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This lesson focuses on the February 25, 2011, second estimate of U.S. real gross domestic product (real GDP) growth for the fourth quarter (Q4) 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.

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 second estimate of real GDP growth released on February 25, 2011, for the fourth quarter  of 2010 (October-December.)  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 second semester of the 2010-2011 school year (January-May), EconEdLink will publish four Focus on Economic Data lessons on "U.S. Real GDP Growth."  Real GDP data is announced three times for each fiscal quarter. For Q4 2010, the first estimate was made in January.  The second estimate was made in February (this lesson).  The third estimate for Q4 is made in March. 

[NOTE: GDP data reports lag the reporting period - the fiscal quarter. The current estimate is the second for Q4 2010.  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 "first, second and third" have replaced the previous 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:

  • January (first estimate for Q4 2010): How to read the data, real vs. nominal, and how the data is collected
  • February (second estimate for Q4 2010): Factors influencing the change in GDP, revisions, and seasonal adjustment
  • March (third estimate for Q4 2010): Business cycles and indicators of future growth or decline.
  • April (first estimate for Q1 2011): More details of GDP growth and international comparisons.

MATERIALS


Key Economic Indicators

as of February 25, 2011

Inflation

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in January on a seasonally adjusted basis. Over the last 12 months, the all items index increased 1.6 percent before seasonal adjustment.

Employment and Unemployment

The U.S. unemployment rate fell by 0.4 percentage point to 9.0 percent in January, while nonfarm payroll employment changed little (+36,000). Employment rose in manufacturing and retail and declined in construction and transportation.

Real GDP

U.S. real gross domestic product increased at an annual rate of 2.8 percent in the fourth quarter of 2010, (that is, from the third quarter to the fourth quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.6 percent.

Federal Reserve

The Federal Open Market Committee 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.

PROCESS

The U.S. economy grew in the fourth quarter of 2010, but not quite at the rate of growth that was first reported by the BEA in January, 2011. Remember, real GDP is reported three times for each quarter, with the later estimates based on additional and more complete information.  Read the February 25,2011, BEA news release for details about Q4 2010 real GDP growth.

U.S. Bureau of Economic Analysis
Gross Domestic Product: Fourth Quarter 2010 (second estimate)

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

"The GDP estimates released today are based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 3.2 percent."

Q4 2010 real GDP growth was 2.8 percent, which is below the recent historical average growth rate.  U.S. real GDP growth has averaged 3.3 percent since 1947, with a high quarterly rate of 17.2 percent in Q1 of 1950 and a quarterly low rate of -10.40 percent in Q1 of 1958.  More recently, the U.S. real GDP growth rate was at a low of minus 6.8 percent in Q4 of 2008, and up 5.0 percent in Q4 of 2009. (Note: The growth rate for each quarter is reported as an annual rate.)

[Note to Teachers: For the history of monthly U.S. current dollar and real GDP growth rates since 1947 and annual growth rates since 1930, go to this BEA webpage: ' ]

[Note to Teachers: Assign individual or small groups of students to different ten year periods of time.  Can they suggest what happened to the economy during that itme period?]

Figure 1, below, shows graphically the U.S. quarterly real GDP growth rates from 1999 through Q4 of 2010.   Note the real GDP negative growth in 2008 and the first half of 2009.   This is the period that looks like the traditional definition of a recession.  According to the National Bureau of Economic Research (NBER), the recession ended in June of 2009 (http://www.nber.org/cycles.html .]

[Note to Teachers:  Students should be able to identify the periods of recession during this time span.)Information on Recessions and Recoveries

GDP Figure 1

Read the full February 25, 2011, BEA announcement of U.S. real GDP growth at: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm .  The BEA breaks down the quarterly growth or decline by sector - personal consumption expenditures (PCE), private investment, government spending, and net exports.

  • What sectors grew in Q4 2010?
  • What sectors declined in Q4 2010?

[From the February 25, 2011 announcement: "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 negative contributions from private inventory investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased."

"The small fourth-quarter acceleration in real GDP primarily reflected a sharp downturn in imports, an acceleration in PCE, an upturn in residential fixed investment, and an acceleration in exports that were mostly offset by downturns in private inventory investment and in federal government spending, a deceleration in nonresidential fixed investment, and a downturn in state and local government spending."]

[Note to teachers:  Students can look at the detailed GDP Data by Industries to identify how well the key industries in their city or region are doing.]

What was the Current-dollar GDP in Q4?

"Current-dollar GDP -- the market value of the nation's output of goods and services -- increased 3.2 percent, or $115.9 billion, in the fourth quarter to a level of $14,861.0 billion. In the third quarter, current-dollar GDP increased 4.6 percent, or $166.4 billion."

$14,861,000,000,000

The U.S. current dollar GDP growth rate was slower in Q4 2010 than the rate reported in Q3 2010.  The Q3 growth rate was 4.6 percent.

The real growth rate of GDP in Q4 was 2.8 percent and the real GDP growth rate for Q3 was 2.6 percent.  When looking at the real rates of growth, the rate increased from Q3 to Q4.

Note that the current dollar GDP estimate of 3.2 percent growth for Q4 2010 (reported February 25, 2011) is greater than the reported real growth rate of 2.8 percent.   What's the difference?

[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 2.1 percent in the fourth quarter, the same increase as in the advance estimate; this index increased 0.7 percent in the third quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 1.2 percent in the fourth quarter, compared with an increase of 0.4 percent in the third."]

 

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

 

The U.S. population was estimated to be approximately 310 million at the end of 2010.  To determine the U.S. per capita (per person) GDP, simply divide the nominal GDP by the population - 310 million.  What was the approximate U.S. per capita GDP at the end of 2010? [$47,358.  $47,358 x 310 million = $14.861 trillion]

 

[Note to Teachers: To compare the U.S. per capita GDP with the per capita GDPs of other nations, see the CIA World Factbook, https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html Remember, a high per capita GDP doesn't necessarily mean that all people in a country have high incomes or a high standard of living.]

 

GDP Estimate Revisions

 

GDP estimates are found in two forms.

 

1.  Quarterly Estimate Revisions

 

First, there are the revisions of the quarterly estimates made three times for each quarter.  For Q4 2010, the first estimate was made in January.  It was a 3.2 percent rate of real GDP growth.  This month, the estimate was reduced to just 2.8 percent.

 

The BEA explained the change: "The downward revision to the percent change in real GDP primarily reflected an upward revision to imports and downward revisions to state and local government spending and to personal consumption expenditures (PCE) that were partly offset by an upward revision to exports."

 

An increase in imports and a smaller increase in exports resulted in a reduction of GDP (lower net exports).  Government spending and personal consumption expenditures were lower than originally estimated.  A change in the estimate of the GDP price index can also impact the revision.  This month, there was no change in the GDP price index.

 

The Q4 estimate is subject one more change when the final estimate is made on March 25, 2011.  Additional data and revisions of other data may increase or decrease the final estimate.

 

2.  Annual Revisions

According to the BEA annual revisions to GDP estimates are made each year in order to:

  1. Incorporate most complete and reliable source data.
  2. Provide a more detailed picture of the economy.
  3. Make improvements to methods used for preparing the estimates.

In 2010, revisions were made to 2007-2009 data.  The changes reflected new definitions of concepts or categories, changes in how the data is organized in the presentation, changes in the benchmark data, and improved methodologies.

The 2010 revisions reduced the previous estimates of U.S. GDP for the three-year period of 2007 - 2009.  The revised estimate of GDP at the end of 2009 was reduced by $119 billion to $14.119 trillion.  The largest portion of the GDP total to be reduced was the personal consumption expenditures sector – down by $87.8 billion in 2009.

Figure 2, below, shows the growth of U.S. gross domestic product from 2000 through 2010, as annual data.  Note the periods of recession - very slow or negative growth.

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 14,657.8 13,245.6

 

2010 End-of-Year GDP Data

The BEA added to the Q4 2010 GDP announcement an estimate for the final 2010 GDP data.  For the year...

"Real GDP increased 2.8 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."  GDP growth in 2010 reversed the decrease in GDP in 2009.  In 2010, the U.S. economy grew at a rate slightly more than the loss in 2009 and essentially flat growth in 2008.  Ending 2008 at $14.369 trillion, the economy's output shrunk to $14.119 trillion in 2009, a loss of $250 trillion in output.  By the end of 2010, in a recovery, the economy's annual output grew by almost $539 trillion during the year.

"The increase in real GDP in 2010 primarily reflected positive contributions from private inventory investment, exports, PCE, nonresidential fixed investment, and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased."  All sectors, except imports, contributed to the 2010 GDP growth.

"The price index for gross domestic purchases increased 1.3 percent in 2010, in contrast to a decrease of 0.2 percent in 2009."  There was little inflationary impact on the GDP data in 2010.

Note:  The level of real GDP reported for Q4 and that reported for the year 2010 differ slightly, due to the way the quarterly data is adjusted to determine an annualized rate of growth for the quarter.

Quarterly GDP data is seasonally adjusted to remove variations that normally
occur at about the same time and in about the same magnitude each year—for example, weather, holidays, and tax payment dates. After seasonal adjustment, cyclical and other short-term changes in the economy stand out more clearly.  Annual data is not seasonally adjusted.

What is the BEA?

The Bureau of Economic Analysis (BEA), an agency of the U.S. Department of          Commerce, “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 to teachers: 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 ]

CONCLUSION

"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 2.8 percent in the fourth quarter of 2010, (that is, from the third quarter to the fourth quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.6 percent." (U.S. Bureau of Economic Analysis, Gross Domestic Product: Fourth Quarter 2010 (second estimate), February 25, 2011.)

The economy is growing at a modest - almost average - pace.  Unfortunately, this growth has not resulted in the creation of enough new jobs to reduce the unemployment rate to anywhere near a normal level.  The U.S. unemployment rate remains at 9 percent (as of January, 2011).

It is generally clear that if unemployment is high, the economy will not be producing at its full or normal output. Since people who are not working, their labor resources are not being used effectively. What is the relationship between unemployment and output?

Okun’s Law

In 1962, economist Arthur Okun theorized that there is a predictable relationship between unemployment and national output (GDP). Okun's Law correlates changes in real GDP and changes in the unemployment rate. He said that real GDP grows at about 3% per year when unemployment is normal.

For every point above 3.0 percent unemployment, the nation’s GDP decreases by 2%. And, it also works in reverse – each percentage point under 3.0 results in an additional 2 percent in GDP growth. For example, if the U.S. unemployment rate is 9.0 percent, 6.0 percent over the 3.0 average, GDP is reduced by 12 percent.

Many suggest that this historic relationship between unemployment and the “GDP gap” no longer exists – at least to the degree that Professor Okun suggested. The economy grew at a greater rate in late 2009, despite an even higher unemployment rate. The new concept is the “jobless recovery,” made possible by technology and greatly improved productivity.

Are we in a "new economy," one where the relationship between employment and output has changed?  Keep an eye on the employment and GDP data for the rest of the school year.
 

ASSESSMENT ACTIVITY


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."]

EXTENSION ACTIVITY

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                 Year
1           Qatar                          $145,300                             2010 est.
2           Liechtenstein           $122,100                             2007 est.
3           Luxembourg               $81,800                             2010 est.
4           Bermuda                     $69,900                             2004 est.
5           Norway                        $59,100                             2010 est.
6           Singapore                   $57,200                             2010 est.
7           Jersey                          $57,000                             2005 est.
8           Kuwait                          $57,100                             2010 est.
9           Brunei                          $50,300                             2010 est.
10         United States             $47,400                             2010 est.

In terms of total size of GDP, the U.S. ranks second, just behind the European Union nations’ total (all estimates are 2010):

Rank  Country                      GDP (current dollar)
1         European Union      $14,890,000,000,000
2         United States           $14,720,000,000,000
3         China                           $9,872,000,000,000
4         Japan                           $4,338,000,000,000
5         India                             $4,046,000,000,000
6         Germany                     $2,951,000,000,000
7         Russia                         $2,229,000,000,000
8         Brazil                            $2,194,000,000,000
9         United Kingdom        $2,189,000,000,000
10       France                         $2,160,000,000,000

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.