GDP up more than expected

In Chapter 7 of your e-book, you are learning about the main macro measure: gross domestic product or GDP. GDP helps us to measure the performance, speed, and health of the macroeconomy. Looking at the path of real GDP allows us to evaluate our monetary and fiscal policies, our investment and savings patterns, and our material well being.

This week there was good news on the GDP front. The first estimate of third quarter economic growth was better than most economists (including myself) had expected. The Bureau of Economic Analysis reported this week that U.S. real GDP grew at a 3.9% annual rate in the third quarter.

The most common way to calculate GDP is to add up all spending on domestically produced final goods and services, leading to the equation GDP = C+I+G+X-IM. There was good growth in nonresidential fixed investment (I) helping to make up for the weakness in housing. There was also good growth in exports (X) because of the weak dollar. I am still trying to figure out why consumer spending grew at three percent! Government purchases grew by 3.7 percent at annualized rate almost entirely because of defense spending growth.

Click here for a sample of the reactions of various economists to the latest GDP report, and here for a detailed analysis of the GDP picture. Anyway if GDP growth is so could why did the Fed feel the need to cut interest rates this week? Do they know something that isn’t in the stats?

Extra Credit: Why does the BEA Press Release refer to real GDP? Is there a fake GDP? Explain. How much did the GDP deflator rise in the third quarter? If you are the first student to send me an e-mail (kwoodward@saddleback.edu) with the answer, you will be rewarded with two extra credit Discussion Board points. Only two points extra credit per student can be earned in any given week from the blog questions.