Sunday, September 30, 2012

Second Quarter GDP Revised From A 1.7% Increase To A 1.3% Increase!

My students know how sad and disappointing this news is. See GDP report: Economic growth revised lower. Why is this disappointing? Let's suppose that per gapita GDP is $50,000 (it is a little less than that right now). Now what if over the next 20 years GDP (actually real GDP) rises every year by 1.3% instead of just 1.7%? How much difference will this make?

First, we need to say what the annual per capita GDP increase will be. Per capital GDP is GDP divided by population. What if we assume that population grows 1% per year. Then instead of an increase in per capita GDP of 1.7%, it would be about 0.7% (and instead of 1.3%, it will be about 0.3%).

Compounding an annual increase of 0.7% over 20 years would leave us with a per capita GDP of $57,407. That is more than $4,000 above what it would be if we grow only 0.7% per year ($53,056). $4,000 less in everyone's pocket is bad news.

One technical note. When you see numbers like this reported in the media, real GDP did not increase 1.3% in the second quarter. It means that if it increased at the rate it actually did for that quarter for a whole year, then the yearly increase would be 1.3%. It would have increased about 0.325% for the quarter. If it does that for 4 straight quarters, the GDP will end up being about 1.3% higher than it was before.

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