Online Lesson

Focus on Economic Data: U.S. Real GDP Growth, February 26, 2010

Key Economic Concepts:

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

Description:

This lesson focuses on the February 26, 2010, second estimate of U.S. real gross domestic product (real GDP) growth for the fourth quarter (Q4) of 2009, reported by the U.S. Bureau of Economic Analysis (BEA). The current data and historical data are explained. The meaning of GDP and potential impacts of changes of GDP are explored. This lesson will also raise questions about the impact of the current level of growth on the U.S. economy and individuals.

Current Key Economic Indicators as of February 26, 2010
Inflation	On a seasonally adjusted basis, the U.S. CPI-U increased 0.2 percent in January, 2010, the same increase as in December, 2009. The index for all items less food and energy fell 0.1 percent in January after rising 0.1 percent in December. (February 19, 2010)
Employment and Unemployment	The U.S. unemployment rate fell from 10.0 to 9.7 percent in January, 2010, and nonfarm payroll employment was essentially unchanged (-20,000). Employment fell in construction and in transportation and warehousing, while temporary help services and retail trade added jobs. (February 5, 2010)
Real GDP	U.S. real gross domestic product increased at an annual rate of 5.9 percent in the fourth quarter of 2009. In the third quarter, real GDP increased 2.2 percent. (February 26, 2010)
Federal Reserve	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. (January 27, 2010)

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Lesson Objectives:

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.

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 February 26, 2010, for the fourth quarter (October-December of 2009.) Understanding the level and rate of growth of the economy's output (GDP) helps to better understand growth, employment trends, the health of the business sector, and consumer well-being. 

[Note to teachers: During the second semester of the 2009-2010 school year (January-May), EconEdLink will publish five Focus on Economic Data lessons on "U.S. Real GDP Growth."  Real GDP data is announced three times for each fiscal quarter. For Q4 2009, the first estimate was made in January, the second estimate is made in February, and the third estimate for Q4 is made in March.]

[NOTE: that the GDP data reports lag the reporting period - the fiscal quarter. The current estimate is for Q4 (October-December, 2009).  Each of the three estimates for a quarter will include more comprehensive data and may modify the growth rate reported earlier].

[NOTE: The BEA previously used the terms "advance, preliminary and final" to identify the three quarterly real GDP estimates.  The terms "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 2009): How to read the data, real vs. nominal, and how the data is collected
• February (second estimate for Q4 2009): Factors influencing the change in GDP, revisions, and seasonal adjustment (THIS LESSON)
• March (third estimate for Q4 2009): Business cycles and indicators of future growth (decline)
• April (first estimate for Q1 2010): Regional GDP growth data and international comparisons.
• May (second estimate for Q1 2010): Year-end summary and future growth factors.

Resources:

• Bureau of Economic Analysis: This website is the news release of the second estimate of U.S. gross domestic product for the fourth quarter of 2009.
  www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm ^[3]
   
• Bureau of Economic Analysis: "Measuring the Economy: A Primer on GDP and the National Income and Product Accounts"
  www.bea.gov/national/pdf/nipa_primer.pdf ^[4]
   
• "Taking the Pulse of the Economy: Measuring GDP." J. Steven Landefeld, Eugene P. Seskin, and Barbara M. Fraumeni, Journal of Economic Perspectives, Volume 22, Number 2, Spring 2008,Pages 193–216.
  www.bea.gov/about/pdf/jep_spring2008.pdf ^[5]
   
• Bureau of Economic Analysis: Here is an overview of current economic data, go to 'Overview of the U.S. Economy: Perspective from the BEA Accounts'
  www.bea.gov/newsreleases/glance.htm ^[6]
   
• The Conference Board: "Global Business Cycle Indicators" www.conferenceboard.org/economics/bci/pressRelease_output.cfm?cid=1 ^[7]
   
• NBER Recession Announcement: "Determination of the December 2007 Peak in Economic Activity." December 1, 2008
  wwwdev.nber.org/cycles/dec2008.html ^[8]  

Process:

Here's the headline:  "U.S. Economy Grows at a 5.9% Rate"

The Bureau of Economic Analysis' announcement about real GDP growth in late 2009 seemed like very good news.  The U.S. economy grew at an annualized rate of 5.9 percent from October through December.  Given the real GDP declines of much of the previous two years, was this evidence that the recession is over?  Using GDP as an indicator that some people feel identifies a recession, maybe it is over.  Then again, the National Bureau of Economic Research uses much more than simple GDP growth to identify the beginning and end of a recession. 

A key indicator for the NBER will be employment growth - normally a lagging indicator of recovery.  If hiring and payroll employment increase in the coming months, we may see the "official" end of the two year old recession.   Some analysts sense that this recovery will be an exceptionally long one - very slowly bring back the millions of lost jobs.  Some fear a "jobless recovery," increased output due more to productivity gains and structural changes in  the economy.  That may mean many of the lost jobs will never be replaced (in those industries) and whole new industries will have to evolve to create jobs.   Let's take a look at the February 26 BEA announcement to see if there are signs of recovery.  

Second Estimate of U.S. Gross Domestic Product Growth: Third Quarter 2009
U.S. Bureau of Economic Analysis
Released Friday, February 26, 2009

"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 5.9 percent in the fourth quarter of 2009 (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 2.2 percent."

In January, the BEA had estimated that U.S. real GDP had increased by 5,7 percent.  The February "second" estimate for Q4 2009 increased the real GDP growth rate to 5.9 percent.

The BEA commented on the upward revision of the Q4 2009 real GDP estimate, noting that the added 0.2 percent was "based on more complete source data than were available for the "advance" estimate issued last month."  After the January estimate, some analysts suggested that the 5.7 percent increase was unusually high and might be revised downward.  This report confirms that the growth in Q4 was probably real, but leaves the possibility that growth did not continue as we entered Q1 of 2010.  If real GDP growth continues into 2010, the big question is whether it will result in employment growth.  Employment growth will be very good news for the economy.  The prospect of a "jobless recovery" remains until job creation returns.

"The second estimate of the fourth-quarter increase in real GDP is 0.2 percentage point, or $6.1 billion, higher than the advance estimate issued last month, primarily reflected upward revisions to private inventory investment, to exports, and to nonresidential fixed investment that were partly offset by an upward revision to imports and downward revisions to PCE and to state and local government spending."

[Note to teachers:  Students can look at the U.S. GDP annual data since 1929 and quarterly data since 1947 in both current and chained dollars.  www.bea.gov/national/xls/gdplev.xls ^[1]   This is a good way to better understand business cycles and how the economy has performed through significant eras of U.S. history.]

Where did the Q4 2009 come from?

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

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

The BEA commonly references two important consumer product groups in the real GDP announcements, motor vehicles and computers.  "Motor vehicle output added 0.44 percentage point to the fourth-quarter change in real GDP after adding 1.45 percentage points to the third-quarter change. Final sales of computers subtracted 0.01 percentage point from the fourth-quarter change in real GDP after subtracting 0.08 percentage point from the third-quarter change."

The BEA announcement included these comments to clarify the accuracy and real meaning of some of the data.

"Quarterly estimates are expressed at seasonally adjusted annual rates, unless otherwise specified. Quarter-to-quarter dollar changes are differences between these published estimates. Percent changes are calculated from unrounded data and are annualized. “Real” estimates are in chained (2005) dollars. Price indexes are chain-type measures."

The BEA announcement added additional information  to further clarify the meaning of the real GDP data

Price Level

"The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.9 percent in the fourth quarter, 0.2 percentage point less than in the advance estimate; this index increased 1.3 percent in the third quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 1.3 percent in the fourth quarter, compared with an increase of 0.3 percent in the third."

The “gross domestic purchases price index” measures the prices paid for goods and services purchased by U.S. residents. The index includes prices of personal consumption expenditures, gross private domestic investment, and government consumption expenditures and gross investment. The difference between gross domestic purchases price index and the gross domestic product (GDP) price index is purchase index excludes the prices of exports and includes prices of imports.

The Components of GDP in Q4 2009

"Real personal consumption expenditures increased 1.7 percent in the fourth quarter, compared with an increase of 2.8 percent in the third. Real nonresidential fixed investment increased 6.5 percent, in contrast to a decrease of 5.9 percent. Nonresidential structures decreased 13.9 percent, compared with a decrease of 18.4 percent. Equipment and software increased 18.2 percent, compared with an increase of 1.5 percent. Real residential fixed investment increased 5.0 percent, compared with an increase of 18.9 percent."

"Real exports of goods and services increased 22.4 percent in the fourth quarter, compared with an increase of 17.8 percent in the third. Real imports of goods and services increased 15.3 percent, compared with an increase of 21.3 percent."

"Real federal government consumption expenditures and gross investment increased 0.1 percent in the fourth quarter, compared with an increase of 8.0 percent in the third. National defense decreased 3.5 percent, in contrast to an increase of 8.4 percent. Nondefense increased 8.3 percent, compared with an increase of 7.0 percent. Real state and local government consumption expenditures and gross investment decreased 2.0 percent, compared with a decrease of 0.6 percent."

"The change in real private inventories added 3.88 percentage points to the fourth-quarter change in real GDP, after adding 0.69 percentage point to the third-quarter change. Private businesses decreased inventories $16.9 billion in the fourth quarter, following decreases of $139.2 billion in the third quarter and $160.2 billion in the second."

"Real final sales of domestic product -- GDP less change in private inventories -- increased 1.9 percent in the fourth quarter, compared with an increase of 1.5 percent in the third."

Gross domestic purchases 

"Real gross domestic purchases -- purchases by U.S. residents of goods and services wherever produced -- increased 5.5 percent in the fourth quarter, compared with an increase of 3.0 percent in the third."

Current-dollar GDP 

"Current-dollar GDP -- the market value of the nation's output of goods and services – increased 6.3 percent, or $219.6 billion, in the fourth quarter to a level of $14,461.7 billion. In the third quarter, current-dollar GDP increased 2.6 percent, or $90.9 billion.

Revisions of Q4 2009 Data

"The second estimate of the fourth-quarter increase in real GDP is 0.2 percentage point, or $6.1 billion, higher than the advance estimate issued last month, primarily reflected upward revisions to private inventory investment, to exports, and to nonresidential fixed investment that were partly offset by an upward revision to imports and downward revisions to PCE and to state and local government spending."

Real GDP Growth for the Year 2009

"Real GDP decreased 2.4 percent in 2009 (that is, from the 2008 annual level to the 2009 annual level), in contrast to an increase of 0.4 percent in 2008."

For the year, U.S. real GDP decreased - the impact of the recession.  The BEA announcement explained, "The decrease in real GDP in 2009 primarily reflected negative contributions from nonresidential fixed investment, exports, private inventory investment, residential fixed investment, and personal consumption expenditures (PCE), that were partly offset by a positive contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, decreased."

Even the larger than expected Q4 growth did not make-up for the GDP losses in early 2009.  The data below shows the quarterly changes in nominal (current dollar) and real (chained weight) GDP growth in 2008 and 2009.  How long will it take to replace the output lost during the two year recession?

Quarterly Change in U.S. GDP
2008 and 2009

Quarter	Current Dollar	Real (Chained)
Q1 2008	1.0	-0.7
Q2 2008	3.5	1.5
Q3 2008	1.4	-2.7
Q4 2008	-5.4	-5.4
Q1 2009	-4.6	-6.4
Q2 2009	-0.8	-0.7
Q3 2009	2.6	2.2
Q4 2009`	6.3	5.9

[Note to  teachers: The data above is one "snapshot" of the current recession.  Compare this data to the level of employment reported by the Bureau of Labor Statistics.  Link to U.S. annual and quarterly employment data:

http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=LNS12000000&output_view=net_1mth ^[2]   You can request BLS employment data back to 1948.]

The BEA announcement added, "The downturn in real GDP primarily reflected downturns in nonresidential fixed investment and in exports and a larger decrease in private inventory investment that were partly offset by a larger decrease in imports and a smaller decrease in residential fixed investment."

 "The price index for gross domestic purchases was unchanged in 2009, compared with an increase of 3.2 percent in 2008."

 "Current-dollar GDP decreased 1.3 percent, or $183.2 billion, in 2009. Current-dollar GDP increased 2.6 percent, or $363.8 billion, in 2008."

 "During 2009 (that is, measured from the fourth quarter of 2008 to the fourth quarter 2009), real GDP increased 0.1 percent. Real GDP decreased 1.9 percent during 2008. The price index for gross domestic purchases increased 0.6 percent during 2009, compared with an increase of 1.9 percent during 2008."

A Quick Review of GDP

The components of the measurement of GDP are:

GDP =      C  (personal consumption expenditures) 
               + I    (net private investment) 
               + G  (government spending)
               + X  (net exports/exports minus imports)
 
Figure 1, below, shows the categories of U.S. GDP for the four quarters of 2009.  Notice how the percentage of GDP that comes from personal consumption expenditures has increased.  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:  Percentage Shares of Gross Domestic Product by Category
2009

Spending Category	2009 Q1	2009 Q2	2009 Q3	2009 Q4*
Gross Domestic Product	100.0	100.0	100.0	100.0
Personal Consumption Expenditures	70.4	70.7	71.0	71.8
Goods	22.6	22.6	23.1	23.1
Durable Goods	7.2	7.1	7.4	7.3
Nondurable goods	15.3	15.4	15.7	15.8
Services	47.9	48.1	47.9	47.4
Gross Private Domestic Investment	11.9	11.0	11.0	11.9
Fixed Investment	12.8	12.3	12.1	12.0
Nonresidential	10.2	9.8	9.5	9.5
Structures	3.8	3.5	3.3	3.0
Equipment and Software	6.4	6.3	6.3	6.4
Residential	2.6	2.4	2.5	2.5
Change in Private Inventories	-0.9	-1.2	-1.0	-0.1
Net Exports of Goods and Services	-2.7	-2.4	-2.7	-3.1
Exports	10.6	10.6	10.9	11.6
Goods	7.9	6.9	7.3	7.9
Services	3.7	3.6	3.7	3.7
Imports	13.3	13.0	13.6	14.7
Goods	10.6	10.3	11.0	12.0
Services	2.7	2.6	2.6	2.7
Government Consumption and Gross Investment	20.3	20.7	20.7	20.5
Federal Government	7.8	8.0	8.1	8.1
National Defense	5.3	5.5	5.6	5.6
Non-Defense	2.5	2.6	2.6	2.6
State and Local Governments	12.5	12.7	12.5	12.4
*Second estimate for Q4

 

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 2, below, shows the monthly changes in real GDP from 1990 through 2009.  Note the 1990-91, 2001, and 2008-2009 recessions with periods of negative GDP growth.



[Note to teachers:  This is an opportunity to introduce or reinforfor students the idea of the "business cycle."] 

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. For example, consumer spending for jewelry always declines in January, after the Christmas buying season ends. Thus, the strength in spending for jewelry for any given January is not determined by whether it increases or decreases -- it always decreases -- but by whether it decreases more or less than “normal decrease.” In simple terms, if spending for jewelry decreases at the “normal” rate, the seasonally adjusted spending series would indicate spending increased at the trend rate. If spending for a January decreases at a rate less than “normal,” seasonally adjusted spending would show a growth rate above the trend rate, and if spending for a January decreases more than “normal,” the seasonally adjusted change in spending would either be a decrease or an increase below the normal trend rate.

Other examples of economic series affected by seasonal patterns include: Consumer spending for clothing and consumer electronics, which decreases each January after the Christmas season ends; automobile production, which drops in July, as factories retool for new models; heating oil production, which increases during September, as producers anticipate the winter heating season; and home construction, which increases in March, as weather conditions improve.

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 to teachers:  Students may have a variety of views as to what data best represents the "health" of the U.S. economy.]

Conclusion:

$14,258,200,000,000

That's the BEA's estimate of U.S. gross domestic product at the end of 2009. That's a decrease of about $183 billion from GDP at the end of 2008. Personal consumption expenditures have decreased by about $41 billion. More importantly, gross private investment decreased by over $500 billion in the year.  Less investment does not bode well for future growth and employment. Net exports decreased in 2009, a positive for the measurement of GDP, since a negative net export number reduces the GDP measurement.

$14 trillion dollars sounds like a lot.  It is almost $50,000 per person.   It is high compared to most of the nations of the world.  In terms of purchasing power (income relative to cost of living), it is possibly higher than any other country.   Yet, we fear that our economic future may not be as "good" as our past.   Will it be better for some and not as good for others? 

Maybe some of the issues that threaten our economic growth - terrorism and war, health care costs, geo-political risk, energy, etc., will somehow be resolved.  Maybe the incredibly creative force of free markets and entrepreneurship will stimulate growth. 

What do you think?

For more detail about the components of GDP for recent years, go to  

www.bea.gov/out henational/nipaweb/TableView.asp?SelectedTable=5&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2000&LastYear=2009&3Place=N&Update=Update&JavaBox=no ^[9]

Assessment Activity:

Have your students click here to complete an interactive quiz on the GDP lesson.

1. According to the BEA second estimate, what was the U.S. real GDP growth rate in Q4 2009?

a.  4.9 %
b.  5.2 %
c.  5.9 % [CORRECT]
d.  6.4 %

[See the February 26, 2010, BEA announcement, "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 5.9 percent in the fourth quarter of 2009"]

2. How did the second estimate of the real GDP growth rate of Q4 2009 reported in February 2010 compare to the first (advance) estimate for O4 2009 that was reported in January?

a. The same growth
b. More growth [CORRECT]
c. Less growth

[See the February 26 BEA announcement: ""The second estimate of the fourth-quarter increase in real GDP is 0.2 percentage point, or $6.1 billion, higher than the advance estimate issued last month."]

3. What is the largest spending component of GDP?

a. Personal consumption expenditures [CORRECT]
b. Government expenditures
c. Private investment expenditures
d. Net exports

[Personal consumption expenditures are, by far, the largest component of GDP, over 70 percent. See Figure 2.]

5. How does real GDP differ from GDP?

a. Real GDP is in current dollars and GDP is in constant dollars.
b. Real GDP is a net measurement and GDP is a gross measurement.
c. Real GDP is adjusted for inflation and GDP is not adjusted. [CORRECT]

["Real" means adjusted for the effect of inflation, so that GDP measurements over time can be more accurately compared in terms of actual output.]

6.  If the nation's nominal GDP in year 1 was $10 trillion and $11 trillion in year 2, and the rate of inflation from year 1 to year 2 was 5 percent, what was the nation's real GDP growth rate from year 1 to year 2?

a. 1 percent
b. 5 percent [CORRECT]
c. 10 percent

[The nation's nominal growth was 10 percent ($10 trillion to $11 trillion. If inflation in that time period was 5 percent, the real growth was just 5 percent. Subtract the annual rate of inflation from the rate of GDP growth in the year.]

7.  Which of these factors may result in a seasonal adjustment of GDP data?

a.  inflation
b.  income level
c.  consumer preferences
d.  weather [CORRECT]

[See the lesson "procedures." 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.."] 

8.  What was the U.S, current dollar GDP estimate for Q4 2009?

a.  $13,719.0 billion
b.  $14,461.7 billion [CORRECT]
c.  $14,909.5 billion

[See the February 26 BEA announcement: "Current-dollar GDP -- the market value of the nation's output of goods and services – increased 6.3 percent, or $219.6 billion, in the fourth quarter to a level of $14,461.7 billion."]

Short Answer Essay Question:

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
1	Lietchtenstein	$118,000	2007 est.
2	Qatar	$110,700	2008 est.
3	Luxembourg	$81,000	2008 est.
4	Bermuda	$69,900	2004 est.
5	Norway	$59,300	2008 est.
6	Kuwait	$57,400	2008 est.
7	Jersey	$57,000	2005 est.
8	Brunei	$53,100	2008 est.
9	Singapore	$51,500	2008 est.
10	United States	$46,900	2008 est.

 

 

 

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

 

Rank	Country	GDP
1	European Union	$14,910,000,000,000	2008 est.
2	United States	$14,260,000,000,000	2008 est.
3	China	$7,973,000,000,000	2008 est.
4	Japan	$4,329,000,000,000	2008 est.
5	India	$3,297,000,000,000	2008 est.
6	Germany	$2,918,000,000,000	2008 est.
7	Russia	$2,266,000,000,000	2008 est.
8	United Kingdom	$2,226,000,000,000	2008 est.
9	France	$2,128,000,000,000	2008 est.
10	Brazil	$1,993,000,000,000	2008 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?  Link: www.cia.gov/library/publications/the-world-factbook/rankorder/rankorderguide.html ^{[10] [10]} .  

 

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.

 

Links Used:

1. ^{^} "www.bea.gov/national/xls/gdplev.xls" - (www.bea.gov)
2. ^{^} "http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=LNS12000000&output_view=net_1mth" - (data.bls.gov)
3. ^{^} "www.bea.gov/bea/newsrel/gdpnewsrelease.htm" - (www.bea.gov)
4. ^{^} "www.bea.gov/national/pdf/nipa_primer.pdf" - (www.bea.gov)
5. ^{^} "www.bea.gov/about/pdf/jep_spring2008.pdf" - (www.bea.gov)
6. ^{^} "www.bea.gov/bea/glance.htm" - (www.bea.gov)
7. ^{^} "www.conference-board.org/economics/bci/pressRelease_output.cfm?cid=1" - (www.conference-board.org)
8. ^{^} "http://wwwdev.nber.org/cycles/dec2008.html" - (wwwdev.nber.org)
9. ^{^} "http://www.bea.gov/out henational/nipaweb/TableView.asp?SelectedTable=5&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2000&LastYear=2009&3Place=N&Update=Update&JavaBox=no" - (www.bea.gov)
10. ^{^} "https://www.cia.gov/library/publications/the-world-factbook/rankorder/rankorderguide.html" - (www.cia.gov)

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