Question

Plot the level of real GDP (FRED code: GDPC1). Then plot the rate of economic growth as the percent change from a year ago of this index. Describe how real GDP behaves in recessions, which are denoted in the FRED graph by vertical shaded bars.

Answer 1

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Question:

Answer:

Real GDP	Real GDP	%Change in Real GDP
1989	9257.1	-
1990	9312.9	0.60%
1991	9421.5	1.16%
	Next Recession
2007	15761.9	-
2008	15328.02	-2.7%
2009	15356.05	0.18%
	Next Recession
1979	6816.02	-
1980	6813.5	-0.039%
1981	6902.1	1.30%
1982	6802.4	-1.4

% annual Change = (Current year's value - Previous year's value)/ Previous year's value

Real GDP: Real GDP is inflation adjusted GDP.

Real GDP = Nominal GDP/ Deflator

When deflator (inflation) decrease Real GDP increase and vice-versa.

Here we have taken the data from three recession- July 1981–Nov 1982, July 1990–Mar 1991 and Dec 2007–June 2009. We have seen the common trend that during the recession period real GDP increase from previous level. During the recession inflation decrease rapidly or the economy face the problem of deflation due to lower AD. When AD decrease rapidly, its decrease output and price level. During the recession the economy get shrink rapidly and inflation decrease rapidly also. So, decreasing inflation positively affect the Real GDP and its increased from the previous level.

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