Question

D10.1 [Analyzing real GDP over the business cycle] Go to the Web site of the Federal Reserve Bank of St. Louis (FRED) (research.stlouisfed.org/fred2/). a. Find the values for the most recent quarter for the following three variables: (1) Nominal Gross Domestic Product (GDP), (2) Real Gross Domestic Product (GDPC1), and (3) Real Potential Gross Domestic Product (GDPPOT). b. Using the data from part (a), calculate the GDP Price Deflator for the most recent quarter. c. Calculate for this quarter the percentage difference between real GDP and potential GDP. d. Using Figure 10.2 on page 322, describe the relationship between real GDP and potential GDP over the past 10 years.

Answer 1

a.         In the second quarter of 2015, nominal GDP equaled $17,913.7 billion, real GDP equaled $16,333.6 billion in chained 2009 dollars, and potential GDP equaled $16,853.1 billion in chained 2009 dollars. These GDP values are annual rates.

b.         The GDP price deflator in the second quarter of 2015 equaled: [($17,913.7 billion/$16,333.6 billion) × 100] = 109.7.

c.         The percentage difference between real GDP and potential GDP in the second quarter of 2015 equaled: [($16,853.1billion - $16,333.6 billion)/$16,333.6 billion] × 100 = 3.2%.

d.         Potential GDP increased annually as the result of increases in the labor force, capital stock, and technology. Real GDP increased from 2003 through 2007 and was very close to potential GDP but fell below potential GDP during the recession of 2007-2009. Although real GDP has since increased, it remained below potential GDP in 2015.