This lesson focuses on the September 30, 2010, third (final) estimate of U.S. real gross domestic product (real GDP) growth for the second quarter (Q2) of 2010, 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.
- 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 "final" or third estimate of real GDP released on September 30, 2010, for the second quarter (April, May and June) of 2010. 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: During the first half of the 2010-2011 school year (August-December), EconEdLink will publish five Focus on Economic Data lessons on U.S. Real GDP Growth.
GDP data is announced three times for each fiscal quarter. For Q2 2010, the first estimate was made in July, the second estimate was made in August, and the third (final) estimate for Q2 is made in September - this estimate.
GDP data reports lag the reporting period - fiscal quarter. The current estimate is for Q2 (April-June, 2010). 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.
The BEA previously used the terms "advance, preliminary and final" to identify the three quarterly real GDP estimates. The terms "first, second and third" have replaced the previous announcement language.]
Fall Semester 2010-2011 Real GDP "Focus on Economic Data" Lessons:
Each Real GDP lesson will provide the most up-to-date data and focus on some specific topics or issues related to GDP:
- August 27 (second estimate for Q2, 2010): What are GDP, real GDP, per capital GDP, potential GDP. Recent history of real GDP.
- September 30 (third estimate for Q2 2010): GDP and business cycles, indicators of future growth (decline).
- October 29 (first estimate for Q3 2010): Factors influencing the change in GDP, revisions, and seasonal adjustments. How the data is collected.
- November 23 (second estimate for Q3 2010): U.S. regional economic growth comparisons and international comparisons.
- December 22 (third estimate for Q3 2010): Year-end summary and GDP-related current issues
BEA third estimate of US GDP Q2 2010, news release:
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.
Determination of the December 2008 Peak in Economic Activity: This is a NBER recession announcement made on December 1, 2008.
NBER determiination of the trough and the end of the most recent recession in June, 2009.
Key Economic Indicatorsas of September 30, 2010
On a seasonally adjusted basis, the CPI-U increased 0.3 percent in August, the same increase as in July. The index for all items less food and energy was unchanged in August after rising 0.1 percent in July.
Non-farm payroll employment changed little (-54,000) in August, and the unemployment rate was about unchanged at 9.6 percent. Government employment fell, reflecting a decrease of 114,000 temporary jobs associated with the decennial census. Private-sector payroll employment continued to trend up modestly (+67,000).
Real gross domestic product increased at an annual rate of 1.7 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent.
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 for the federal funds rate for an extended period.
What Do You Think Is the Best Indicator of the Health of the U.S. Economy?
Inflation? Employment? Gross Domesting Product Growth? The S&P 500 Index?
Everyone has their opinion abou the best sign of strength of weakness in the economy. Of course, there ar emany pmore potenital answers to the "best indicvator" question. Many say that output is the key - real output, that is, adjusted for the impact of inflation. For some, the amout of putput per person (per capital real GD) is it. Do the citizens have more goods and servies to satisfy their wants?
This lesson introduces the meaning of real gross domestic product growth as a measure of economic well-being.
[Note: It might be interesting to ask ths question of your students, and discuss the relative significance of the most common macroeconomic measurements. Which measurement - inflation, employment, GDP growth - means the most to their lives?]
A Quick Review of Gross Domestic Product
A nation's gross domestic product (GDP) is the total market value of all final goods and services produced within the country, usually measured over one year. Nominal GDP measures the output of goods and services in current prices while real GDP measures the output of goods and services in constant prices, adjusted for the effects of inflation.
Final goods and services means that all goods are counted as they are finally produced; that is, there is no need to count the output of the steel industry, which is an "intermediate" input, because the value of the steel will be counted in cars, refrigerators, buildings and all the other final uses of steel.
The reference to what is "produced" emphasizes that not all sales of goods represent new production. For example, a new house is included in GDP in the year it is built, but the sale price of a house that was built years ago and resold this year is not included in this year's GDP. (Definition from "Virtual Economics" version 3.0, Council for Economic Education, 2005.)
The components of the measurement of GDP are:
GDP = C (personal consumption expenditures or household spending)
+ I (net private investment or business spending)
+ G (government spending - all levels)
+ X (net exports, calculated as exports minus imports)
[Note: GDP data is reported by fiscal quarter. You may want to introduce your students to the concept of quarters; Q1 is January-March, Q2 is April-June, Q3 is July-September, and Q4 is October-December. Remember that the data for each quarter is reported three times during the following quarter.]
U.S. Bureau of Economic Analysis Announcement
Gross Domestic Product: Second Quarter 2010 (Third Estimate)
Released September 30, 2010
"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 1.7 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent. The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, the increase in real GDP was 1.6 percent (see "Revisions")."
The final real GDP growth estimate for Q2 of 2010 was slightly higher than the second estimate released in August. Though this estimate is a downward revision from the initial August estimate of 2.4 percent growth, it was not reduced from the September estimate (-1.6 percent) as some had predicted.
Is 1.7 percent real growth a good sign? U.S. real GDP growth has averaged about 3 percent over the last several decades.
[Note: Students can look at the historical GDP data on the BEA webpage to see the cyclical pattern of growth and decline over time - the business cycles.]
The BEA announcement identified the sectors of growth and decline that contributed to the overall estimate of Q2 2010 real GDP growth.
"The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures, nonresidential fixed investment, exports, private inventory investment, federal government spending, and residential fixed investment."
Areas of decline in the total included, "Imports, which are a subtraction in the calculation of GDP, increased. The deceleration in real GDP in the second quarter primarily reflected a sharp acceleration in imports and a sharp deceleration in private inventory investment that were partly offset by an upturn in residential fixed investment, accelerations in nonresidential fixed investment and in federal government spending, and an upturn in state and local government spending.
Essentially, all sectors contributed in some positive way to the overall Q2 growth. Is this good news? In recent quarters, there have been more erratic patterns of growth and decline in government spending, investment and personal consumption. While personal consumption was declining during the recesson, government spendiing was increasing. Similarly, while private sector employment was decreasing during the recession, government spending was increasing (mostly census hiring.)
As usual, the BEA commented on two critical industries:
"Final sales of computers added 0.03 percentage point to the second-quarter change in real GDP after adding 0.10 percentage point to the first-quarter change."
"Motor vehicle output subtracted 0.06 percentage point from the second-quarter change in real GDP after adding 0.74 percentage point to the first-quarter change."
[Note: Ask students why these two industries seem to be so important to the BEA. They are always specifically reported in the GDP data. Do they reflect something about the state of the overall economy or the future?]
[Note from the Author: I asked the BEA why they specifically report data about motor vehicles and computers. The BEA reply was that they will include in the announcement specific data that is commonly requested. The tables linked from the announcement include many specifc product categories, but motor vehicles and conputers are two that are popular enough to deserve a mention in the announcement. To see the specific product categories, see Table 2 of the BEA announcement .]
[To ask the BEA a question about GDP data, go to the FAQ page and click on "Ask a Question ."]
Measuring Real GDP - Adjusting for Inflation
The BEA does not use the cumsumer price index (CPI) to adjust fo rinflation. The CPI measures only final consumer prices. The BEA uses the "price index for gross domestic purchases." This measure if inflation is more broad in scope.
From the BEA FAQs: "BEA's featured measure of inflation in the U.S. economy is the percent change in the price index for gross domestic purchases . This index measures 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."
From the September 30 announcement: "The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 0.1 percent in the second quarter, the same increase as in the second estimate; this index increased 2.1 percent in the first quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 0.8 percent in the second quarter, compared with an increase of 1.6 percent in the first."
Q2 Change in Real GDP by Sector
"Real personal consumption expenditures increased 2.2 percent in the second quarter, compared with an increase of 1.9 percent in the first."
"Real nonresidential fixed investment increased 17.2 percent, compared with an increase of 7.8 percent. Nonresidential structures decreased 0.5 percent, compared with a decrease of 17.8 percent. Equipment and software increased 24.8 percent, compared with an increase of 20.4 percent. Real residential fixed investment increased 25.7 percent, in contrast to a decrease of 12.3 percent."
"Real exports of goods and services increased 9.1 percent in the second quarter, compared with an increase of 11.4 percent in the first. Real imports of goods and services increased 33.5 percent, compared with an increase of 11.2 percent."
"Real federal government consumption expenditures and gross investment increased 9.1 percent in the second quarter, compared with an increase of 1.8 percent in the first. National defense increased 7.4 percent, compared with an increase of 0.4 percent. Nondefense increased 12.8 percent, compared with an increase of 5.0 percent. Real state and local government consumption expenditures and gross investment increased 0.6 percent, in contrast to a decrease of 3.8 percent."
"The change in real private inventories added 0.82 percentage point to the second-quarter change in real GDP, after adding 2.64 percentage points to the first-quarter change. Private businesses increased inventories $68.8 billion in the second quarter, following an increase of $44.1 billion in the first quarter and a decrease of $36.7 billion in the fourth."
"Real final sales of domestic product -- GDP less change in private inventories -- increased 0.9 percent in the second quarter, compared with an increase of 1.1 percent in the first.
Gross domestic purchases Real gross domestic purchases -- purchases by U.S. residents of goods and services wherever produced -- increased 5.1 percent in the second quarter, compared with an increase of 3.9 percent in the first."
Although a small percentage increase in personal consumption may be larger in total dollars, the increase in net private investment was a very significant part of the Q2 2010 growth. Real nonresidential fixed investment increased 17.2 percent in Q2, compared with an increase of 7.8 percent in Q1. This seems to bode well for future growth as businesses may be adding to productive capacity. Housing construction, or residential fixed investment, was still a lag on the economy in Q2.
Gross National Product
The BEA has used the measurement of "gross domestic product" as the key growth measurement since 1991, replacing the measurement gross national product (GNP). The change to GDP factored out production by U.S. comapanies located outside the United States and provides a more true measure of "national" output. The BEA continues to report GNP data.
"Real gross national product -- the goods and services produced by the labor and property
supplied by U.S. residents -- increased 1.8 percent in the second quarter, compared with an increase of 4.4 percent in the first. GNP includes, and GDP excludes, net receipts of income from the rest of the world, which increased $3.7 billion in the second quarter after increasing $22.9 billion in the first; in the second quarter, receipts increased $2.0 billion, and payments deceased $1.7 billion."
Current-Dollar GDP - Not Adjusted for Inflation
"Current-dollar GDP -- the market value of the nation's output of goods and services -- increased 3.7 percent, or $132.3 billion, in the second quarter to a level of $14,578.7 billion. In the first quarter, current-dollar GDP increased 4.8 percent, or $169.1 billion."
Ther BEA announcement explained the difference between the second estimate made in August and the third (final) estimate in September. "The third estimate of the second-quarter increase in real GDP is 0.1 percentage point, or $3.4 billion, higher than the second estimate issued last month, primarily reflecting upward revisions to private inventory investment and to personal consumption expenditures that were mostly offset by an upward revision to imports." GDP growth estimates are adjsuted as new economic data becomes available. The first estimate of Q2 growth made in July was a 2.4 percent growth rate.
Advance Estimate Second Estimate Third Estimate
(Percent change from preceding quarter)
|Real GDP Growth (%)||2.4||1.6||1.7|
|Current-dollar GDP Growth (&)||4.3||3.6||3.7|
|Gross domestic purchases price index||0.1||0.1||0.1|
Figure 1, below, shows the categories of U.S. GDP for 2007-2009 and the first two quarters of 2010. Notice how the percentage of GDP that comes from personal consumption expenditures has increased recedntly. Notice also that the percentage of GDP coming from net private investment decreased well into 2009 and then increased. A smaller loss from negative net exports and increased government spending (stimulus) have also contributed to the growth of GDP.
Figure 1: Change in Real Gross Domestic Product Data
(2007, 2008, 2009, August 2010, and September 2010)
|Total Gross Domestic Product (GDP)||1.9||.0||-2.6||3.7||1.7|
|Personal Consumption Expenditures||2.4||-.3||-1.2||1.9||2.2|
|Gross Private Domestic Investment||-3.1||-9.5||-22.6||29.1||26.2|
|Equipment and software||3.7||-2.4||-15.3||20.4||24.8|
|Net Exports of Goods and Services|
Government Consumption Expenditures
& Gross Investment
|State and Local Governments||1.4||.3||-.9||-3.8||.6|
[Teacher Note: Studnets should be able to look at this data and "see' the recession through the numbers. Note the beginning of the recovery in recent quarters.]
Some GDP Component Definitions:
- Durable goods. Tangible products that can be stored or inventoried and that have an average life of at least three years.
- Nondurable goods. Tangible products that can be stored or inventoried and that have an average life of less than three years.
- Fixed Investment. Assets that are used repeatedly, or continuously, in processes of production for an extended period of time. They consist of equipment and software and structures , including owner-occupied housing.
- Nonresidential fixed investment. Consists of purchases of both nonresidential structures and equipment and software.
- Nonresidential structures. Investment in nonresidential structures consists of new construction (including own-account production), improvements to existing structures, expenditures on new mobile structures, brokers' commissions on sales of structures, and net purchases of used structures by private businesses and by nonprofit institutions from government agencies. New construction includes hotels and motels and mining exploration, shafts, and wells. Nonresidential structures also includes equipment considered to be an integral part of a structure, such as plumbing, heating, and electrical systems.
- Equipment and software. Investment in equipment and software consists of capital account purchases of new machinery, equipment, furniture, vehicles, and computer software; dealers' margins on sales of used equipment; and net purchases of used equipment from government agencies, persons, and the rest of the world. Own-account production of computer software is also included.
- Residential fixed investment. Consists of purchases of private residential structures and residential equipment that is owned by landlords and rented to tenants.
- Change in private inventories. The change in the physical volume of inventories owned by private business, valued at the average prices of the period. It differs from the change in the book value of inventories reported by many businesses; the difference is the inventory valuation adjustment (IVA).
Figure 3, below, shows the monthly changes in real GDP from 1990 through Q2 2010. Note the 1990-91, 2001, and 2008-2009 recessions with some periods of negative GDP growth.
[Note: This is an opportunity to introduce or reinforce students the idea of the "business cycle."]
The U.S. GDP expanded at an annual rate of 1.70 percent in Q2 of 2010, well below the historical average. From 1947, when GDP data was first reported, until the present, the U.S. average GDP growth has been 3.31 percent. The historical high growth rate of 17.20 percent was in March, 1950. The historical low rate of -10.40 percent was in March, 1958.
Figure 3, below, illstrates the concept of the business cycle - recurring periods of growth, peak, decline and trough (sometimes a recession.) Can you see the same pattern in the numbers for 2008-2010 in Figure 2?
Real GDP and Seasonal Adjustment
The BEA noted in the announcement that the "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 determination of real GDP from the current dollar GDP is impacted by a change in the price level - as measured by the price index for gross domestic product. During the quarter, the price level did not significantly change. For the GDP data to be meaningful, a reported change in the measurement of output produced at a higher price level has to be increased to reflect constant prices. Thus, we have a figure called "real GDP growth."
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.
Seasonal adjustments remove recurring seasonal variations (variations that occur in the same month or quarter each year) from economic series so that the remaining movements in the series better reflect cyclical patterns in economic activity.
What do we know about the accuracy of GDP?
The quarterly GDP estimates are made three times - what the BEA calls "vintages." The BEA web page "frequently Asked Questions" section explains. "Early vintages of the GDP estimates are based on partial and incomplete source data. Subsequent GDP estimates incorporate increasingly comprehensive and improved source data. Periodically, BEA conducts studies of reliability. In these studies, reliability is defined as whether the successive vintages of GDP estimates present a consistent, general picture of the economy.
The most recent reliability study found (as have previous studies) that the early estimates of GDP present a useful picture of economic activity. They consistently indicate whether growth is positive or negative, whether growth is accelerating or decelerating, whether growth is high or low relative to the trend, and where the economy is in relation to the business cycle. In addition, the latest study found that the average revisions to GDP are small and positive, indicated a tendency toward upward revisions, and found that the GDP estimates have not contained information that would have improved the prediction of future revisions to GDP growth." The BEA feels that the GDP estimates are reasonably accurate.
When asked if the GDP revisions tend to revise the estimates upward, the BEA replies, "Average revisions from the current quarterly estimates—advance, preliminary, and final—to the latest available estimates are not significantly different from zero. That is, even though GDP revisions are non-zero, they are “unbiased.” In other words, on average they neither raise nor lower GDP growth."
"Most GDP revisions result from the incorporation of new or revised source data that were not available at the time of the earlier estimates. In addition, annual revisions to quarterly estimates include the effects of periodic improvements in estimation methods that are necessary to keep the GDP attuned to the changing economy. Methodological improvements typically are put in place as part of once-every-five-year “comprehensive” GDP revisions. The most recent such revision, in 2003, yielded long-run growth rates of current-dollar and real GDP, measured from 1930-2002, that were virtually the same as the pre-revision growth rates."
Measuring the size of the economy is a monumental task with many variables. The BEA takes three months to provide what they feel is an accurate estimate, and then allows for future revision based on additional or more accurate data. Measuring the "health" of the economy is even more difficult. What is the best measurement of a healthy economy? Output? Jobs? Growth? Stability?
[Note: Students may have a variety of views as to what data best represents the "health" of the U.S. economy.]
Short Answer Essay Question:
1. If gross domestic product increases by 10 percent over a year, are we better off? Why or why not?
[Possible 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 capita GDP increases, we may be "better off."]
The bottom line - U.S. real gross domestic product increased at an annual rate of 1.7 percent in the second quarter of 2010. In the first quarter, real GDP had increased by 3.7 percent.
The 2008-2009 recession is "officially" over - ending in June of 2009 according to the Bureau of Economic Analysis. There has been slow growth over the past year, but the unemployent rate is stil hovering just below 10 percent. Saying that the recession is over is small comfort to the millions of workers who are still unemployed.
This lesson raised several questions about the real meaning of GDP growth to students and others. If the economy is growing but few jobs are being created, is GDP growth a real indicator of the health of the economy?
The U.S. Central Intelligence Agency (CIA) “World Factbook” ranks the nations of the by various economic measures, including gross domestic product. The “top ten” nations in the current edition are listed below.
[Note: The CIA GDP data is reported using “purchasing power parity” a process that determines the relative values of two currencies. It equates the purchasing power of various nations’ currencies and lists them as equivalent to U.S. dollars.]
|Rank||Country||Per Capita GDP|
|11||United States||$46,000||2009 est.|
In terms of total size of GDP, the U.S. ranks second, just behind the European Union nations’ total:
|1||European Union||$14,430,000,000,000||2009 est.|
|2||United States||$14,140,000,000,000||2009 est.|
|8||United Kingdom||$2,128,000,000,000||2009 est.|
Take a look at the economic data for the world’s nations available from the CIA World Factbook: Guide to Country Comparisons . What does the data tell you about the various nations?
[Note: Asign different countries to students or have them draw country names. Students can look at the national data and identify the key characteristics of the country. For instance, they can speculate about the reasons for the country's high or low per capita output.]