In preparation for tomorrow’s class, here’s an excerpt from “The Street Light” a blog by economics professor Kash Mansori (also in my blogroll, to the right). Since we will be talking about GDP and its components, here’s a little application of what we’ll be doing. Note that it’s a little dated (posted on 4/27/07), but still applicable to understanding how GDP components can lead to a clearer picture of how the economy is doing.
Breaking down GDP growth into its components makes it easier to see where the strengths and weaknesses in the US economy are right now. It’s no surprise that residential investment is the biggest drag on the economy, now down about 17% from one year ago. But growth in other business spending is also slowing down worryingly – non-residential investment has only grown by about 3% over the past year, compared to 6-8% growth from 2004-2006. Even export growth has slowed. The only bright spot in the economy is the consumers keep steadily increasing their spending, by about 3.4% over the past year.
To make things even clearer, take a look at the accompanying graph.
As you may or may not recall, GDP or Gross Domestic Product is the total dollar value of all the goods and services produced in a period of time. For the data above, it’s quarterly. All the percent changes that are referred to in the quote, are for changes from the the first quarter of 2006 to first quarter of 2007 (first quarter = the months of January through March).
Update: Below is an updated chart of the data from the above table – up to the third quarter of 2007:
Data Source: Bureau of Economic Analysis