Yesterday, the Department of Commerce Bureau of Economic Analysis (BEA) released the Gross Domestic Product (GDP) report for the 4th Quarter of 2009.
So just how much did the U.S. economy produce in 2009? How did that compare with the previous year? In other words, did the economy grow during 2009? Did it grow enough to keep up with U.S. population growth? Let’s examine these questions.
What is the GDP?
Gross Domestic Product (GDP) is the total dollar value of final goods and services produced during the year. It is everything that the country produced using its the land, labor and capital resources.
Two Ways to Measure GDP
The simplified chart below shows the circular flow of macroeconomic activity. U.S. Households supply land, labor and capital as inputs for production to U.S. Firms. In return, firms pay U.S. Households wages for labor, rents for use of land, and interest and profits for use of capital. In turn, firms supply goods and services to households, which households purchase as consumers. Consumer spending becomes corporate revenue for firms.
You can either measure GDP either in the top loop as final goods and services produced, or in the bottom loop, as national income. The two measures are identical.
The chart is simplified and leaves out Government spending, capital Investments and net eXports. (Net exports, X and Exports minus Imports. The complete equation for GDP is
GDP = C + G + I + X
where C = Consumer Spending
G = Government Spending
I = Capital Investment
X = Net Exports (Exports - Imports)
How is GDP Reported and by Whom?
GDP is reported for every quarter by the Bureau of Economic Analysis (BEA), part of the U.S. Department of Commerce. There are actually three revisions called advance, preliminary and final that are released one, two and three months after the end of a quarter. For instance, the latest GDP report released on January 29, 2010 was the advance report for Q4 2010. The advance report is not very accurate because most of the data has not been collected yet. The next two revisions will greatly improve the measurement accuracy.
Nominal and Real GDP
GDP is reported in dollars. Nominal GDP measures output in current dollars. But economists are generally interested in the actual quantity of output. If the quantity of goods and services stayed the same but prices rose over the year, nominal output would be higher, but the real output would be unchanged. So mostly economists look at real GDP, which is adjusted for price inflation. They use a measure of the inflation rate called the GDP Deflator to get the Real GDP from the nominal GDP. The BEA reports Real GDP in chained dollars, which has to do with the way they measure the inflation rate.
Here is a annual chart of Real GDP from 1990 to the end of 2009. The vertical axis is the annual rate of output in chained dollars per year. In 2009, the economy was producing at a rate of 12,988.7 billion dollars per year.
Normally Real GDP steadily grows each year, with an occasional slowdown in output. The drop off in 2009 was one of the largest contractions since the BEA started collecting data. (The series goes back to 1947.)
The annual figures for Real GDP were 12988.7 billion in 2009 and 13312.2 in 2008. This is a slowdown of -2.43 percent. So the whole U.S. economy contracted in 2009. This is what a recession is all about. Here is a chart of annual change in Real GDP from 1990 to 2009.
Why Did The U.S. Economy Contract in 2009?
By measuring GDP we know the economy contracted. But U.S. Population increased from 302.7 million in 2008 to 305.5 million in 2009, about 0.9%. Let’s called it 1% population growth. So to maintain the same standard of living, real GDP must grow by about 1% per year. Instead it shrank by -2.43%. In the aggregate, out standard of living has come down. What happened?
Clearly the rise in the unemployment rate had something to do with the reduction in output. With U-6 Unemployment at 17.3%, that means 26 million idle workers out of a civilian labor force of 153,059 million. These workers are not receiving wages. Some collect unemployment benefits, most do not. Measuring GDP as National Income by the bottom loop in the Circular Flow chart it is clear that GDP will be reduced when workers are idle. But by how much?
The median earnings in the U.S. for goods-producing production workers is $793.19 per week or $41,245.88 per year. Multiply that by 26 million idle workers and that is 1.09 trillion dollars in missed wages. Of course, from the Circular Flow chart, missing wages translates to missing consumer spending. That explains a lot of the contraction in real GDP.
So the reason the economy contracted so much in 2009 because so many workers became unemployed.
Answers to Questions
Now we know the answer to the questions posed at the beginning of this article.
How much did the U.S. economy produce in 2009?
Real output was 12,988.7 billion dollars worth of final goods and services.
How did that compare with the previous year?
Real output was down 323.5 billion dollars or -2.44% from 2008.
Did the economy grow during 2009?
No, the economy contracted. It should have grown by at least 0.9% to keep up with population growth.
Did it grow enough to keep up with U.S. population growth?
Population grew by +0.9% but the economy shrunk by -2.43%. The reduction in U.S. living standard was -3.33%
If Real GDP had grown by 0.9% in 2009 it would have grown to 14,510 billion dollars. Actual 2009 output of 12,998.7 came up 1,522 billion dollars short. Most of that is due to idle workers not receiving wages.
Conclusion about U.S. Output in 2009
The U.S. economy did very poorly in 2009. The problem is the large number of idle workers. There can be no doubt that unemployment is the number one problem facing the U.S. in 2010.
