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Lesson

GDP Data: Is the Economy Healthy?

Updated: May 31 2017,
Author: Scott Wolla

Concepts

This series of lessons will introduce you to economic data that economists use to assess the health of the economy. You will learn about economic data and what they communicate about the health of the economy. This lesson focuses on Gross Domestic Product (GDP), which is important for analyzing the health of the broader economy.

Introduction

ESSENTIAL QUESTION: What do current GDP data say about the health of the economy?

This lesson is part of a series that asks students to assess the current health of the economy by examining current economic data. This lesson focuses specifically on Gross Domestic Product data provided by the Bureau of Economic Analysis and available on the FRED data website. Students will learn what the GDP measures, the difference between nominal and real GDP, and the difference between measuring the level of GDP and the GDP growth rate. Finally, students will conduct an analysis of the current GDP growth rate relative to the historical mean and the Federal Open Market Committee (FOMC) projection for Real GDP growth as part of an assessment of the broader economy.

Learning Objectives

• Define GDP, Real GDP, recession, and economic growth.
• Examine the most recently reported GDP, Real GDP, and Real GDP growth rate data.
• Differentiate between changes in the level of Real GDP and the economic growth rate.
• Determine a trend based on the six most recent Real GDP releases.
• Analyze the current health of the economy based on the current Real GDP growth rate, historical Real GDP data, and estimates of projected Real GDP growth.

Process

1.     Ask the students if they have been to the doctor for a health check-up recently. Remind students of the routine: A nurse likely started the process with some routine tests to collect information – perhaps she strapped a band around your arm and pumped it full of air to test your blood pressure. Then she might have taken your temperature, looked in your ears and eyes with a light, and tested your reflexes with a small hammer.

2.     Ask the students why all of this was necessary. Students might suggest that the nurse is collecting information about how your body is functioning. Tell students that this process is “data collection.”

• The nurse collected relevant information on your health to be assessed by the doctor. The initial data check helped the doctor identify potential problems – determining if there were any data that seemed out of order.
• If everything checked out, the doctor likely gave you her assessments, maybe some advice on eating healthy and exercising, and bid farewell until your next appointment.
• If, however, the data showed some irregularities, the doctor likely asked for further tests – collecting more data to observe. Many times the doctor’s diagnosis requires treatment – prescription medicines or even surgery. All of this is meant to check the state of your health, and if it is needed, to use treatment strategies to return you to health.

3.     Tell the students that the economy, like the human body, is extremely complex. And like the body, most times the economy functions very well on its own. However, there are times when the economy suffers maladies such as recessions or periods of high inflation that require treatment. And like the body, early detection of potential problems will prevent more serious issues and will likely mean less invasive treatment.

4.     Tell the students that economists use economic data to assess the health of the economy. And economists use economic data to assess whether treatment is necessary.

5.     Tell the students that Gross Domestic Product, or GDP, measures the market value of all final goods and services produced in a country in a calendar year. As such, it is seen as an indicator of the “size” of the economy. Display Visual 1: Key Facts about GDP.

6.     To review the key information, show the EconEdLink video and use the review quiz located here: http://www.econedlink.org/interactives/EconEdLink-interactive-tool-player.php?iid=204

7.     Ask the students to guess the size of the U.S. economy in terms of dollars.

• Show the GDP economic data dashboard . Tell students that the dashboard has key data that will be used to assess the health of the economy. Box 1 contains the most recent 20 quarters of GDP data. This is Nominal GDP.
• Pass out Activity 1. Ask students to record the most recent data (ex. “\$18.7 trillion”), the month and year of the release (ex. “Nov 2016”) on Activity 1: Analyzing GDP Data. Notice that the number is given in billions of dollars – ask students to state the size of the U.S. economy in trillions, rounding to the tenth.
• Refer to the graph of Nominal GDP since 1948 in Box 2. Have students examine and then describe (verbally) the shape of the line. (A relatively smooth line, with a few bumps, that slopes upward.)

8.     Tell the students that inflation is a rise in the general or average price level of all the goods and services produced in an economy. Nominal GDP measures output in current prices. For example, 1995 production was measured in 1995 prices, and 2015 production was measured in 2015 prices. Because the price level tends to rise over time, it is important to adjust for inflation when comparing GDP over time. Define Real GDP as GDP measured in dollars of constant purchasing power. In other words, Real GDP is GDP that has been adjusted for inflation. Give each student a copy of Activity 2: Nominal and Real GDP. Ask students to read and complete the exercise before moving on.

9.     Tell the students that when Real GDP rises, the economy has expanded, or grown, which means the economy has produced more goods and services than it did in the prior time period. The U.S. economy does not always grow – there are periods where Real GDP has decreased. When Real GDP decreases from one period to another, the economy has contracted. A prolonged period of economic contraction is a recession. Define recession as a decline in the rate of national economic activity, usually measured by a decline in real GDP for at least two consecutive quarters (i.e., six months).

10.  Ask students how economic growth or recession might affect them. Tell students that a growing economy is associated with rising incomes and more job opportunities for workers. Recessions are associated with stagnant incomes and a rising unemployment rate, or fewer job opportunities for workers.

11.  Show the economic data dashboard , Box 3. Ask students to describe how the level of Real GDP has changed since 1948.

• Notice the areas that are shaded gray – those time periods identify U.S. recessions.
• Ask students to identify what happens to GDP during recessions.
• Ask students to identify the approximate dates of the last three recessions and record their answer on Activity 1: Analyzing GDP Data.

12.  Explain to students that the GDP information discussed to this point has discussed the levelof nominal and real GDP over time. Economists find it helpful to measure the rate at which the economy has expanded or contracted. Think of driving on an interstate highway – it is important to notice forward progress (miles traveled) toward your destination (this is a level measure), but it is often more useful to measure your rate of progress (your speed, measured in miles per hour).

13.  Economists are quick to point out that one data point does not indicate a trend. Ask students to record the Real GDP growth rate for the most recent six months (Box 4). Based on the data and the bars since the last recession, is there a trend? Ask students to record their analysis on Activity 1: Analyzing GDP Data.

14.  Show the economic data dashboard , Box 5, to show the growth rate of the economy.

• Define economic growth as an increase in real output as measured by real GDP. Each bar on the graph represents the economic growth rate measured on a yearly basis, but updated quarterly. Explain that economic growth has been positive for most quarters but there have also been recessions during the time span shown on the graph.
• Ask students to read the information in Box 6. Ask students to analyze whether the most recent Real GDP data indicate whether the economy is expanding or contracting. Ask students to record their findings on Activity 1: Analyzing GDP Data.

15.  Remind students that it is important to compare the data to some benchmark. Using the doctor illustration, your doctor will compare your blood pressure to the acceptable range – if the reading is too low or too high, it might indicate a health problem. Tell students they will use two benchmarks to gauge GDP – the historical average and the Federal Reserve’s FOMC projections. Refer students to Boxes 7 and 8 and to Activity 1: Analyzing GDP Data and the economic dashboard . Give students time to complete this part of the analysis.

16.  Discuss key content with students to ensure they understand what Real GDP reveals about the health of the economy. Ask the students to describe their assessment and defend it using data.

Conclusion

GDP data are among the most watched economic data because they indicate economic growth, and economic growth has implications for employment and inflation. Knowing the size of the national economy (the level) is important, but knowing the growth rate of the economy might be more meaningful. It is important to compare the growth rate to the historical average, and projections for future growth can provide a valuable benchmark.

Extension Activity

FRED data is available for your state, county, and Metropolitan Statistical Area (MSA). For example, click the following links to examine economic data about Minneapolis, MN. Use FRED to find data about your local economy and write a short economic report about the state of the local economy. Start by entering the name of your city, county, or state in the search box on this page.

Assessment

Which of the following would not be counted in GDP?

A.     A widget produced in Germany by a U.S. company.

B.     A widget produced in Missouri by a Canadian company.

C.     A widget produced in Tennessee by a U.S. company.

D.    A widget produced in Arkansas by a Chinese company.

A general rule of thumb says that a country has experienced a recession if:

A.     GDP has declined.

B.     Real GDP has declined.

C.     Real GDP has declined for at least two consecutive quarters.

D.    Nominal GDP has declined for at least two consecutive quarters.

GDP measures the:

A.     Change in production levels at U.S. owned firms measured quarterly.

B.     Change in total employment at U.S. owned firms over the course of a given year.

C.     Total market value of all final goods and services produced in an economy in a given year.

D.    Total market value of intermediate goods and services produced by the citizens of a country in a given year.

Real GDP is:

A.     Nominal GDP adjusted for inflation.

B.     GDP adjusted for changes in output.

C.     Nominal GDP adjusted for population.

D.    GDP adjusted for standard of living.

If potential Real GDP for an economy is estimated as 2.5 and the current Real GDP growth rate is 4.5, you should be most concerned about:

A.     Nothing, the economy is growing.

B.     The possibility of an increase in the unemployment rate.

C.     The possibility of an increase in the inflation rate.

D.    The possibility of rising levels of poverty.

Which of the following is likely the best indicator of economic health?

A.     Nominal GDP grew by 3 percent this year.

B.     Nominal GDP is \$18 trillion.

C.     Real GDP grew by 3 percent this year.

D.    Real GDP is \$18 trillion.

Subjects:
Economics