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 growth released on December 22, 2010, for the third quarter of 2010 (July-September.)  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.


  • 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.


The U.S. economy continued to grow slowly, according to the latest estimate of real GDP growth by the Bureau of Economic Analysis. Despite the hundreds of billions of dollars of economic stimulus spending and Federal Reserve policies to keep interest rates very low, the economy remains sluggish and unemployment remains very high.

The good news is that the most recent estimate of real GDP growth, the final estimate for the third quarter of 2010, was slightly higher than the first and second estimates for Q3 2010 made in October and November. Read the BEA’s December 22 announcement of real GDP growth for Q3 2010 for more details.

Is this enough growth for the economy?

U.S. Bureau of Economic Analysis
National Income and Product Accounts
Gross Domestic Product, 3rd quarter 2010 (third estimate)

Released December 22, 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 2.6 percent in the third quarter of 2010, (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 increased 1.7 percent.”

Real GDP growth has improved slowly since the second quarter, but still not enough to put the millions of unemployed workers back on the payrolls. Congress and the Obama administration recently agreed on a compromise stimulus spending and tax package aimed, again, at jump-starting the economic recovery. The new $858 billion federal tax plan includes an extension of the Bush-era tax cuts - a two-year extension for all income levels - an extension of unemployment benefits, and a one-year payroll tax holiday for businesses.

“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 2.5 percent.” The final estimate for Q3 was 0.1 percent higher than the November estimate and 0.6 percent higher than the first estimate made in October.

The BEA commented that the “acceleration” in real GDP growth in Q3 resulted from reduced imports (imports subtract from the measurement of GDP) and an increase in private inventory investment. Reduced residential fixed investment (housing) and nonresidential fixed investment (business investment), and exports slowed the increase. Reduced investment in housing and businesses may be a sign of consumer and business pessimism about the future.

Should businesses invest more? 

How can governments encourage businesses to invest?

The history of real GDP growth over the past several years, Figure 1, below, shows the business cycles of expansion, peak, decline and trough. Note the period of late 2008 and early 2009, the most recent recession. The National Bureau of Economic Research (NBER) announced that the recession began (a peak in the business cycle) in December, 2007, and ended (a trough in the business cycle) in June, 2009.

Figure 1 GDP

Note the "business cycle" in the chart.

Figure 2, below, shows the current dollar and constant dollar figures for U.S. gross domestic product for the past decade. Note that the both constant dollar and real GDP decreased from 2008 to 2009 – the recession. Also notice the long period of steady economic expansion between the years 2000 and 2008, leading up to the recession.

Compare the dollar measurements in Figure 2 with the graph in Figure 1 to see how the graphic representation of GDP growth was determined. [Note: The graph shows only real GDP.]

Is real GDP growth more meaningful than the current-dollar measurement?

U.S.Current and Constant Dollar GDP
2000 - 2010


 Current Dollar

 Constant Dollar
 "Real" GDP































 2010 Q3



Which sectors grew in Q3 and which sectors did not grow?

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

Sectors adding to real GDP in Q3:
    Personal consumption expenditures              + 2.4 %
    Private inventory investment                          + 1.6 %
    Nonresidential fixed investment                     + 10.0 %
    Exports                                                                 + 6.8 %
    Federal government expenditures                 + 8.8 %
    State and local government consumption      + 0.7 %

Sectors reducing real GDP in Q3:
    Residential fixed investment (housing)          - 27.3 %
    Imports (an increase reduces GDP)              + 16.8 %

Key industries
    Motor vehicles                                               + 0.75 %
    Computers                                                     + 0.29 %

[BEA Footnote: “Quarterly estimates are expressed at seasonally adjusted annual rates, unless otherwise specified… Real estimates are chained (2005) dollars.”]


You may hear references to gross national product (GNP) and gross domestic product (GDP).  What is the difference?

The U.S. current-dollar GDP in Q3 2010 (annualized) was $14,745.1 billion. When adjusted for inflation in chained 2005 dollars, the real GDP was $13,278.5. Current-dollar GDP increased 4.6 percent, or $166.4 billion, in Q3, and after increasing 3.7 percent, or $132.3 billion in Q2.”

Prior to 1991, the BEA used gross national product (GNP) as the primary measurement of production output. The difference is that GDP is a measurement of production within a country's borders and GNP is a measurement of production by enterprises owned by a country's citizens. Production within a country's borders, but by an enterprise owned by someone from outside the country, counts as part of the country’s GDP. The BEA switched to GDP primarily because most of the other developed nations used GDP at that time, and it made international production output comparisons easier.

Figure 3, below, shows the components of U.S. national income, gross national product and gross domestic product for Q3 2010. Note that the largest component of GDP, by far, is employee compensation (salaries and wages).

Measuring National Income, GNP, and GDP:

  • To determine U.S. national income, add lines 8 through 15 (various sources of income).
  • To determine U.S. gross national product (line 4), subtract lines 5 and 6 (capital consumption and the statistical discrepancy) from national income (line 7).
  • To determine U.S. gross domestic product (line 1), add line 2 (foreign income) and subtract line 3 (foreign payments) from gross national product (line 4)..

U.S.National Income and Product Accounts, Q3 2010 ($billions)

1.    Gross Domestic Product                                                        14,745.1

2.    Plus: Income receipts from the rest of the world                      704.0

3.    Less: Income payments to the rest of the world                       515.5

4.    Equals: Gross National Product                                         14,933.6

5.    Less: Consumption of fixed capital                                        1,871.9

6.    Less: Statistical discrepancy                                                      184.1

7.    Equals: National Income                                                       12,877.5

8.    Compensation of employees                                                   8,033.0

9.    Proprietors’ income                                                                   1,059.5

10.  Rental income                                                                               303.8

11.  Corporate profits                                                                         1,640.1

12.  Net interest and miscellaneous payments                               719.6

13.  Taxes on production and imports (less subsidies)             1,002.2

14.  Business current transfer payments (net)                                133.4

15.  Current surplus of government enterprises (deficit)               –14.2

To determine National Income, GNP, and GDP:

  • To determine U.S. national income, add lines 8 through 15 (various sources of income). 
  • To determine U.S. gross domestic product, subtract lines 5 and 6 (capital consumption and the statistical discrepancy) from national income (line 7). 
  • To determine domestic product, add line 2 (foreign income) and subtract line 3 (foreign payments) from gross national product (line 4).

The Lasting Impact of the Recession

Since the National Bureau of Economic Research (NBER) Business Cycle Dating Committee identified that the recession ended in June, 2009, U.S. economic growth has been erratic.  The quarterly growth rate has fluctuated between 1.7 and 5.0 percent.  Although the unemployment rate has dropped slightly from its high of 10.1 percent in October 2009, it remains high by historical standards - at 9.8 percent in November.

The NBER Defined the 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 NBER announcement of the beginning of the recession read like this: "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."

The NBER "determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II."

Source: Business Cycle Dating Committee, National Bureau of Economic Research, report on “Determination of the June 2009 Trough in Economic Activity ,” September 20, 2010.

What Happened During the 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 2009. 

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. Reduced 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. 

GDP and Other Macroeconomic Data

It is sometimes instructive to find relationships between various macroeconomic data.  These relationships may sometimes give us a broader picture of the economy. For instance, there is a general relationship between output (GDP) and employment. As GDP increases, employment tends to increase.  In the past several months, as real GDP has decreased, the unemployment rate has increased. One piece of data confirms the meaning of the other.

Figure 4 illustrates four sets of macroeconomic data - CPI, unemployment, real GDP growth and the federal funds rate. Notice the long term relationship of periods of output growth and decline with the changes in the unemployment rate. This relationship makes sense as the number of employed is directly related to output. Some increase in output can be attributed to improvements in productivity, but growth is very much dependent on labor force growth and employment. In late 2008 and 2009, as U.S. real GDP declined, the unemployment rate increased substantially.

Figure 4:  Selected Macroeconomic Data

Year Real GDP
CPI-U Fed Funds
Target Rate
1999 4.8 2.2 2.2 4.75
2000 4.1 4.0 3.4 6.00
2001 1.1 4.3 2.8 5.00
2002 1.8 5.7 1.6 1.75
2003 2.5 5.9 2.3 1.00
2004 3.6 5.8 2.7 1.00
2005 3.1 5.2 3.4 2.75
2006 2.7 4.7 3.2 4.75
2007 1.9 4.4 2.8 5.25
2008 0.0 5.8 3.8 2.25
2009 -2.6 9.3 -0.4 0 to 0.25
2010 2.6* 9.7** 2.1*** 0 to 0.25

*Real GDP change data for 2010 is through the 3rd quarter, 2010.

**Unemployment is the monthly average through November, 2010

***Annual CPI-U estimate is for the first six months of 2010.

Business Cycles

Business cycles or periodic fluctuations in growth and employment illustrate the relationships of some data (see Figure 3). When the National Bureau of Economic Research (NBER) tracks cycles in order to identify recessions, they use the combination of employment, GDP growth and other factors. How do consumer prices fit into this analysis? The NBER uses real GDP growth and real personal income as primary factors identifying business cycles. Using employment and income data adjusted for inflation allows the NBER to make more accurate comparisons from one data period to the next.

Inflation and GDP

Accurate measurement of gross domestic product or GDP growth is also dependent on the accurate measurement of inflation. A rise in the price level "inflates" the measurement of GDP growth - miscalculating real growth in the economy. A more meaningful measurement of the growth of output is real GDP - the nominal GDP measurement adjusted for the impact of inflation.  Although CPI is the most common measurement of inflation for many uses, the adjustment of GDP uses a process based on the GDP deflator. Both the CPI and the GDP deflator are measurements of average prices, but the GDP deflator includes all of the goods and services produced in the economy, not just the CPI market basket.

CPI vs. GDP Deflator as Measures of Inflation

The rate of inflation rate determined by the CPI and GDP deflator are normally quite similar.  Since the CPI uses a fixed market basked of goods and services, it assumes a fairly constant pattern of consumer purchases. Over time, the market basket may be changed, based on changes in consumer behavior. The GDP deflator uses a flexible basket of goods and services based on the actual quantities of goods and services produced in a year, while the prices of the goods and services are fixed. The GDP deflator uses a much larger quantity of goods and services.

The CPI does not take into account substitution - the tendency of consumers to choose lower priced goods in place of more expensive ones. Just the opposite sometimes happens, as consumers may choose to purchase more expensive goods as their incomes increase. The GDP deflator can take these substitutions into account.  Because the GDP deflator assumes substitutions, it may underestimate the impact of inflation when consumers do not (are not able to) substitute. The CPI may overestimate the impact of inflation when consumers do substitute.

Most government agencies and many private contracts use the CPI to determine a cost of living adjustments (COLA).  The Social Security Administration added a 5.8 percent COLA to Social Security benefits and SSI payments in January 2009, based on  the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of 2007 to the third quarter of 2008.  If there had been no increase in the CPI in that time period, there would have been no increase in benefits.

Inflation and Unemployment

Long-standing economic theory had assumed that there is a predictable trade-off between the impact of public policy decisions and economic change on inflation and unemployment. This theory, developed by New Zealand Economist William Phillips in 1958, was based on his observation of an inverse relationship between money wage changes (inflation) and unemployment in the British economy over a period of time. The "Phillips Curve" proposed that when unemployment is low, inflation tends to be high and when unemployment is high, inflation tends to be low.

The implication for policy makers was that "Keynesian" policies could be used to control unemployment and inflation. Increased spending can lower unemployment with the risk of a high rate of inflation.  Policy makers face the Phillips Curve trade-off. Today, policy makers who propose to use monetary policy (lower interest rates) or fiscal policy (deficit spending) to stimulate the economy, and increase GDP and employment, are aware of its potential inflationary effect. The Phillips Cure theory lost favor in the late 1980s when there were periods of both high unemployment and high inflation, followed in the 1990s by periods of low unemployment and low inflation.

The Federal Reserve recognized this potential trade-off in its most recent monetary policy statement when it justified an aggressive stimulatory policy by saying that the current conditions did not include an inflationary threat. Low inflation provides room for aggressive policies to stimulate the economy. Should inflation become a real threat, the Fed may slow down growth of the money supply.

Look at the data in Figure 4 about the recent performance of the U.S. economy.  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?
  • Is the trend of the CPI-U related to the real GDP growth and payroll employment data?
  • If you were a member of the NBER "Business Cycle Dating Committee, would you argue that we are still in a recession?


Once again:

“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 2.6 percent in the third quarter of 2010, (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 increased 1.7 percent.”

U.S. economic growth was slower than desired in Q3 2010, but, still positive growth.  The ongoing debate is over whether or not the government should take further stimulatory actions or let the economy growth on it own?  Ask the millions of workers who continue to be unemployed. 

Watch the continuing discussion about how the most recent stimulus should be spent.


Next, complete the essay question below on the interactive notepad.

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


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.]



Per Capita GDP





2007 est.




2009 est.




2009 est.




2004 est.




2009 est.




2005 est.




2009 est.




2009 est.




2009 est.


Faroe Islands


2008 est.


United States


2009 est.


In terms of total size of GDP, the U.S. ranks second, just behind the European Union nations’ total:






European Union


2009 est.


United States


2009 est.




2009 est.




2009 est.




2009 est.




2009 est.


United Kingdom


2009 est.




2009 est.




2009 est.




2009 est.

Take a look at the economic data for the world’s nations available from the CIA World Factbook What does the data tell you about the various nations?

Choose one nation. Summarize what you perceive is that nation’s “standard of living,” according to its per capita GDP and other measures of social welfare.