US Economy by State vs the EU by Country: Fair Comparison?

The US economy is 33% larger than the EU economy.  The population of the US is approx 345 million. The EU's population is approximately 450 million----23% larger than the US. 

Calculate GDP per person for each geographic area

Calculate your US State GSP (Gross State Product) and Individual EU Country GDP, on a per-person basis

Make comparisons.

Questions: What do these calculations say about the distribution of that "product"?  Does it matter?

Link to US Economy. Link to EU Economy

Potential Real GDP vs Actual Real GDP and the PPF.

Here is a  nice illustration of "Potential Real GDP" vs "Actual Real GDP.  Potential GDP is an estimate at a given point in time of an economy's potential to produce Real GDP given its available resources (Land, Labor, Capital, Entrepreneurship).  Gives me an opportunity to show how two important AP Macroeconomic concepts are related to each other.

The Congressional Budget Office (CBO) publishes a forward looking projection of Potential RGDP years in advance.  This graphic gives the estimated trajectory of Potential RGDP that was calculated in a given year (2007,09,11,13,15, and 2017).  The heavy BLACK line is the trajectory of the "Actual RGDP" that was recorded in the respective year.

It is evident Actual RGDP, since the advent of the 2008 recession has been below the projected Potential---the difference is known as the "Output Gap".

It is noteworthy that after 2008 the CBO consistently lowered the estimate of the US economy's potential to produce Real GDP.

Source: VOXEU

Below I paired this graphic with the Production Possibilities Frontier (PPF).  The PPF is an important model in AP Macro.

I color coded the PPF frontiers in a similar color as the one in the graphic to show the contraction of the US PPF over time (as calculated by the CBO).  I used Point "A" to represent the heavy black line and a consistent under-utilization of societal resources, shown as a point inside the PPF.

Both of these models show the same thing---an output gap that suggests more resources could be put into use before we reach our economic potential.

Updated map showing US Gross State Product (GSP) vs the Rest of the World. Students love this!

Mark Perry over at AEI has quickly put together the latest (2013) "Gross STATE Product (GSP)" data onto a map that students find interesting every time I have shown it in the past. It gives a great perspective as to just how large the US economy is and will continue to be (hopefully!).

In place of the name of the US State it puts a country whose dollar value of Gross DOMESTIC Product (GDP) is equal/similar to the dollar value of output of that State.

For instance, Australia's GDP is roughly the same of that of Texas's GSP. Brazil similar to California, so on and so forth.

Source: Carpe Diem at AEI

Here is the accompanying data in Excel form that show the numbers used for each State.

Half of the US GDP is produced in very small geographic sections of the country. What is up with the rest of the US?

Not a fair question, as I will address below...

This graphic has been passed around the Twitter-sphere so much I do not know its origin.

Quite amazing if accurate. Roughly 20 metropolitan areas in the US are responsible for 50%, or about $8.4 Trillion of the US GDP in 2013 ($16.8 Trillion nominal dollars).  

One the one hand it makes sense because these areas have very high population densities and much of the US is relatively rural.  

Still, kinda looks unbalanced to look at it like this.

LARGE infographic showing the scale and scope of the US economy. Some interesting facts and figures...

[Source: U.S. Census Bureau]

Find out how your city/region would fare in terms of GDP if it was its own country.

Here is a world GDP (Gross Domestic Product) ranking by country AND with the added twist of including the dollar value of production of goods/services in US cities/metropolitan areas. 

To look at this properly, DO NOT include the US GDP number. This is because  the overall US GDP number INCLUDES the city/metropolitan area number.  It is there for reference and scale. In your mind, bump up every country/city on the list one spot.

If you look down the list, you see "New York/Northern New Jersey-Long Island, NY-NJ-PA". This represents a regional geographic area that produces $1.287 TRILLION dollars in final goods and services.

If this geographic area were its own country, it would be the 13th (remember, you have to bump up one spot) largest economy in the world in terms of the dollar value of goods and services it produces.

Go down the list and find your city/metropolitan area and see how it ranks relative to the rest of the world.  The US is STILL a production machine. We often forget that. 

Note: The screen shots I took here are not the entire list. Go HERE at the Wall Street Journal to find the rest, if you don't see your area here.

GDP vs EMPLOYMENT...This is THE graph people FOR and AGAINST the OWS protesters need to see and think about...

In AP Macroeconomics we teach students there is a direct relationship between changes in Real GDP and Employment (or an inverse relationship between Real GDP and UN-employment). 

In the graph below this relationship holds nicely, whether Real GDP (Blue Line) is increasing or decreasing. Employment (RED Line) follows, albeit to different degrees but the relationship is relatively tight.  It makes sense: If in real terms, more goods and/or services are produced, more people will be hired. If fewer goods and/or services are produced, fewer people are needed.

Source: Carpe Diem

However, in the first/second quarter of 2009 this relationship breaks down. While Real GDP bottoms out, employment continues a free fall.  As Real GDP recovers and increases, employment STILL falls before leveling out.  We have a large GDP to employment deficit. 

Starting in the first quarter of 2010 notice the change in the slope of the Real GDP line relative to the slope of the employment line. The former becomes steeper and the latter relatively less steep.  Very different from previous years.  Real GDP is now at its pre-recession level BUT employment is at approx. 6.6 million FEWER workers. What a difference two years makes!

If, on a macro-level, businesses are producing and selling the same dollar amount of goods and/or services as they did before the recession and doing it with many fewer workers, it is relatively easy to see why corporate profits are at record levels. 

Can we chalk this up to "corporate greed"? Were these 6 million workers not really needed in the first place? Has technology and/or efficiencies/improved processes rendered many workers unnecessary? Are businesses working the remaining workers to death to wring as much profit out of them as possible? 

Corporate greed is not a new thing.  If this was the case, why did it not happen to this extent before?  Did corporations just recently figure out how to do more with less?  Below I extended the timeline of the above graph back to 1950.  The last time we had a significant separation between these Real GDP and Employment was back in the 1950's.  Why did the gap close for so many years/decades then reappear?  Are the two periods comparable in any way? Is there no connection?  Am I completely off the mark and comparing apples and oranges?   I honestly don't know and would love to hear any suggestions....

Nice podcast from NPR on the pitfalls of measuring GDP. Good stuff!

Measuring Gross Domestic Product (GDP) is a daunting task, especially in an economy like the US which so large and has many moving parts. 

This is a short primer on some of the shortcomings of measuring GDP and how it is not an accurate measure of "social welfare".  Like all statistics on the economy, you have to drill down deeper into the data to really get a sense of what is happening in the economy.  (Listen or read the transcript below)

Why GDP Is Like GPA

Heard on All Things Considered

October 28, 2011 - MICHELE NORRIS, host: By one measure, the U.S. economy has completely recovered from the last recession. GDP, the nation's gross domestic product, is the sum total of everything the U.S. produces, and it's now back to where it was before the financial crisis. Of course, the country has more people now and millions of them are unemployed.

And as NPR's Robert Smith reports, GDP is not a perfect number.

"Don't Cry for Dallas/Ft Worth, Argentina"---See how US cities stack up in production of goods and services relative to whole countries...

The US economy is STILL a GDP producing monster, even in the midst of a recession/near-recession. Below is a comparison of US cities dollar value of production of goods and services with a country that has a similar dollar value of production (GDP). 

Dallas/Ft Worth is ranked number 6 in the US. If it was its own separate country it would have the GDP of Argentina.  Argentina is the 28th largest economy in the world!  Go HERE to see how the other metropolitan areas/country equivalents rank...

Carpe Diem

Here is my short take on why we are in between the proverbial rock and a hard place in terms of the economy...I think this is a worthy two cents...

I can see alot by looking at numbers. One source of our economic problems can be seen in just looking at one key government statistic.

Gross Domestic Product (GDP) is the sum total of a nations domestic output of finished goods and services. There are four major categories of expenditures: Personal Consumption Expenditures (what you and I purchase), Gross Private Investment (what businesses buy AND residential housing), Govenment Expenditures (what Federal, State and Local govts purchase) and Net Exports (exports minus imports). These categories are totaled below in (2), (7), (22) and (14). 

The recession officially started in the first half of 2008. Starting from left and going right, look at line 1.  Notice how total GDP declines, then recovers.  We are back to square one---Almost.

Look at the number in 2008 III and 2011 II.  Three out of the  four categories ARE back to 2008 levels or better.  How can that be and we have 9.1% unemployment vs 5% in 2008?

Source: Bureau of Economic Analysis (BEA)

Category Gross Private Investment is still in the red by approx. -$220 billion. Look at the subcategories on this line.  Non-residential structures (factories, office buildings, etc) and residential---the housing industry are still in a funk.  There is an acute lack of spending in these critical, job creating industries.

There is what is called "Excess Capacity" in the system---too many existing idle resources (factories, buildings, houses) in place that prevent new spending by businesses. In the simplest terms, we appear to have too many "structures chasing too few productive uses".

 If I own a business and want to expand, due to cutbacks in the last two years, I probably have extra space in my own  building or there is an empty one nearby.

Until this excess capacity is absorbed or becomes depreciated beyond productive use, seems we will be in slow period for an extended period of time. 

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.

Texas IS just like China---well, in this one regard anyway...

Texas one of the fastest growing states in the last ten years in terms of Gross State Product (GSP)---the dollar value of the production of goods and/or services. We are number 2 behind California, but are likely to surpass them in the near future.

For those of you who have lived in Texas a relatively long time, how many people do you know that recently came here from one of the states shown below as a "loser". As a teacher this subject comes up frequently.  When I ask students if they moved to Texas sometime during their lifetime to raise their hands, I usually get a 30% to 40% affirmative response. The reason?---business relocation and jobs. 

Texas produces $1 Trillion in GSP--that is roughly 1/14th of the total US Gross Domestic Product (GDP).  That is a lot of "stuff"....

Texas wins in U.S. economy shift

""Texas became the USA's second-largest economy during the past decade — displacing New York and perhaps heading one day toward challenging California — in one of the biggest economic shifts in the past half-century...."
 
"...Texas notched one of the biggest increases in size in a half-century, surpassing $1 trillion in annual economic output. The state gained nearly a full percentage point in its share of the U.S. economy during the decade, reaching 8.3% in 2010. This growth in economic clout has been matched only twice in the past 50 years — by California in the 1980s and Texas itself during the 1970s oil boom.""'

What does Texas produce? 

GDP is back to Pre-Recession Level!! Why has the unemployment rate not followed suit? Is a hiring binge around the corner?

The latest report on Gross Domestic Product (GDP) released on Friday shows the US economy is back to the pre-recession level of Real GDP.  See graph below.  However, the unemployment rate of 9.4%  has barely budged in sometime. We are producing the same amount of GDP with millions fewer workers in a span of 2-3 years.  Will there be an unleashing of hiring in the coming months? If demand for goods and services remains strong AND if the productivity per worker declines as a result of this increase in demand, then businesses will have to assess whether their current workers are over-worked to the point where it is counter productive to NOT hire additional workers to help with production. OR they will substitute capital (Technology) for labor and the road will remain difficult for workers at the margin. The beat goes on...


Source: Carpe Diem



The bright side to Imports---They help us Export! Huh? Answer within...

I was quite surprised by this graph. A little over half of the dollar value of  imports into the US are in the form of inputs---goods used as a component in a finished good (Industrial Supplies) or are used to make other goods (Capital Goods).  Ultimately both contribute to the manufacture of a finished product MADE IN THE USA, to be either sold domestically or exported.  I am just a high school econ teacher, but I think that means jobs for Americans. I pose the question: Why is our trade deficit such a problem? (HT: CafeHayek)


Carpe Diem



Updated Map comparing each US States production of goods and services relative to another countries production...Fun times with GSP and GDP!!

Each State has a Gross State Product (GSP)---the dollar value of its production of goods and services in a calendar year.  If you add up each States GSP you will have Gross Domestic Product (GDP)--the dollar value of goods and services produced within the US in a calendar year.  This interactive compares each States GSP with another countries GDP that is similar. If some States were their own countries (California, Texas, Florida, etc) , they would be in the Top 20 in the world in terms of the size of their GDP.  Just another way to illustrate what a powerhouse we STILL are in producing "stuff"...

From THE ECONOMIST: Which countries match the GDP and population of America's states? (HT: Jason Welker)

""IT HAS long been true that California on its own would rank as one of the biggest economies of the world. These days, it would rank eighth, falling between Italy and Brazil on a nominal exchange-rate basis. But how do other American states compare with other countries? Taking the nearest equivalent country from 2009 data reveals some surprises. Who would have thought that, despite years of auto-industry hardship, the economy of Michigan is still the same size as Taiwan's?""

Nice interactive graph on key mesurements of US economy, demographics, politics...

Nice Interactive graphic on the US from The Economist...

http://www.economist.com/blogs/dailychart/2010/11/us_interactive_guide

""AMERICA as a whole has just endured its sharpest recession since the 1930s, and the recovery is still fragile. But as our interactive map reveals, the pain has been spread very unevenly. The hardest-hit state, Nevada, has an unemployment rate more than three times as bad as that of North Dakota, the state that has done best on that measure. Unsurprisingly, perhaps, there is a close inverse correlation between growth rates and unemployment.


But what of politics? On the whole, the states with the worst unemployment levels tend to vote Democratic, and those with the best are in the Republican camp. Politicians will argue furiously about which way round the arrow of causation ought to run.
Interestingly, America's ethnic composition seems to have little consistent economic impact. States with large numbers of Hispanics (by far the fastest-growing ethnic group in America) include low-growth/high unemployment states like California and Nevada, as well as good performers like Texas and New Mexico.""

Another nice graph of Actual RGDP relative to Potential RGDP...Impress your High School (guess that is me) or College Econ teacher with this knowledge

Another nice graphic illustrating the output gap, which is the difference between what we actually produce and the output potential of our economy, as measured  by Real GDP:

In common graphical form that we have come to know so well in AP Macroeconomics, we can illustrate the output gap in both the Production Possibilities Frontier and the Aggregate Demand/Aggregate Supply Model of the Economy:

The PPF shows our productive capacity in terms of raw production of capital and consumer goods.  The Long Run Aggregate Supply Curve (LRAS) is this raw production converted to inflation-adjusted GDP.   We know we are not always at our potential in the PPF. Sometimes we are outside it and sometimes we are inside it.  We can certainly say our economy today is under-producing/under-utilizing resources, mainly people (9.6% unemployment rate, well over the Natural Rate of Unemployment). 

Point "B" represents the under-employing of resources relative to our potential Point "A". When we convert the raw production at Point "B" to inflation-adjusted prices, we get a Real GDP to the left of our FE RGP. This is represented as movement along our Short-Run Aggregate Supply curve to Point "B" on the  AD/AS Model. 

How soon do we close the gap between Actual RGDP and Potential RGDP? The first graph gives two Real GDP growth rate examples. One is the growth rate from the end of last severe recession we experienced, 1983-84. The second is a tepid growth that seems to be the consensus growth rate we will actually have (again, this is a best guesstimate scenario). Recovery back to full-employment is not going to be quick, UNLESS we get a HUGE positive Aggregate Supply Shock, such as the one in the 1990's.  Don't see that is going to happen, but as mentioned in class, I WISH it would come in the alternative energy sector--significantly reduce energy costs in a clean way,  which will significantly reduce the cost of production across the board. In turn, this may open up new possibilities in a broad range of industries.  Any other suggestions as to what you would like see contribute to a "Positive Supply Shock"??? Let me know--I am always willing to learn new things!

Actual Real GDP vs Potential Real GDP...VERY nice interactive graph for this IMPORTANT concept

     These graphs below are part of an interactive available HERE on the relationship between ACTUAL RGDP and POTENTIAL RGDP.  In addressing the problems in our economy, it is critical to understand the difference between the two.  I can see the Production Possibilities Frontier, Short-Run Aggregate Supply and Long Run Aggregate Supply implicitly and explicitly through-out.  I have copied and pasted the two most important parts below, but if you go to the link you can build the models yourself step by step. 
     In the first graph, the ideal situation is for the lines to run parallel to each other with no gap. This means that our actual GDP production is equal to our potential to produce GDP given our resources and full-employment of those resources (people first and foremost).  When you see blue, we are actually producing beyond our potential. Unemployment is very low, which can be a good or bad thing  (more on that in class). Where you see pink, it means actual GDP is below potential GDP---we are in a recession and unemployment is high. This is where we currently find ourselves.

Graph copied from Ezra Klein

     This second graph below shows the data from the graph above PLUS how unemployment would be affected given different GDP growth rates.  If our GDP increased at an annual rate of 6% we would reach the Natural Rate of Unemployment("NRU") of 5% rather quickly (2012). The NRU is considered the lowest unemployment rate we should reach if we are fully employing all our resources.  It is impossible to reach an actual unemployment rate of 0%. There is always some frictional and structural unemployment no matter how good the economy might be performing.  However, NO reputable economist is predicting that high a growth rate anytime soon.  It seems more likely we will be in between 2%-3% average growth rate for the foreseeable future and we won't reach full-employment until the mid to late 20-teens.  Hmm...about the time the class of 2011 graduates from college...that is the good news...

Graph copied from Ezra Klein

""Compared with a healthy economy, about 7 million working-age people and 5 percent of the nation’s industrial capacity are sitting idle, not producing what they could. The economy is growing again, but at a rate — less than 2 percent in recent months — that’s too slow to keep up with a population that keeps increasing and workers who keep getting more efficient.
This is the output gap, the divide between the amount the United States can produce and what it is actually producing. The gap, currently $900 billion, explains why we feel so miserable more than a year into what is technically classified as an economic recovery.""