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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 "second estimate" of real GDP released on August 27, 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.

GDP data is announced three times for each fiscal quarter. For Q2 2010, the first estimate is made in July, the second estimate is made in August, and the third (final) estimate for Q2 is made in September.

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. 


Current Key Economic Indicators

  • Inflation: On a seasonally adjusted basis, the CPI-U increased 0.3 percent in July after falling 0.1 percent in June. The index for all items less food and energy increased 0.1 percent in July after increasing 0.2 percent in June. (August 13, 2010)
     
  • Employment and Unemployment: Total non-farm payroll employment declined by 131,000 in July, and the unemployment rate was unchanged at 9.5 percent. Federal government employment fell, as 143,000 temporary workers hired for the decennial census completed their work. Private-sector payroll employment edged up by 71,000. (August 6, 2010)
     
  • Real GDP: U.S. real gross domestic product increased at an annual rate of 1.6 percent in the second quarter of 2010, that is, from the first quarter to the second quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent. August 27, 2010)
     
  • Federal Reserve Monetary Policy: The Committee (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. (August 10, 2010)

TASK

  • 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 on consumers and producers, and implications for the future.

PROCESS

First - What are GDP and Real GDP?

Simply put, gross domestic product (GDP) measures "the value of final goods and services produced in the United States in a given period of time."  Add the value of all of the final goods and services by businesses and governments in one year, including investment, and accounting for net exports, and you get the GDP.

Real GDP, also in simple terms, is GDP adjusted for the effect of a change in the price level - thus, a measure of "real" growth without inflation.  Subtract any inflation during the year to measure only the "real" increase in output - not including increased (or decreased) prices.

While GDP is considered an indicator of economic progress, it is not necessarily a measure of well-being or quality of life, because it does not account such factors as income distribution, rates of poverty, crime, or literacy. GDP measures the nation's output of goods and services - and is generally related to levels of employment, and income - so it does give us a picture of the health of the economy.

Students:  Is our GDP - output of goods and services - a good measure of our well-being and standard of living?  Is per capita GDP a better measure of well-being?  To learn more about the per capita GDPs of the world's nations, go to the CIA World Factbook .

Bureau of Economics Analysis: Gross Domestic Product: Fourth Quarter 2010 (Advance Estimate)

Announcement date: January 28, 2011

"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 3.2 percent in the fourth quarter of 2010, (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.6 percent."

A 3.2 percent real GDP growth rate.  Sounds good, right?  The BEA reported that the rate of growth of real GDP improved from the 2.6 percent  growth rate in the third quarter of 2010 to an annualized rate of 3.2 percent in Q4.  Then, the BEA added a "caveat" to their announcement.  "The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency."  The second and final estimates, to be made in February and March, may be higher or lower than the initial estimate, based on better or more complete economic data.

Examples: In the third quarter, the advance estimate made in October was a 2.0 percent growth rate.   In November, the estimate was increased to 2.5 percent.  The final estimate for Q3, made in December was a real GDSP growth rate of 2.6 percent.  In Q3, the new and better data resulted in a higher estimate.  For Q2 of 2010, the advance estimate was a 2.4 percent growth rate.  It was reduced to 1.7 percent by the time of the final estimate made in September.  The Q3 2010 estimate was increased by 0.6 percent and the Q2 2010 estimate was reduced by 0.7 percent.

What really happened in Q4 2010?  You will have to wait until the March 25, 2011 final estimate for Q4 to find out.  Then again, a revision of all of the 2011 GDP estimates may be made in January of 2012.

One GDP milestone was reached in Q4.  The annual measurement of U.S. real GDP finally reached the level prior to the recession.  In 2007 U.S. annual real GDP was $13.229 trillion. U.S annual real GDP dropped to $12.881 trillion by 2009, In 2010 annual real GDP was almost $13.249 trillion - $29 billion over the 2007 level.

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A note about the U.S. GDP at the end of 2010

If you look at the BEA’s history of the annual and quarterly levels of GDP, both in current dollars and chained dollars, you may be a bit confused. This data can be found on the BEA website at www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm .

The list of annual GDP figures indicates that the 2010 current dollar U.S. GDP was $14.6602 trillion. It indicates that the 2010 U.S. GDP in chained (adjusted for inflation) dollars was $13.2487 trillion.

The list of GDP figures by quarter indicates that the 2010 Q4 current dollar U.S. GDP was $14.8704 trillion. It indicates that the 2010 Q4 U.S. GDP in chained (adjusted for inflation - base year 2005) dollars was $13.3826 trillion.

What’s the difference?

The Quarterly GDP data is the most recent measurement. $14.3826 was the GDP for Q4, and thus the most recent estimate. The “annual” figures are the four quarterly estimates added together and divided by four – resulting in the average of the four quarters.

Why?

To determine the GDP for a year, is it best to use the GDP at the end of the year or use the average GDP for the whole year? The BEA methodology is to use the average of the four quarters and provide a figure that represents size of the economy over the full year period. If the GDP estimate for Q4 was higher than the three previous quarters, it increases the annual average. And, if the GDP decreased in Q4, it reduces the annual average.

How big was the U.S. economy at the end of 2010?

  •  $14.8794 trillion in current dollars
  •  $13.2487 trillion in chained 2005 dollars.
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Figure 1, below, shows the quarterly growth rates of U.S. real gross domestic product form 2001 through 2010.  Note the period of the recession, December 2007 through June, 2009 and the low or negative growth rates reported for Q1 2008 through Q2 2009.  Real GDP  growth is just one of the key data points used by the National Bureau of Economic Research (NBER) Business Cycle Dating Committee to identify recessions. Link to NBER:  www.nber.org/cycles/main.html
 

Figure 1:  U.S. Quarterly Real GDP Growth
2007-2010
Quarter Real GDP
Growth Rate (%)
2007 Q1 0.9
2007 Q2 3.2
2007 Q3 2.3
2007 Q4 2.9
2008 Q1 -0.7
2008 Q2 0.6
2008 Q3 -4.0
2008 Q4 -6.8
2009 Q1 -4.9
2009 Q2 -0.7
2009 Q3 1.6
2009 Q4 5.0
2010 Q1 3.7
2010 Q2 1.7
2010 Q3 2.6
2010 Q4* 3.2
*First estimate

 
Where Did Q4 2010 Real GDP Growth Come From?

The BEA announcements typically identify two sets of trends.  One is the "increase" in real GDP.  What sectors added to or reduced the level of GDP?  This reflects the simple measurement of the output for each sector.   For Q4, the BEA provided this summary:

"The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, and nonresidential fixed investment that were partly offset by a negative contribution from private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased."

The second set of trends are the sectors that added to the rate of growth.  For instance, imports decreased at a greater rate than the previous month and personal consumption expenditures increased at a greater rate.  This added more to the rate of growth.

"The acceleration in real GDP in the fourth quarter primarily reflected a sharp downturn in imports, an acceleration in PCE, and an upturn in residential fixed investment that were partly offset by downturns in private inventory investment and in federal government spending and a deceleration in nonresidential fixed investment."

Key Industries: Computers and Automobiles

The BEA announcement typically identifies two key industries that are of particular concern to those who use the real GDP data.  In recent years, these have been computer and motor vehicle sales.   For Q4, the BEA reported that computer sales increased at a siilar rate, but automobile output fell significantly.

"Final sales of computers added 0.31 percentage point to the fourth-quarter change in real GDP after adding 0.29 percentage point to the third-quarter change. Motor vehicle output subtracted 0.34 percentage point from the fourth-quarter change in real GDP after adding 0.49 percentage point to the third-quarter change."

Students:  What products do you think are indicators of growth in the economy?

How is GDP Measured?

There are two basic ways to determine a nation’s GDP.

1. Income Approach. This method adds all of the incomes that governments, businesses and other entities pay for the productive resources they use to produce goods and services: wages, salaries, and other labor income, corporate profits, interest and other investment income, farmers’ income, and income from non-farm unincorporated businesses. After adjusting for indirect taxes and depreciation, GDP is determined.

2. Expenditure Approach. Measuring the total expenditure of money used to buy things is a way of measuring production. This is expenditure method of calculating GDP include personal consumption expenditures, gross private investment, government expenditures and net exports.

What are the Components of GDP?

GDP is generally reported as the sum of four components (sectors).  The formula for determiniing GDP is:  C + I + G + X = GDP

  • C = Personal Consumption Expenditures
  • I = Gross Private Fixed Investment
  • G = Goernment Expenditures and Inestment
  • X = Net Exports (Exports minus Imports)

Students: What percentage of your spending is for imported goods?  Although imports are only 16 percent of our goods and services, many lower-priced consumer goods are made in China and other nations.  What is your experience?

Want to know more about the economies of nations where your goods are made? Go to the CIA World Factbook: www.cia.gov/library/publications/the-world-factbook/docs/profileguide.html

The January 28, 2011, BEA announcement for Q4 2010 reported:

  • Real personal consumption expenditures (PCE) increased 4.4 percent in the fourth quarter, compared with an increase of 2.4 percent in the third. Perdsonal consumption expenditures are 70.8 percent of the U.S. GDP. 
  • Real nonresidential fixed investment increased 4.4 percent in the fourth quarter, compared with an increase of 10.0 percent in the third.  Nonresidential investment is 9.8 percent of GDP.  Residential fived investment increased by 3.4 percent in Q$ and is 2.2 percent of the total GDP.
  • Real exports of goods and services increased 8.5 percent in the fourth quarter, compared with an increase of 6.8 percent in the third. Real imports of goods and services decreased 13.6 percent, in contrast to an increase of 16.8 percent.  Exports are 12.9 percent and imports are 16.2 percent of the total GDP.  Remember, imports are a subtraction from GDP, so the net exports total is a subtraction of 3.3 percent in the determination of the Q4 GDP.
  • Real federal government consumption expenditures and gross investment decreased 0.2 percent in the fourth quarter, in contrast to an increase of 8.8 percent in the third. Real state and local government consumption expenditures and gross investment decreased 0.9 percent, in contrast to an increase of 0.7 percent.  Federal, state and local governments represent 20.4 percent of GDP.

U.S. Gross Domestic Product
Q4 2010

Personal Consumption Expenditures 70.8% $10,525.2 trillion
Gross Private Domestic Investment 12.1% $1,796.7 trillion
Government Expenditures and Investment 20.4% $3,040.7 trillion
Net Exports (Exports minus Imports) -3.3% -$492.2 billion
Total U.S. GDP (through Q4 2010) 100% $14,870.4


How much has U.S. GDP grown?

Figure 2, below, shows the current dollar and real GDP data for the years 2000 through 2010.  Note the decrease in GDP from 2007 to 2009 - the recent recession. 

Figure 2:  U.S. Current and Constant Dollar GDP
Annual Rates
2000-2010
Year Current Dollar
GDP
Constant Dollar
"Real" GDP
2000 9,951.5 11,226.0
2001 10,286.2 11,347.2
2002 10,642.3 11,553.0
2003 11,142.1 11,840.7
2004 11,867.8 12,263.8
2005 12,638.4 12,638.4
2006 13,398.9 12,976.2
2007 14,061.8 13,228.9
2008 14,369.1 13,228.8
2009 14,119.0 12,880.6
2010 14,660.2 13,248.7

 

Note:  The 2010 annual GDP in the Figure 2 differs somewhat from the GDP level reported for Q4 2010, due to differences in computing methods.

One GDP milestone was reached in Q4.  The annual measurement of U.S. real GDP finally reached the level prior to the recession.  In 2007 U.S. real GDP was $13.229 trillion. Real GDP dropped to $12.881 trillion by 2009, In 2010 real GDP was almost $13.249 trillion.

The Impact of Inflation and Measuring Real GDP

To adjust for inflation, the BEA uses the percent change in the price index for gross domestic purchases. The BEA defines this as the change in 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."

The BEA announcement on Q4 added, "The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 2.1 percent in the fourth quarter, compared with an increase of 0.7 percent in the third. 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 0.4 percent in the third."

Discussion Question: How did inflation affect you in the past few months? Did you notice any price changes? For recent inflation data, go to the U.S. Bureau of Labors Statistics website - www.bls.gov .

The Impact of Inventories

Inventory consists of the raw materials, intermediate goods, and finished goods that are ready for sale. Inventories represent one of the most important assets of a business. The turnover of inventory represents a sources of revenue generation and subsequent earnings for a company.

Holding a large amount of inventory over time is not usually good for a business. Holding inventory means that the business has paid the costs to produce good that have not been sold. Holding too little inventory may be bad because the business risks of losing potential sales and potential market share.

The BEA identifies the impact of changes in inventories - "Changes in inventories are the smallest component of the GDP, usually less than 1% of GDP but they are much more important than their absolute size. In fact, large changes in inventories signal changes in aggregate demand and, thus, are indicators of future economic activity. As the change in inventories is a flow equal to the change in the stock of unsold goods, they are a form of investment, often referred to as involuntary investment."

Q4 2010 inventories: "The change in real private inventories subtracted 3.70 percentage points from the fourth-quarter change in real GDP after adding 1.61 percentage points to the third-quarter change. Private businesses increased inventories $7.2 billion in the fourth quarter, following increases of $121.4 billion in the third quarter and $68.8 billion in the second.."

Gross National Product

In 1991, the United States switched from using gross national product (GNP to gross domestic product GDP) as the primary measurement of production or output GDP is product produced within a country's borders. GNP is product produced by enterprises owned by a country's citizens. Using GDP essentially factors out the production from firms outside the US and the impact of trade.

What happened to GDP in 2010?

According to the BEA, "Real GDP increased 2.9 percent in 2010 (that is, from the 2009 annual level to the 2010 annual level), in contrast to a decrease of 2.6 percent in 2009."

In 2010, quartery GDP growth estimates varied from 1.7 percent to 3.7 percent.  The annual average was 2.9 percent, a small increase oer the 2009 annual increase.

"The increase in real GDP in 2010 primarily reflected positive contributions from private inventory investment, exports, personal consumption expenditures (PCE), nonresidential fixed investment, and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased."

Real GDP growth was shared by all sectors in 2010, and slightly reduced by a negatie net export total.  The annual increase of 2.9 percent was not large enough to generate large numbers of new jobs, as the unemployment rate remained above 9 percent at the end of 2010.

More Q4 and 2010 annual GDP data: http://bea.gov/newsreleases/national/gdp/2011/pdf/gdp4q10_adv.pdf

Some Key GDP Definitions

  • Gross domestic product (GDP). The market value of goods and services produced by labor and property in the United States, regardless of nationality.
     
  • Real gross domestic product (real GDP). GDP adjusted for the effect of a change in the price level.
     
  • Gross national product (GNP). The market value of goods and services produced by labor and property supplied by U.S. residents, regardless of where they are located.
     
  • Full Employment GDP. The nation's potential output when all of the nation's productive resoruces (natural, human, and capital resources) are fully utilized.  If all of the nation's factories were working at full capacity and there was full employment, what would the GDP be?
     
  • Potential GDP: The highest level of real gross domestic product that could be reached without putting pressure on the price level - inflation.
     
  • Per Capita GDP. The nation's GDP divided by its population.
     
  • Real per capita GDP:  The nation's real GDP divided by its population.

CONCLUSION

What happened to GDP in 2010?

According to the BEA, "Real GDP increased 2.9 percent in 2010 (that is, from the 2009 annual level to the 2010 annual level), in contrast to a decrease of 2.6 percent in 2009."

In 2010, quarterly GDP growth estimates varied from 1.7 percent to 3.7 percent.  The annual average was 2.9 percent, a small increase over the 2009 annual increase.

"The increase in real GDP in 2010 primarily reflected positive contributions from private inventory investment, exports, personal consumption expenditures (PCE), nonresidential fixed investment, and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased."

Real GDP growth was shared by all sectors in 2010, and slightly reduced by a negative net export total.  The annual increase of 2.9 percent was not large enough to generate large numbers of new jobs, as the unemployment rate remained above 9 percent at the end of 2010.

The recession ended in mid-2008, but the impact on employment continued.  Keep an eye on the GDP growth and employment data to look for a real recovery.

www.nber.org/cycles/recessions_faq.html

ASSESSMENT ACTIVITY

Next, answer the questions on the interactive notepad below.


1. How is a nation's real per capita GDP determined?

2. What data from the BEA announcement supports the NBER decision that the U.S. is in a recession?

EXTENSION ACTIVITY

The BEA provides a breakdown of U.S. gross domestic product (nominal GDP and real GDP) growth annually since 1930 and by quarter since 1947, to the present year. Take a good look at the data over the time period.  Gross Domestic Product: Percent Change From Preceding Period, www.bea.gov/national/index.htm#gdp

  • What are the periods of growth and decline? Was the data (growth rates) consistent throughout the period of time?
     
  • Can you identify the periods of the recessions (and the Great Depression)?
     
  • Compare the nominal growth rates and the real growth rates.  Can you find periods of high inflation?