent. Employment increased in professional and business services, food services and drinking places, retail trade, and health care.

Real GDP

Real gross domestic product increased at an annual rate of 2.5 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 0.4 percent.

Federal Reserve

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 and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent...

INTRODUCTION

Each month, the Bureau of Economic Analysis (BEA), an agency of the U.S. Department of Commerce, releases an estimate of the level and growth of U.S. gross domestic product (GDP), the output of goods and services produced by labor and property located in the United States.

This lesson focuses on the BEA's third (final) estimate of real GDP released on December 22, 2009, for the third quarter (July - September) of 2009. 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 first half of the 2009-2010 school year (September-December), 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 Q3 2009, the first estimate is made in October, the second estimate is made in November, and the third estimate for Q3 is made in December.

Note that the GDP data reports lag the reporting period - fiscal quarter. The current estimate is for Q3 (July-September 2009). Each of the three estimates for a quarter will include more comprehensive data and may modify the growth rate reported earlier.

NOTE: The BEA previously used the terms "advance, preliminary and final" to identify the three quarterly real GDP estimates. The terms "advance, second and third" are now used in the announcement language.]

Each Real GDP lesson will provide the most up-to-date data and focus on some specific topics or issues related to GDP:

  • September (third estimate for Q2 2009): How to read the data, real vs. nominal, and how the data is collected
  • October (advance estimate for Q3 2009): Factors influencing the change in GDP, revisions, and seasonal adjustments
  • November (second estimate for Q3 2009): Business cycles and indicators of future growth (decline)
  • December (third/final estimate for Q3 2009): Year-end summary and GDP-related current issues

MATERIALS


Key Economic Indicators

as of December 22, 2009

Inflation

On a seasonally adjusted basis, the CPI-U increased 0.4 percent in November after rising 0.3 percent in October. The index for all items less food and energy was unchanged in November after increasing 0.2 percent in October.

Employment and Unemployment

The U.S. unemployment rate edged down to 10.0 percent in November, and nonfarm payroll employment was essentially unchanged (-11,000). In the prior 3 months, payroll job losses had averaged 135,000 a month. In November, employment fell in construction, manufacturing, and information, while temporary help services and health care added jobs.

Real GDP

U.S. real gross domestic product (real GDP) increased at an annual rate of 2.2 percent in the third quarter of 2009, according to the "third" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent.

Federal Reserve

The FOMC will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

PROCESS

 U.S. Bureau of Economic Analysis News Release: Gross Domestic Product, Third Quarter 2009

The third and final BEA estimate of real GDP growth for the third quarter (Q3) of 2009 was less than the second estimate, but still showed an increase – a growing economy. This was the second revision of Q2 real GDP, beginning with the first estimate of 3.5 percent growth released in October. The second estimate released in November was 2.8 percent growth. 

The news release began, “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 2.2 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent.”

The BEA added,“The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month.”

The news release briefly explained the difference between the December final estimate and the previous estimates. “The "third" estimate of the third-quarter increase in real GDP is 0.6 percentage point, or $17.3 billion, lower than the second estimate issued last month, primarily reflecting downward revisions to nonresidential fixed investment, to private inventory investment, and to personal consumption expenditures.”

Q3 2009 Real GDP Growth Estimates
  Advance
(October)
Second
(November)
Third
(December)
Real GDP Growth* 3.5 2.8 2.2
Current-dollar GDP* 4.3 3.3 2.6
Gross domestic purchases price index 1.6 1.4 1.3
* Percent change from the preceding quarter.

 What the Percentages Mean

In a footnote in the announcement, the BEA explained the meaning of the percentages estimated in the real GDP data. “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 (2005) dollars. Price indexes are chain-type measures.”

[NOTE: The economy grew at a 2.2 percent annual rate during the third quarter.  Ask students if this is a good sign, given that the economy lost an average annual rate of almost 4 percent over the last year.  We are not yet where were were a year ago.]

Where Did the Q3 Growth Come From?

The BEA announcement explained the Q2 growth...

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

“The upturn in real GDP in the third quarter primarily reflected upturns in PCE, in exports, in private inventory investment, and in residential fixed investment and a smaller decrease in nonresidential fixed investment that were partly offset by an upturn in imports, a downturn in state and local government spending, and a deceleration in federal government spending.”

Figure 1 shows the quarterly changes in U.S. real gross domestic product in the past ten years, from 1999 through Q3 2009. Note the most recent declines (recession) in 2001 and the decline that may indicate the beginning of the current recession in Q4 2007.

Figure 1 GDP

[NOTE:  One negative factor in the third quarter was the continued drop in nonresidential fixed investment.  Companies are not yet investing in future productive capacity. Ask students why companies are not investing.  Do they not yet see future consumer demand and profits?]

The Mission of the Bureau of Economic Analysis

The BEA’s Web Site home page explains its mission, organization, and methods.

Mission

“The Bureau of Economic Analysis (BEA) promotes a better understanding of the U.S. economy by providing the most timely, relevant, and accurate economic accounts data in an objective and cost-effective manner.

Vision

To be the world's most respected producer of economic accounts.  Core Values of BEA

  •    Integrity: Maintaining the sterling reputation of BEA and its statistics.
  •    Quality: Producing timely, relevant, and accurate statistics.
  •    Excellence: Fostering staff excellence and recognizing and rewarding employee contributions.
  •    Responsiveness: Providing customers with the programs and services they need.
  •    Innovation: Using technology and new methodologies to meet measurement challenges. 

BEA's Role in the Federal Statistical System

“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.

BEA is one of the world's leading statistical agencies. Although it is a relatively small agency, BEA produces some of the most closely watched economic statistics that influence the decisions made by government officials, business people, households, and individuals. BEA's economic statistics, which provide a comprehensive, up-to-date picture of the U.S. economy, are key ingredients in critical decisions affecting monetary policy, tax and budget projections, and business investment plans. The cornerstone of BEA's statistics is the national income and product accounts (NIPAs), which feature the estimates of gross domestic product (GDP) and related measures.

The GDP was recognized by the Department of Commerce as its greatest achievement of the 20th century and has been ranked as one of the three most influential measures that affect U.S. financial markets. Since the NIPAs were first developed in the aftermath of the Great Depression, BEA has developed and extended its estimates to cover a wide range of economic activities.

Today, BEA prepares national, regional, industry, and international accounts that present essential information on such key issues as economic growth, regional economic development, inter-industry relationships, and the Nation's position in the world economy.”

Source:  BEA Mission Statement

[NOTE: NIPAs (national income and product accounts) are the BEA's economic measurements that “display the value and composition of national output and the distribution of incomes generated in its production.” Source: BEA Glossary ]

Details of the Q3 2009 Real GDP Growth

The BEA news release provided some highlights of U.S. Q3 GDP growth (declines)…

Motor vehicle output added 1.45 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change.”

[NOTE:  Is this the result of the "Cash for Clunkers" program? Ask students: If it is a result of the car purchase subsidies, is it a very good sign?]

“Final sales of computers subtracted 0.08 percentage point from the third-quarter change in real GDP after subtracting 0.04 percentage point from the second-quarter change.”

GDP Change by Sector

Real personal consumption expenditures increased 2.8 percent in the third quarter, in contrast to a decrease of 0.9 percent in the second. Real nonresidential fixed investment decreased 5.9 percent, compared with a decrease of 9.6 percent. Nonresidential structures decreased 18.4 percent, compared with a decrease of 17.3 percent. Equipment and software increased 1.5 percent, in contrast to a decrease of 4.9 percent. Real residential fixed investment [housing] increased 18.9 percent, in contrast to a decrease of 23.3 percent.”

Real exports of goods and services increased 17.8 percent in the third quarter, in contrast to a decrease of 4.1 percent in the second. Real imports of goods and services increased 21.3 percent, in contrast to a decrease of 14.7 percent.”

Real federal government consumption expenditures and gross investment increased 8.0 percent in the third quarter, compared with an increase of 11.4 percent in the second. National defense increased 8.4 percent, compared with an increase of 14.0 percent. Nondefense increased 7.0 percent, compared with an increase of 6.1 percent. Real state and local government consumption expenditures and gross investment decreased 0.6 percent, in contrast to an increase of 3.9 percent.”

“The change in real private inventories added 0.69 percentage point to the third-quarter change in real GDP, after subtracting 1.42 percentage points from the second-quarter change. Private businesses decreased inventories $139.2 billion in the third quarter, following decreases of $160.2 billion in the second quarter and $113.9 billion in the first.”

Real final sales of domestic product -- GDP less change in private inventories -- increased 1.5 percent in the third quarter, compared with an increase of 0.7 percent in the second.”

Gross Domestic Purchases

Real gross domestic purchases -- purchases by U.S. residents of goods and services wherever produced -- increased 3.0 percent in the third quarter, in contrast to a decrease of 2.3 percent in the second.

[NOTE: Gross domestic purchases are the ”market value of goods and services purchased by U.S. residents, regardless of where those goods and services were produced. It is gross domestic product (GDP) minus net exports of goods and services. Equivalently, it is the sum of personal consumption expenditures (PCE), gross private domestic investment, and government consumption expenditures and gross investment.”]

Gross national product

Real gross national product -- the goods and services produced by the labor and property supplied by U.S. residents -- increased 3.0 percent in the third quarter, in contrast to a decrease of 1.0 percent in the second. GNP includes, and GDP excludes, net receipts of income from the rest of the world, which increased $25.7 billion in the third quarter after decreasing $7.4 billion in the second; in the third quarter, receipts increased $15.7 billion, and payments decreased $10.0 billion.

[NOTE: Gross national Product is the “market value of goods and services produced by labor and property supplied by U.S. residents , regardless of where they are located. It was used as the primary measure of U.S. production prior to 1991, when it was replaced by gross domestic product (GDP) .”]

Current-dollar GDP

Current-dollar GDP -- the market value of the nation's output of goods and services – increased 2.6 percent, or $90.9 billion, in the third quarter to a level of $14,242.1 billion. In the second quarter, current-dollar GDP decreased 0.8 percent, or $26.8 billion.

[NOTE: Current dollar means “the market value of an item. It reflects prices and quantities of the period being measured.”]

Current vs. Chained (Real) Measurements

Current dollar estimates are expressed in current prices. Chained dollar (real) estimates are adjusted for inflation using the price index for gross domestic purchases. The BEA press release explains…

“The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.3 percent in the third quarter, 0.1 percentage point less than the second estimate; this index increased 0.5 percent in the second quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 0.3 percent in the third quarter, compared with an increase of 0.8 percent in the second.” Much of the price index for GDP change in Q3 was energy prices.

[NOTE:  Make sure your students are clear about the difference between the nominal (current) dollar GDP and the chained (real) GDP measurements.]

Corporate Profits

At the same time the BEA reports on GDP, it reports on corporate profits. The BEA reported…

“Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $132.4 billion in the third quarter, compared with an increase of $43.8 billion in the second quarter.” 

“Taxes on corporate income increased $15.1 billion in the third quarter, compared with an increase of $35.6 billion in the second. Profits after tax with inventory valuation and capital consumption adjustments increased $117.3 billion in the third quarter, compared with an increase of $8.2 billion in the second. Dividends decreased $6.1 billion, compared with a decrease of $62.1 billion; current-production undistributed profits increased $123.5 billion, compared with an increase of $70.3 billion.”

“Domestic profits of financial corporations increased $82.8 billion in the third quarter, compared with an increase of $28.5 billion in the second. Domestic profits of nonfinancial corporations increased $27.6 billion in the third quarter, compared with an increase of $29.8 billion in the second.”

[NOTE: Corporate profit (profits from current production) is the “income that arises from current production, measured before income taxes, of organizations treated as corporations in the national income and product accounts (NIPAS). With several differences, this income is measured as receipts less expenses as defined in Federal tax law. Among these differences are: Receipts exclude capital gains and dividends received; expenses exclude bad debt, depletion, and capital losses; inventory withdrawals are valued at current cost; and depreciation is on a consistent accounting basis and valued at current replacement cost.” ]

The BEA commented on the importance of the “profits…

“Profits before tax with inventory valuation adjustment is the best available measure of industry profits because estimates of the capital consumption adjustment by industry do not exist. This measure reflects depreciation-accounting practices used for federal income tax returns. According to this measure, domestic profits of both financial and nonfinancial corporations increased in the third quarter. The increase in nonfinancial corporations reflected increases in utilities, information, "other" nonfinancial, retail trade, and transportation and warehousing that were partly offset by decreases in wholesale trade and manufacturing. Within manufacturing, the largest decrease was in “other” durable goods, and the largest increase was in motor vehicles.”

“Profits before tax increased $157.9 billion in the third quarter, compared with an increase of $90.6 billion in the second. The before-tax measure of profits does not reflect, as does profits from current production, the capital consumption and inventory valuation adjustments. These adjustments convert depreciation of fixed assets and inventory withdrawals reported on a tax-return, historical-cost basis to the current-cost measures used in the national income and product accounts.” 

Summary of Recent Economic Data Through Q3 2009

Figure 2, below, shows the values of the sectors of U.S. GDP in Q3 2009 in current (nominal) dollars and in chained dollars (adjusted for inflation. Note that personal consumption expenditures were, by far, the largest percentage of GDP (almost 70 percent).   Although imports and exports are a relatively small percentage of the U.S. economy, their decreases show that problems in the United States impact the world economy and foreign economic problems impact the U.S. 

Figure 2:  U.S. Gross Domestic Product
3rd Quarter 2009
(Final estimates in $ billions)
  Current Dollars
(nominal)
Chained Dollars
(adjusted for inflation)
Gross Domestic Product 14,242.1 12,973.0
Personal Consumption Expenditures 10,132.9 9,252.6
Private Investment

1,556.1

1,474.4
Net Exports -402.2 -357.4
Government Expenditures 2,955.4 2,585.5
Change and Percent from Q2 2009 to Q3 2009
Gross Domestic Product 71.5 +2.20%
Personal Consumption Expenditures 63.6 +1.96%
Private Investment 17.7 +0.54%
Exports 59.3 +1.78%
Imports 86.4 -2.59%
Government Expenditures 16.9 +0.55%


The Impact of the Current Recessionary Period

Since the declaration of the current recession by the National Bureau of Economic Research (NBER) Business Cycle Dating Committee in December 2008 (citing that the recession began a year earlier in December 2007), U.S. economic conditions have worsened. GDP growth (despite the popular belief) is not the sole determinant of a recession.

The NBER defines a recession this way…

"A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.

Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity.

The committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment. This series (data report) reached a peak in December 2007 and has declined every month since then."

Source: Business Cycle Dating Committee, National Bureau of Economic Research, report on “Determination of the December 2007 Peak in Economic Activity ,” December 11, 2008.

What Happens During a Recession?

Increased unemployment. When consumer or business spending decreases, the demand for labor decreases.  Employment may lag recovery efforts, as it takes time for employers to increase output and create jobs. 

Decreasing investment. When firms expect less demand for their goods and services, they will cut costs and not invest in productive capacity. Investment spending decreased almost forty percent in the last quarter. 

Lower stock market prices. If the recession results in lower corporate profits and uncertainty about future values, stock prices may fall. As investors sense a recovery, stock prices may rise and be an indicator of a better economy in the future. Remember, stock prices do not always follow the general economic trends.
Increased government spending and budget deficits. Decreased output and employment leads to lower tax revenues (income tax, sales tax, corporation taxes, etc.). Some government programs, such as unemployment compensation will increase. More government borrowing will mean higher more debt to repay and higher taxes in the future

Lower price level. Reduces spending typically results in less price pressure. The result is a lower rate of inflation.  Greater problems will occur if prices fall – deflation. A recession may put pressure on firms to reduced prices to compete. Lower prices and profits are a disincentive to invest and increase output. 

Look at the following data about the performance of the U.S. economy since the beginning of the current recession (Figure 3). Notice the relationships of real GDP growth, payroll employment (the NBER's key data) and the unemployment rate. CPI data has been included because it is also the subject of monthly "Focus on Economic Data" lessons.

  • What trends do you see in the four data sets?
  • What generalizations can you make about the trends of the four data sets?
  • Are the real GDP growth and payroll employment trends related?
  • Are the real GDP growth and unemployment rate trends related?
  • Are the payroll employment and unemployment rate trends related?
  • Is the trend of the CPI-U related to the real GDP growth and payroll employment data?
Figure 3: U.S. Economic Data
December 2007-September 2009
                  Real GDP Growth (Quarterly) Payroll Employment Change Unemployment Rate (CPI-U) Consumer Price Index (%change)
Dec-07 2.1 (Q4) 120,000 4.40% 0.30%
Jan-08   -72,000 4.90% 0.40%
Feb-08   -144,000 4.80% 0.20%
Mar-08 -0.7 (Q1) -122,000 5.10% 0.40%
Apr-08   -160,000 5.00% 0.20%
May-08   -137,000 5.50% 0.50%
Jun-08 1.5 (Q2) -161,000 5.60% 0.90%
Jul-08   -128,000 5.80% 0.70%
Aug-08   -175,000 6.20% 0
Sep-08 -2.7 (Q3) -321,000 6.20% 0
Oct-08   -380,000 6.60% -0.80%
Nov-08   -597,000 6.80% -1.70%
Dec-08 -5.4 (Q4) -681,000 7.20% -0.80%
Jan-09   -741,000 7.60% 0.30%
Feb-09   -651,000 8.10% 0.40%
Mar-09 -6.4 (Q1) -663,000 8.50% -0.10%
Apr-09   -519,000 8.90% 0
May-09   -303,000 9.40% 0.1
Jun-09 -0.7 (Q2) -463,000 9.50% 0.7
Jul-09   -304,000 9.40% 0
Aug-09   -154,000 9.70% 0.4
Sep-09 2.2 (Q3) -139,000 9.80% 0.2
Oct-09   -111,000 10.20% 0.3
Nov-09 * -11,000 10.00%

0.4

 

*GDP data for Q4 2009 is not yet available

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

[NOTES:
 
1. Data for real GDP growth, employment and unemployment rate significantly worsened (almost continually) from December 2007 until the most recent quarter.
2. As payroll employment decreased, the unemployment rate increased (with few minor) exceptions).
3. As GDP growth slowed and turned negative, the unemployment rate increased and payroll employment decreased.
4. As payroll employment decreased and real GDP decreased, there was little inflation and, at times, short periods of deflation in consumer prices. (Remember, more volatile energy prices are a significant variable in the CPI data.)]

CONCLUSION

The final estimate of 2009 Q3 real GDP growth was much smaller than the first estimate released in October.  "Real gross domestic product...increased at an annual rate of 2.2 percent in the third quarter of 2009."  The first real GDP estimate in October was 3.5 percent growth.  In November, the second estimate was reduced to 2.8 percent growth. The BEA attributed the change in the estimate to more complete data "reflecting downward revisions to nonresidential fixed investment, to private inventory investment, and to personal consumption expenditures.”  The previous estimates had been higher.

Still, 2.2 percent real GDP growth during a recession seems like pretty good news - assuming that the growth is sustainable and was not just the result of short-term economic stimulus and programs like the "cash for clunkers" auto purchase subsidies.

The BEA's mission is to "provide a comprehensive, up-to-date picture of the U.S. economy, (which) are key ingredients in critical decisions affecting monetary policy, tax and budget projections, and business investment plans.
 
Does the economy require further stimulus to recover from the recession?  Or, is the recession over and the economy is in a period of sustained growth?   The number of monthly job losses has decreased greatly over the past six months and may turn positive very soon.  Maybe not.  Watch for the December 2009 employment report by the Bureau of Labor Statistics issued on January 8, 2010. 

If further stimulus is necessary, what policies will work?

Monetary policy?  The federal funds rate is so low that further interest rate reductions by the FOMC are not really possible.  Recent Fed and Treasury programs have stabilized the financial system and financial market, but credit is still tight for many.   

Fiscal policies?  Can more federal spending help?  Or, have we stretched the budget too far?  Will lower taxes provide incentives for individuals and firms to invest and create jobs?  Then again, lower taxes will also increase the budget deficit.

What do you think?

ASSESSMENT ACTIVITY

Essay Questions:
1.  What government policies do you think can help to turn around an economy in a recession? 

[Answers will vary. Students should be able to explain the relationship between the specific policy they recommend (fiscal or monetary) and the impact on employment and output. Fiscal policies (tax cuts or spending) are intended to put money into people's hands to spend. Their spending will generate more output and result in more jobs. Monetary policies are intended to lower borrowing costs and provide liquidity in the economy. Lower borrowing costs should be an incentive for consumers to spend and businesses to invest.]

2.  How might that policy impact the current U.S. economic conditions?

[Students should be able to explain the relationship between the specific policy they recommend (fiscal or monetary) and the impact on employment and output. Fiscal policies (tax cuts or spending) are intended to put money into people's hands to spend. Their spending will generate more output and result in more jobs. Monetary policies are intended to lower borrowing costs and provide liquidity in the economy. Lower borrowing costs should be an incentive for consumers to spend and businesses to invest.]

EXTENSION ACTIVITY

The Misery Index

In the 1970s, Brookings Institution economist Arthur Okun created the "misery index,"a combination of the unemployment rate and the inflation rate.  Dr. Okun proposed that a period of both high inflation and high unemployment results in significant economic and social costs to the nation.  An increase in the misery index indicates greater problems and a decrease in the index indicates improvement.  One other prevailing theory has been that there is a natural trade-off between unemployment and inflation - the so-called "Phillips Cure."  In theory, the conditions that cause unemployment will reduce inflationary pressure and visa-versa.  When the trade-off does not happen and both unemployment and inflation increase, the economy has more significant problems that traditional policies may not be able to solve.  One key variable that may create conditions of both high (low) inflation and high (low) unemployment is changes in energy prices.

In June, 1980, the misery index reached it highest level in history - 21.98%.  The lowest level for the misery index was 2.97 percent in July 1953.  In November, 2009, despite a high unemployment rate (10 percent) the index stands at only 13 percent, because the rate of inflation is fairly low (less tahn a 3 percent annual rate).  Imagine the problems many people faced in 1980 when over 10 percent of the labor force was unemployed and they were experiencing a very high rate of inflation at the same time.

Look at the annual data for unemployment and inflation.  When has the "misery index" increased? When has it decreased?
 

[TEACHER NOTE: Do you think economic conditions have impacted recent presidential elections? CEE has a great lesson about the possible relationship between economic conditions and presidential election results.

“To What Extent Do Economic Conditions Determine the Outcome of Presidential Elections?” in Focus on Economics: Civics and Government, Unit 3, Lesson 8.

Description: Students consider how economic performance is evaluated and are introduced to four major indicators of macroeconomic performance: growth rate of real income, unemployment rate, inflation rate, misery index. They complete a worksheet comparing changes in these indicators with the outcomes of U.S. presidential elections from 1960 to 1992 and examine the influence of economic conditions of the likelihood of the incumbent party winning an election.]