Tiffin University Chapter 5 Real Gross Domestic Product Paper

Activity 2.2: Essay: GDP

Introduction

In this paper, you will apply what you have learned in Chapter 5 to the firm or business you selected in order to see how the concepts can be applied to a business situation. In particular, you will examine actual data for the GDP of the United States and explain how firms would react to the changing GDP environment.

Activity Instructions

Go to the St. Louis Fed FRED (Federal Reserve Economic Data website) and search for “Real GDP”. You can also find GDP data (and many other data series) by clicking on “Categories”, then “National Income & Product Accounts” and then GDP. For either method, select the “Billions of Chained 2009 Dollars*, Quarterly, Seasonally Adjusted** Annual Rate” and you should see a graph. To see a little more detail, adjust the lower limit of the date displayed to January 2000. This is accomplished by clicking on the first date in the field on the right-hand side above the graph, then clicking the double arrows that are to the left and right of the decade until you reach the 2000-2009 range, then click 2000. Then click on “Jan”, and the graph will redraw itself to the new range.
Given the data that you found regarding the GDP of the country and thus the economic environment into which your firm finds itself, what business decisions might the firm you chose in Week 1 make? Might they need to adjust their pricing? Should they increase or decrease their output, or should they maintain the same level of production? Why? Are there other changes to the business environment that could affect your firm’s decisions or profitability (perhaps relating to other competing businesses or suppliers to the market in which your firm produces)? If this was 2005 (and you only had data through 2005), how would you answer those questions? What if this was 2009?
Please note that if you have selected a firm based or primarily operating in a foreign country, you can assume that the trends in the GDP for that country is the same as that of the trends of the GDP of the United States.
Notes about the particular form of the data:
* Chained 2009 Dollars is a slightly more complex way of adjusting prices to obtain a Real GDP.
** Seasonally Adjusted means that the data is ‘smoothed’ to account for events unique to particular times of the year. For instance, if we were to look at retail sales, the (unadjusted) level of sales would be higher in November and December as compared with October or March because of holiday shopping. This makes unadjusted retail sales levels harder to compare between months—if we note that December sales are higher than October, is that because the economy is doing better or because many people are out shopping for the holidays?
If we know that historically, retail sales are 40% higher in December than in October, we can seasonally adjust December’s retail sales by dividing by 1.4. Now we can meaningfully compare the October and December retail sales; if December’s sales are exactly 40% higher, then when we divide by 1.4, December’s retail sales will be equal to October’s retail sales. For instance, if October’s retail sales were $50 Million, then a 40% increase in December would result in $70 million in retail sales. If we divide the $70 million by 1.4, we obtain $50 million as the seasonally adjusted December retail sales. Now, comparing October’s sales ($50 million) and December’s sales ($50 million), we see that the seasonally adjusted retail sales are equal and from that we can infer that the economy is just as strong in December as it was in October. If the retail sales in December were less than we expect, say $60 million, that would mean the economy is not doing as well in December as it was in October. The unadjusted numbers do not illustrate that but if we seasonally adjust by dividing the $60 million by 1.4, we get a seasonally adjusted $42.85 million in retail sales in December. Comparing the seasonally adjusted numbers we can see December’s (seasonally adjusted) sales are less than October, and infer the economy is not doing as well in December as it was in October—the extra sales that we would expect from the holiday season no longer mask the declining economy.

Writing and Submission Requirements

1.5-2 pages (approx. 300 words per page), not including title page or references page
For standard requirements, review the Discussion and Written Assignment Expectations.

Tips for Success

Be sure to refer to the Essay Tips for Success as you craft your submission. In this week, please realize that the note about chained dollars and the note about seasonal adjustment is explaining a peculiarity in the data (that our text does not address). You can ignore that portion of the prompt if you wish; there is nothing below the dotted line that requires a response.
You should also take some time to describe why your firm may take different actions in the three time periods (now, 2005 and 2009). The prompt was designed to have you address the differences between the situations prevailing in those years.

Weekly Learning Goal(s): 3, 4

Identify the determinants of long-run growth. (CLO 2, 4)
Explain how changes in GDP affect employment and the business environment and be able to predict future changes in GDP. (CLO 2, 4)