Question

1.What is real GDP and why is it considered an indicator of the economy’s “health”? 2. Why do economists believe real GDP is a better measure over nominal GDP? 3. How many recessions has the U.S. had in the last decade? When was the last recession and how long did it last? 4. What are the four main GDP expenditure categories? 5. What has happened to GDP in the last year? Which spending categories have gone up? gone down?

Answer 1

1. Real GDP is the sum-total of the economic output produced in a year but value at a pre-determined base market price. It is considered as an indicator of economy's health for all the reasons mentioned below as its superiority over nominal GDP.

2. As already stated above, you know what real GDP is. However, to answer this question, let us understand what nominal GDP is. Contrary to real GDP, nominal GDP is sum total of economic output at current prices.

The reasons why real GDP is preferred by economists are as follows:
a) Because real GDP is based on base year's market price, economic growth can be analysed easily and can be easily compared with previous financial years. But in case of nominal GDP, the output is calculated on market prices, thus, comparison can be done only with the previous quarters.
b) Real GDP takes inflation also into account, unlike nominal GDP.
c) Real GDP is better because when used because after removing the effects of inflation, the change in output can be seen clearly which is not the case with nominal GDP.

3. According to NBER, there have been 33 recessions in the USA since 1854. The last recession as announced by NBER was entered into in December 2017. As per official announcement it lasted from December 2007 to June 2009.

4. The four major categories of expenditures can be picked up from the formula of calculating GDP using expenditure method! Formula: C+I+G+ (X-M)

a) Private Consumption Expenditure (C) - It is generally the largest component of GDP. It is primarily made up of services, and goods (2 types - durable and non-durable). It is calculated by adding durable and non-durable goods to expenditures for services.

b) Investment Expenditure (I) - Investment means additions to the physical stock of capital during a period of time. It has 4 components which are as follows: Business Fixed Investment: Amount which business units spend on purchasing newly produced capital goods like heavy machinery. Inventory Investment (or change in stock): The net change in inventories (stock) of final goods awaiting sale of finished goods, semi-finished goods and raw material is the inventory investment. Residential Construction Investment: This is the amount spent on construction of flats and residential houses. Public Investment: This includes capital formation by government in the form of building of roads, bridges, canals, schools, hospitals, etc.

c) Government Purchases of Goods and Services (G) - The government spends in making roads, bridges etc to provide for its country's citizens. It is important to keep in mind that only the government expenditure which results in the formation of goods and services is accounted for. Transfer payments given to households under various schemes does not result in the production of goods and service, so they are not accounted for.

d) Net Exports (X – M) - There are many businesses which export their goods. Likewise, there are many which import. Therefore, net exports is the difference between the domestic spending on foreign goods (in terms of imports) and foreign spending on domestic goods (in terms of exports).

5. The real GDP of the US for the year 2018 for three quarters is along with in the change in spending in various categories:
Q1 - 2.2%
Spending:
C - The largest component of GDP is consumer spending. It contributes 70% to the economy, and it rose 1.1 percent. Spending on non-durable goods increased by a mere 0.1%, as contrary to spending on durable goods which fell by 3.3%. Spending on services rose 2.1%. t.
I - Business investment rose with a good 7.3%. Investment in equipment increased by 4.7%, while commercial construction rose by a whooping 12.3% with most of the construction being of apartment buildings.
G - Federal government spending rose 1.7%, boosted by a 1.8% increase in military spending. State and local spending rose 0.8%.
X-M - Exports rose by 4.8% which comprises mostly of oil and commercial aircraft. Imports only increased 2.6%.

Q2 - 4.2%
Spending:
C - Consumer spending rose 4%.
I - Business investment fell 0.5%. A 13.3% increase in commercial construction was offset by a 1.1% drop in home building.
G - Government spending rose a moderate 2.1%.
X-M - Exports rose 13.3%.

Q3 - 3.5%
Spending:
C - Again, growth was driven by consumer spending segment rising by 4%.
I - Business spending was quite rising 12%. It was driven by a 13.3% increase in intellectual property products, like patents. On the other hand, commercial construction went down by 7.9% and home building also dropped by 4%.
G - Government spending rose by 3.3%.
X-M - Owing to the trade war, exports fell by 3.5% and imports rose by 9.1%.