Handout: Recent Movements in GDP: Chapter I: Introduction
(the last two quarters of 2002 are, as of this writing, projections; all data are seasonally adjusted)
The most commonly-used measure of the state of the U.S. economy is its real GDP, its real Gross Domestic Product--the market value of goods and services produced for sale (plus some extras, like owner-occupied housing) in the country.
The graph above shows recent movements in seasonally-adjusted real GDP in the United States. ("Seasonally adjusted" means that the data have been purged of the normal seasonal patterns of economic activity: manufacturing booms in the late summer and fall to get ready for Christmas, and retailing booms in late fall for Christmas as well, education is low during the summer, and construction is low during the winter).
Discussion:
Even over the short four year period covered here, we can see the increasing productive power of the U.S. economy. By late 2002 (according to our projections, at least) real GDP will be some ten percent higher than it was four years earlier. When you reflect that the U.S. economy is running much less "hot" today than it was in 1999--compare the then-unemployment rate of roughly 4 percent to today's unemployment rate of roughly 6 percent--you come up with the consensus guess that the productive potential of the American economy today is some 15 percent higher than it was four years ago, and is growing at about 3.75 percent per year.
However--like your standard undergraduate--the economy does not always produce up to its potential. Starting in the third quarter of 2000, growth slowed markedly below the pace set by the growth of productive potential. And starting in the first quarter of 2001, the seasonally-adjusted level of real GDP actually fell for three quarters, before resuming growth at the end of 2001. Such a period of falling real GDP is called a recession.
Extended Discussion:
The task of (short-run) macroeconomic policy is to prevent recessions, or minimize their size and impact, without unleashing a period of high inflation. The task of (long-run) macroeconomic policy is to do whatever can be done to maximize long-run well-being, and a good step toward that is to boost the growth of America's productive potential, and thus of national wealth. For ultimately wealth is power to do things, and more wealth increases our collective options--whether we want to use that productive power to reforest hillsides, build more powerboats, or push back the frontiers of medical knowledge.
It is a somewhat peculiar fact about economics that it is, or pretends to be, agnostic about ends--about what wealth and productive potential are to be used for. That's the business of consumers and voters. Think of economists as being like dentists: just as dentists want you to have healthy teeth to use, and don't think about whether you will use your teeth for good (to eat healthy things) or ill (to bite into cyanide-containing almond pits, or to bite your roommate), so economists want a country to have a large productive potential and the ability to turn that potential into whatever goods and services consumers and voters demand.
Posted by DeLong at August 24, 2002 07:28 PM | Trackback