Gross Domestic Product of the United States in 2009 - Research Paper Example

Gross Domestic Product of the United s in 2009 Introduction The Gross domestic product series in US has been reported a s one of the most developed datasets in the world (Landefeld etal12). At the same time, there have been lot of concerns regarding the exclusion of non market activities like household production from the estimation of US GDP (Kuznets 4). With the emergence of the recent financial crisis, the inadequacy of the US national accounts in capturing the impact of the recession across households and also in warning the economy against the housing and financial markets has been highly controversial (Landefeld et al 12). Though there have been several efforts in the past to expand the conventional GDP measures by including measures of happiness, environment, natural resources etc, the subjectivity involved in these measures made their interpretation difficult(Juster 333, Krueger etal11 etc). However, the debate remains unsettled. Given this background, based on the GDP series of USA, this essay examines how this year’s GDP compares with last year’s GDP both in real and nominal terms. Moreover, based on the limitations of national accounting it is discussed whether GDP provides valuable information for measuring economic activity over time. 2. Quantitative Approach The table in appendix 1 shows the nominal GDP in billion dollar terms, its annual growth rate, GDP deflator with base year 2005=100, real GDP in billion dollar terms and its growth rate from 1950 to 2009.Real GDP is calculated as the ratio of nominal GDP to GDP deflator. The whole data is collected from the Federal Reserve Bank of St: Louis Economics Research Section. The table shows that both real and nominal GDP have been decelerating at annual growth rate of 1.74 percent and 2.6 percent respectively. 9 big expansions and 10 big recessions can be seen for nominal GDP from figure1. 13 big expansions can be seen from the above figure3. 9 recessions can be counted. The growth has been more or less stable in the last 20 years as compared to 1960-1990 since the peaks and troughs are comparatively low in this period. Figure 2 and figure 4 shows the forecasts for nominal GDP and real GDP growth till 2015. They show highly decelrating growth rate s of -2 and -4 percentage respectively for real and nominal GDP growth rates. Figure1 Figure2: with trend line and forecasts Figure3 . Figure4: with trend line and forecasts The following figure shows the trend of actual GDP versus fitted GDP from 1960 to 2009.The graph shows wide deviations between these two especially from the year 2000 onwards. Figure 4: Fitted and Actual GDP 3. Qualitative Approach Though the national accounts system and GDP statistics in USA have been considered as the most developed in the world, many economists have raised serious objections regarding treating GDP as an appropriate measure of economic activity over time. According to their view, the GDP focuses only on market activities and excludes non market activities like the impact of human capital, unpaid household services, expectation s, uncertainty, externalities, and natural rate of unemployment (Kuznets 4). Moreover the measurement based on national accounts is found to be not having a microeconomic meaning (Bros 17). The second criticism according to these economists is that the national accounts miss consumer surplus from the market transactions since the economic activity is measured by prices, which are marginal valuations in perfectly competitive markets (Krueger et al 3). In addition to these the GDP and the national accounts are criticized for being tools in economic forecasting due to the distortion of prices in competitive markets, the impact of income distribution in a nation on prices and marginal valuations etc (Krueger et al 3). In addition to these, economists argue that the causal relationships, functional forms, time lags etc are not explicitly mentioned in the national accounts. Moreover, how far the national accounts statistics and the concepts are reliable are difficult to be verified based on their view. Above all they argue that for getting a clear picture there needs to ignore much information in national accounts statistics or combine the information (Bros 17).All these have been argued as the limitations in national accounts and GDP as useful tools for macroeconomic analysis and forecasting. It has been shown that the growth of officially reported real disposable income has been very different from the growth in the take-home pay and bills of households in US during 200-2007(Landefeld etal3). Many attempts have been done to measure economic activity based on alternative measures. The most comprehensive attempt was done by Krueger et al (111) based on time use and emotional experience. This is based on a time diary method linked to the recalled emotional experiences of a day’s activities and experiences. A measure of happiness has been developed based on survey data on time use and happiness in different activities. However, this also has been considered as a partial measure of well being since it measures only moment to moment feelings and misses general life satisfaction of people. In spite of the criticisms on national accounts and GDP, the supporters argue many merits for using them as tools for analysis and forecasting. They include consistency of concepts and data, readily availability of core set of data nationally and internationally, Moreover it is argued that since the compilation process in national accounts is based on a stock of knowledge and skills to make best estimates with the specific national sources, it can be considered as a main tool for forecasting(Bos 14).In addition to these it is argued that using alternative measures of economic activity based on different surveys can have many statistical and conceptual problems. These include the differences in the units of measurement and frame of reference. Without understanding the concepts of national accounts statistics the impact of many government policies on the macroeconomic aggregates cannot be understood according to the view of this group of economists (Bos 14). The ability of decomposition of growth into different subcomponents is argued as one main advantage of the national income accounts which cannot be provided by alternate measures of economic activity. Moreover the inclusion of non cash value of housing, financial and other services and non cash employer contribution for health insurance, pension and other benefits and the adjustments for underreporting of income all make the GDP as a broader measure of economic activity in US compared to alternate measures according to the proponents(Landefeld et al 18).The deflation of GDP by chain weighted measures in US helps to overcome the biases linked with fixed weight indices according to these economists(Landefeld et al 18). 4. Analysis The quantitative and the qualitative analysis show that there are lot of limitations associated with GDP as a tool for macroeconomic analysis and forecasting. However, due to the subjectivity problems involved in alternative measures as well as other main limitations associated with these measures, GDP can be considered as a much broader measure of economic activity based on the discussion above. The quantitative analysis shows that both the real and nominal GDP have been decelerating in 2009 compared to the previous period. The wide deviation between the real GDP and the predicted GDP shows that GDP has not been appropriate in measuring the real economic activity in many periods. Between 1990 to 2006, there were two big macroeconomic shocks in US. One was the huge rise in oil prices from $ 20 per barrel in 2002 to more than $140 per barrel in 2008. The other was a sudden boom in the housing in USA creating high optimism among investors and lenders. This was not visible in the figures for real GDP above. Moreover, the wide deviation between the actual and the fitted GDP also shows this disparity. The deviations have been much wider from 2000 onwards. This gives an indication that GDP was not able to give the warning of imbalances in the housing and financial markets in US. The recent data shows that the inflation rate in the country fluctuated around 3 percent since 2000 and a big rise in the inflation rate is seen from 2008 with a rate of 5% between June 2007 and June 2008. This rise was very higher than the expectations of Federal Reserve (Jones 5). However, in an aggregate demand and supply framework, the analysis shows that both the shocks (oil price shocks and hosing price shocks) had significant effects on inflation .The net effect on inflation is ambiguous according to this analysis(Jones,2008). There was also a huge increase in the unemployment rate of around 5.7 percent in 2008 and a sudden decline in the ratio of employment to population. At the same time, from the growth rates of nominal and real GDP, it can be seen that both are growing at 2.29 and 0.03 respectively. 5. Conclusion The analysis here shows that in comparison to the alternative measures, GDP can be considered as a much broader measure of economic activity over time in US. However, the trends in nominal and real GDP growth particularly after 2000 show that the officially reported GDP statistics failed to capture the true facts to some extent. A refined measure of income based on the spending by lower income households can be an appropriate measure for measuring the economic activity over time rather than the current measure. This can be a useful measure since there can be bias in the officially reported GDP created by the income of upper income class households. Appendix 1 DATE Nominal GDP Growth ratenominalGDP GDPdeflator Real GDP growthraterealGDP 01/01/1950 293.7 14.635 2006.83 01/01/1951 339.3 15.53 15.697 2161.6 7.7 01/01/1952 358.3 5.60 15.967 2244.0 3.8 01/01/1953 379.4 5.89 16.161 2347.6 4.6 01/01/1954 380.4 0.26 16.307 2332.7 -0.6 01/01/1955 414.7 9.02 16.585 2500.5 7.2 01/01/1956 437.5 5.50 17.155 2550.3 2.0 01/01/1957 461.1 5.39 17.726 2601.3 2.0 01/01/1958 467.2 1.32 18.122 2578.1 -0.9 01/01/1959 506.6 8.43 18.339 2762.4 7.2 01/01/1960 526.5 3.93 18.596 2831.3 2.5 01/01/1961 544.8 3.48 18.804 2897.3 2.3 01/01/1962 585.7 7.51 19.062 3072.6 6.1 01/01/1963 617.8 5.48 19.264 3207.0 4.4 01/01/1964 663.7 7.43 19.562 3392.8 5.8 01/01/1965 719.1 8.35 19.917 3610.5 6.4 01/01/1966 787.7 9.54 20.483 3845.6 6.5 01/01/1967 832.5 5.69 21.113 3943.1 2.5 01/01/1968 909.9 9.30 22.009 4134.2 4.8 01/01/1969 984.5 8.20 23.098 4262.3 3.1 01/01/1970 1038.4 5.47 24.317 4270.3 0.2 01/01/1971 1126.9 8.52 25.531 4413.8 3.4 01/01/1972 1237.9 9.85 26.629 4648.7 5.3 01/01/1973 1382.3 11.66 28.109 4917.6 5.8 01/01/1974 1499.5 8.48 30.669 4889.3 -0.6 01/01/1975 1637.7 9.22 33.553 4880.9 -0.2 01/01/1976 1824.6 11.41 35.485 5141.9 5.3 01/01/1977 2030.1 11.26 37.742 5378.9 4.6 01/01/1978 2293.8 12.99 40.382 5680.3 5.6 01/01/1979 2562.2 11.70 43.756 5855.7 3.1 01/01/1980 2788.2 8.82 47.752 5838.9 -0.3 01/01/1981 3126.9 12.15 52.227 5987.1 2.5 01/01/1982 3253.2 4.04 55.412 5870.9 -1.9 01/01/1983 3534.6 8.65 57.59 6137.5 4.5 01/01/1984 3930.9 11.21 59.76 6577.8 7.2 01/01/1985 4217.5 7.29 61.571 6849.8 4.1 01/01/1986 4460.1 5.75 62.934 7086.9 3.5 01/01/1987 4736.4 6.19 64.757 7314.1 3.2 01/01/1988 5100.4 7.69 66.981 7614.7 4.1 01/01/1989 5482.1 7.48 69.514 7886.3 3.6 01/01/1990 5800.5 5.81 72.202 8033.7 1.9 01/01/1991 5992.1 3.30 74.757 8015.4 -0.2 01/01/1992 6342.3 5.84 76.527 8287.7 3.4 01/01/1993 6667.3 5.12 78.219 8523.9 2.9 01/01/1994 7085.2 6.27 79.867 8871.2 4.1 01/01/1995 7414.6 4.65 81.533 9094.0 2.5 01/01/1996 7838.5 5.72 83.083 9434.5 3.7 01/01/1997 8332.4 6.30 84.551 9854.9 4.5 01/01/1998 8793.5 5.53 85.506 10284.1 4.4 01/01/1999 9353.5 6.37 86.764 10780.4 4.8 01/01/2000 9951.5 6.39 88.642 11226.6 4.1 01/01/2001 10286.2 3.36 90.649 11347.3 1.1 01/01/2002 10642.3 3.46 92.116 11553.2 1.8 01/01/2003 11142.2 4.70 94.094 11841.6 2.5 01/01/2004 11867.8 6.51 96.764 12264.7 3.6 01/01/2005 12638.4 6.49 99.994 12639.2 3.1 01/01/2006 13398.9 6.02 103.255 12976.5 2.7 01/01/2007 14061.8 4.95 106.292 13229.4 1.9 01/01/2008 14369.1 2.19 108.625 13228.2 0.03 01/01/2009 14119.1 -1.74 109.614 12880.7 -2.6 References Bos F. Use, misuse and proper use of national accounts statistics . National accounts occasional paper Nr. NA-096. Netherlands. Division of Macro-economic Statistics and Dissemination Sector National Accounts J, F. Thomas. 1985. Preferences for Work and Leisure. in Time, Goods, and Wellbeing. F.T. Juster and F.P. Stafford, eds., Ann Arbor, MI: Institute for Social Research, University of Michigan, pp. 333-51,1985. Krueger AB., D Kahneman.,D Schkade .,N Schwartz and AA Stone. National Time Accounting: The Currency of Life In Measuring the Subjective Wellbeing of Nations: National Accounts of Time Use and Wellbeing, ed AB Krueger 113-123, Chicago: University of Chicago Press,2009. Kuznets S. National Income and Its Composition.1919-1938.NewYork.NBER. 1941 Landefeld JS.,B R Moulton.,JD Platt and SM Villones. GDP and Beyond: Measuring Economic Progress and Sustainability. 2010. Jones CI : Current Macroeconomic Events. A Supplement to Macroeconomics, August.2008. Read More