Lesson 7 GDP: Hitting on Fewer Cylinders

Hiccup or Real Concern — April’s Drop in Real Consumer Spending

Saving for a Rainy Day

The Myopic Squirrel and $7 trillion worth of Missing Nuts


AD Component Summary

If you don’t like equations, we can just restate this in words by saying that GDP according to the AD approach is the sum of all the items mentioned in the above equation. The below graphs and tables give you a “feel” for how these GDP components have changed through 2010. (If you want to bring these more up to date, we have provided links that let you see how these items have changed over the years).

But before we show you these graphs, let’s make sure we understand the relative sizes of these factors for the US economy. The below table was found here

Line   2009  2010 
1 Gross domestic product 12,880.6 13,248.2
2 Personal consumption expenditures 9,153.9 9,313.6
3      Goods 3,117.4 3,250.4
4           Durable goods 1,094.6 1,178.3
5           Nondurable goods 2,017.4 2,072.6
6      Services 6,032.7 6,064.7
7 Gross private domestic investment 1,515.7 1,774.5
8      Fixed investment 1,630.7 1,694.7
9          Nonresidential 1,290.8 1,364.9
10                Structures 369.6 319.0
11                Equipment and software 916.3 1,056.1
12           Residential 342.7 332.5
13      Change in private inventories -113.1 62.7
14 Net exports of goods and services -363.0 -422.5
15      Exports 1,490.7 1,665.5
16           Goods 1,018.2 1,167.5
17           Services 472.0 498.7
18      Imports 1,853.8 2,088.0
19           Goods 1,513.5 1,736.8
20           Services 340.5 352.4
21 Government consumption expenditures and 

gross investment

2,542.6 2,568.3
22      Federal 1,027.6 1,076.9
23           National defense 693.0 720.2
24           Nondefense 334.6 356.7
25      State and local 1,518.8 1,497.4
26 Residual 37.8 11.0

This table gives the annual 2009 and 2010 figures for US real GDP in billions of current dollars. Notice first that real GDP was approximately $13.2 trillion in 2010. How would you like that amount for your paycheck? Notice who bought most of it? Yes, the consumer did in the form of personal consumption expenditures – the $9.3 trillion is about 70% of GDP. Note also the biggest part of PCE is the almost $6.1 trillion spent on consumer services. One number that surprises many people is the $1.2 trillion spent by households on durable goods. Durable goods include autos, appliances, and many other manufactured goods bought by households – and durable goods represented only about 8% of the US economy.  GDP data are revised several times as more information is collected by the government. The data you find in the links may therefore be somewhat different from the data in MacroNotes.

Notice that I (Gross Private Domestic Investment) was about $1.7 trillion or about 13% of GDP.

You might also notice that international trade in goods and services was a drag on the US economy since export sales were about $422 billion less than imports. Net exports were about -3.2% of GDP in 2010. At $2.5 trillion the government definitely did its part to keep sales high in 2010. Federal, state, and local governments accounted for about 19% of all goods and service produced.

Also worth noting, real GDP increased in 2010 by approx $367 billion or about 2.8%. The only components that declined from 2009 to 2010 were structures and residential investment. State and Local government spending on goods and services was larger than Federal government spending by almost 50%.

Now that you have memorized all those numbers (just kidding – stay awake please) we introduce some charts. While the above data showed you dollar amounts for one year, some of these lovely St. Louis Fed charts – and they are lovely – focus on annual growth. For every quarter of each year they compute the percentage change in the GDP component from the same quarter a year before. In that way we get lots of data points and each one represents a whole year’s worth of percentage change.

Most analysts think in percentage change – rather than dollar amounts. For example, forecasters think a good year for US GDP growth would be around 3%. Why – because that seems to be a reasonable average growth rate based on the past. Anyway, by looking at these charts below, you can get a feel for what is normal. Notice that while PCE averages around 3% and has a pretty small variance – the gross private domestic investment components have some pretty wild and crazy swings.

Consumer spending (C)                                                           

Screen Shot 2016-04-08 at 10.17.44 AM

Screen Shot 2016-04-08 at 10.17.57 AM
Usually C grows each year but notice its fell during the recessions of 1990/91 and 2008/2009. C Durables fluctuates more than C. The growth rate of C was picking up in 2011 as was real disposable income.  Household debt outstanding was falling after 2008. Its growth are starting declining as early as 2006.


Housing (I-R) for both I-R and I-NR, see the link below:         

Screen Shot 2016-04-08 at 10.18.11 AM

Business investment or capital spending (I-NR)

Screen Shot 2016-04-08 at 10.18.21 AM

I is usually between about 15 to 20% of GDP. I-Non-residential took a large dip in the 2008/2009 recession but recovered in 2010 – especially because of strong growth in equipment and software. In contrast I-residential did not bounce back as quickly with growth still negative in 2010 and 2011.

Government (G)

Screen Shot 2016-04-08 at 10.18.32 AM


Screen Shot 2016-04-08 at 10.18.42 AM
Government figures are issued in two formats – the one most useful for GDP analysis is the NIA figures. States generally spend more than the federal government on goods and services (does not include spending on transfer payments which are covered in the chapter on fiscal policy). Notice how the State and Local budgets turn to deficits in the two past recessions. The data in the tables includes all spending. Notice that the Federal government had an NIA deficit of $1.3 trillion in 2010. That deficit was double the one in 2008 and three to four times larger than ones before 2008.

Net Exports:

Net exports (NX) or the trade balance

Screen Shot 2016-04-08 at 10.23.48 AM

Screen Shot 2016-04-08 at 10.23.58 AM

Screen Shot 2016-04-08 at 10.24.05 AM

NX refers to exports less imports of goods and services. Notice from the chart that the balance of goods and services trade has been negative in every year on the chart – reaching approximately -18% of GDP in 2006.

The balance has since improved somewhat but was hovering at about -10% in late 2010.

The Current Account is similar to NX. We will cover the Current Account later in the course. The pie charts show that in 2010 China accounted for almost a fifth of all US purchases but only bought about 7% of US exports. Canada, Mexico account for almost a third of all US exports. They account for about 26% of all US imports.

Change in inventories (ΔINV)             

Screen Shot 2016-04-08 at 10.24.19 AM

The top of the table shows the relationships between Real GDP, Real Final Sales, and Real Change in Inventories. In 2009 Real Final Sales were larger than RGDP – that means that inventories were falling by $145 billion. In 2010 Real Final Sales were less than RGDP so inventories were growing – by almost $59 billion.