Monday, August 1, 2011

Excellent Graphic and Article Explaining the Four Components of GDP. Good Stuff...

Here is an excellent graphic showing the 4 components of GDP using the Expenditure Method of counting Gross Domestic Product and the full article from the Wall Street Journal explaining each one. How these 4 sectors of the economy mesh together is a critical part of understanding our economy. It is vital for an AP Macroeconomics or Introductory college class in Economics. 


Source: Wall Street Journal


Four Ways the Economy could Grow or Shrink
It looked as if the pieces were finally coming together for the U.S. economy in 2011. Instead, they fell apart.
Whether the rest of the year is better or worse depends on four factors: Will consumers spend more readily? Will business investment pick up? Will federal, state and local governments continue to retrench? And will U.S. exporters manage to sell more goods and services to the world?

Friday's report that gross domestic product grew at a mere 0.8% annual rate in the first half of 2011 suggests that the risks to the economy are significant. Recent Federal Reserve research shows that when an economy grows as slowly as it has this year, it often hits "stall speed" and falls into recession—making a "double dip" a very real possibility.The economy's weakened trajectory also makes shocks, such as the European financial crisis and wrangling in Washington over the debt, all the more threatening.

This year, the four key GDP components—consumption, investment, government and trade—have all fallen short of forecasts. But economists, citing factors such as lower gasoline prices and easing supply disruptions from Japan, say growth will be stronger in the second half. To set the recovery back on course, some or all of the four need to do better.


CONSUMPTION
In past recoveries, increases in consumer spending were often the engine of growth. During the year after the 2001 recession the economy wouldn't have grown without Americans' willingness to spend more.
Today's consumers—many repairing balance sheets shredded by the housing bust and recession—can't drive the economy as they once did. Household purchases of goods and services account for about two-thirds of domestic demand, so the economy can't sustain itself if spending doesn't pick up from its second-quarter growth rate of 0.1%.

Some increase looks near-certain. A parts shortage after the March earthquake led Japanese car makers to curtail U.S. production. The thin inventory of Japanese cars on dealer lots meant a drop in motor-vehicle and parts sales that lowered second-quarter GDP growth by about a third of a percentage point.
As production comes back on line, car sales are likely to pick up. Consumers also should get relief as the recent decline in oil prices translates into lower gasoline prices.

But any improvement in spending will be short-lived unless the job market improves. Household-product maker Newell Rubbermaid Inc. last week cut its sales forecast for the rest of the year, saying economic woes in the U.S. and other developed markets had soured consumer moods. "The debt crisis in the U.S. and across many countries in Europe could further stress consumer confidence," Chief Executive Michael Polk said.
INVESTMENT
Business investment in new equipment and software is a rare bright spot, growing at a 7.2% rate in the first half of the year. Looking ahead, businesses have the wherewithal to spend even more. At the end of the first quarter, nonfinancial companies held $1.91 trillion in cash and other liquid assets, according to the Federal Reserve. That's 6.8% of total assets, the highest level since the early 1960s. Robust second-quarter profits suggest the stockpile continued to grow.

Easing supply-chain problems could help here, too. Last quarter's drop in auto production rippled through U.S. factories, leading manufacturers to temporarily cut back on investment plans. In an uncertain economy, companies have been holding off on buying new equipment until orders accumulate; when supply disruptions muted orders, capital spending followed suit.
But uncertainty about the recovery—and the debt debate in Washington—could incline companies to pull back. Juniper Networks Inc., seen as a bellwether for technology spending, warned last week that network-equipment sales were slowing. The Commerce Department reported Wednesday that a gauge of capital-spending plans—orders for nondefense capital goods excluding aircraft—slipped in June from May.
The two other areas of investment—residential and nonresidential construction—are facing headwinds. With a glut of foreclosed properties crowding out new home sales, builders are holding back. And commercial construction is being crimped by difficulty obtaining financing.
GOVERNMENT
When the economy is weak, officials often step up government spending to boost growth. But in the first half of 2011, such spending fell at a 3.5% annual rate—enough to knock three-quarters of a percentage point off GDP.

That decline was partly due to budget woes in state and local governments, as well as what appears to be a one-time slump in first-quarter defense spending. Government spending may continue to slip this year but probably not so quickly.

The real crunch could come next year, as the effects of federal stimulus programs fade. Moreover, the deficit-reduction plan Congress is hammering out will include more spending cuts. Rising tax revenue at the state level may mitigate some such cuts; for local governments, the pain is likely to persist.
TRADE
With the economy unable to depend as much on consumers, exports are one of the keys to U.S. growth. Trade contributed to the economy in the first half, when U.S. exports grew a bit more quickly than imports. But neither exports nor imports grew as fast as last year.

A weaker dollar and a productive work force should help the U.S. increase overseas sales of goods and services—particularly ones not made elsewhere.

That, in turn, depends on demand. While Japan's economy is snapping back from the earthquake, Europe's financial crisis as well as the U.K.'s austerity measures and efforts by central bankers in China and other emerging markets to rein in inflation are all pushing against growth.

There's a risk that not just the U.S. economy, but the global economy is headed for trouble.
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