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July 31, 2008

Components of GDP

By: Wade Rousse

Gross Domestic Product (GDP) has four components:

  1. Personal consumption expenditures (C)
  2. Gross private domestic investment (I)
  3. Government consumption and gross investment (G)
  4. Net exports to foreigners (NX)

If you were to put these into an equation substituting “Y” for GDP, what would it look like?

Voila! Y=C+I+G+NX (the infamous GDP equation).

Memorize this equation and you’ll be well on your way to understanding the macro-economy.

This morning, the Bureau of Economic Analysis (BEA) released its 2008 advance second quarter GDP figure. This figure could be revised on August 28 if newer data suggest inaccuracies (hence the “advance”).

The BEA’s report stated that the annualized growth rate was 1.9 percent. How much did each component contribute to this growth?

  • “C” added approximately 1.1 percent
  • “I” subtracted approximately 2.3 percent
  • “G” added approximately 0.7 percent
  • “NX” added approximately 2.4 percent

If you add these together, you’ll get a second quarter annualized growth rate of 1.9 percent.

Notice the contribution of consumption (C) to last quarter's growth. Were the stimulus checks partially responsible for this upswing? If so, during the third quarter — when there are no stimulus checks — what’s going to happen to the “C” in our equation?

Additionally, this morning's release also revised the GDP growth rate for the fourth quarter of 2007 to a negative 0.17 percent. This means our current economic slowdown now has at least one negative quarter of GDP growth. Is talk of recession poised to resurface?

Posted by Wade at July 31, 2008 3:49 PM


After taking your class, I took another economics course with Nick Larsen, and there were a couple of timelines that we received that actually weren't related, really. One had to do with the fluctuation in the price oil over the last hundred years, and the other had to do with the business cycle in the last hundred years or something. The interesting thing about these two graphs, was that when you put one next to the other you began to see a correlation. There was absolutely no connection to our economic well being and the price of oil for the first half of the century. And then, in something like the seventies...everything changes, and almost every one of our recessions is correlative with a spike in the price of oil. Granted, it could be a coincidence, but it was freaky how in line the phenomena were. Makes you wonder a) if we really are that dependent on the oil industry that the rise in price would so dramatically affect our economy (though purely speculative, I'm guessing yes) and if so 2) what really is the reason we did not move away from oil sooner???

Anyways, that wasn't really my question...just a fun tidbit for anyone who reads this blogs. My actual question is about something more luminous: the internet.

Of course, we all remember the dotcom fiasco that broke down all those online companies that were supposed to change the way we do business. But just because so many didn't work out doesn't necessarily mean that the internet hasn't had its effect. Of course we all know it has. With e-commerce becoming more and more popular, any economic minded individual has to wonder what the effect is on the other non-virtual merchants and such.

Now, I personally don't buy a whole lot online...but for those small, highly expensive things, I do look online first. Things that aren't highly affected by shipping and such. It occurs to me that these are things that include items I might otherwise buy at stores such as Zales, or Whitehall, or even the Sharper Image. Now, I'm not trying draw conclusions, but I am trying to notice a correlation.

I worked for Bloomingdale's a few years ago as a seasonal position, and this is the one downtown...so at least a few of these guys had been working there for 10+ years. Most had been there for at least a few years. Every time I talked to a commission employee, one of the most common conversations was about how the previous year had been bad, but this was down right terrible.

For Christmas, I went to Zales to buy a gift for my girlfriend, and the only thing the salesman and I talked about other than what selections were better was how the business was worse than ever! Now granted, we've seen the hindsight of this, and know that it's gotten worse for the industries, but why?

The other thing I've noticed in this recession, (other than Bennigan's and the other long list of restaurant chains just shutting down locations) is the number of airlines that have disapeared since New Years 08. So far, I've counted three, ATA, Oasis, and one I can't recall. The only US company is ATA. So, what's up with this phenomenon? Is it because fewer ppl. have needed to go across country for one-day business trips due to advancements in telecommunications like video conferencing, and things of that sort? Or is it because these new internet companies like expedia.com have tossed the airlines into such a price battle that some of the weaker companies simply can't compete? Since, ATA shut its doors, I almost never see a airline commercial, but I see William Shattner and the garden gnome all the time! What's the beef? How much is the internet really responsible for all this?

Granted this is all speculation, none of it is based on causality, only correlations, but still...have you noticed that while the previous landmark skyscrapers, the Sears tower and the Hancock Center, have commercial space, the proposed new additions to the Chicago skyline (Trump and the Spire) are more residential based? Has the value of having a commercial office where everyone met communally for work every day declined? I'm sure most would agree that it has. Remember all the 80s and 90s movies that took place in the business centers of New York? Now, even Boiler Room doesn't take place in Manhattan, and it's about the stock market. So what's changed?

This all leads me into my actual question: Are some of the more notable losses in this recession due to an inevitable shift in the corporate sector due to changes in behavior that can be attributed to the integration and advancement of telecommunications and the internet and would have been perceived further down the road anyways?

Posted by: Michael Welton at August 4, 2008 6:11 AM

We live in a dynamic economy. These inevitable changes, which you write of, should probably be viewed as healthy. A necessity for growth in a developed economy is this innovation. Therefore I don’t think you can attribute this as a source of the current economic slowdown. In addition, I’ve noticed you’ve made the leap, and you’re using “recession” instead of “slowdown”. Time will tell if you were really well trained in economics, or not (smile).

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I found your site on Google and read a few of your other entires. Nice Stuff. I'm looking forward to reading more from you.

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