Gross Domestic Product

Carla Jenkins

Definition

• BEA – Bureau of Economic Analysis, Commerce Department Agency produces the Gross Domestic Product (GDP)

• According to the BEA, GDP is defined as ‘the market value of goods and service produced by labor and property in the US, regardless of nationality.’

• BEA only reports real GDP. GDP became the official growth output estimate in 1991. Pre-1991, BEA computed gross national product.

• BEA defines Real GDP as ‘the value of the production of goods and services in the US, adjusted for price changes.’

Real GDP Construction

• Real GDP (Use textbook definition)• BEA used chained dollar estimates when computing Real GDP.

• Chained-dollar estimate: They are used to approximate the chain-type index level. They correctly show growth rates for a series. I believed that chained dollar estimates were introduced to the BEA real GDP estimates in the early 2000s.

BEA GDP Reporting Structure

• First – new estimate reporting• Second – revision of the first estimate• Third – Used to be called final estimate. Revision of the second

estimate. This estimate can only be revised during the benchmarks.• Benchmark- a cycle occurring every 4-5 years where all estimates are

opened to revision. GDP can be revised all the way back to 1929.

Historical Trends

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1920 1940 1960 1980 2000 2020Year

GDP current Real GDP

Market Reaction to Q1 2015 GDP

• Analysts were disappointed that GDP contracted 0.2% versus fourth-quarter 2014.

• This contraction wasn’t a surprise to severe winter. • Stocks went down and analysts opined that the low GDP sent a

market signal to the Federal Reserve that it should delay its interest rate hike.

Real GDP’s Effect Upon Monetary Policy

• The June 2015 Federal Open Market Committee minutes have real GDP prominently featured. The Committee discusses the impact the low first-quarter 2015 GDP estimate would have on its decision to raise the interest rate later this year. The Fed will be looking at the final second-quarter 2015 GDP estimate before deciding.