Impacts of Economic Crisis on GDP: Case Study of US

This presentation discusses the impacts of economic crisis on GDP with a case study of the US. It covers the components of GDP, US GDP between 2001-2005, US GDP under great crisis 2007-2009, and the impacts of great crisis 2007-2009 on GDP components.

IMPACTS OF ECONOMIC CRISIS ON GDP, CASE STUDY OF US
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INTRODUCTION
Gross Domestic Product
• In its basic definition, the GDP of a country is its monetary value for all its finished goods and services and which are locally produced over
a certain period of time
• It’s mainly calculated on annual basis although some countries like the United States have opted to do it on a quarterly basis (Dubé,
Hitsch & Rossi, 2018)
• The GDP of a country is calculated by summing personal consumption expenditures, investments, net exports (exports-imports) and the
government expenditure.
• Basically these are the four major components of the GDP (Consumer expenditure+ Investments + Net exports+ Government expenditure)
• The four components are used to formulate the GDP equation which is expressed as: GDP = C + G + I + NX

The Components of GDP
Private Consumption Expenditure (Dubé, Hitsch & Rossi, 2018)
• Private consumption expenditure is the measure of money value which entails both the consumer goods and services purchased by the households and non-profit
organizations during a certain period of time.
• These goods are classified into durables, non-durables, semi-durables, and services
• Private consumption expenditure is estimated through taking into account all the durable goods owned by the citizens like autos and furniture as well as the non-
durable goods like food, fuel and clothing
• Controversy arises when it comes to evaluating the reliability of the value obtained
• Citizens rarely disclose the true value of their possessions and that is an implication of wrong values of PCE obtained.

The Components of GDP
Investments (Dubé, Hitsch & Rossi, 2018)
• Gross investments are the purchases made by companies in the production of consumer goods.
• And not all purchases are included in the calculation of GDP
• Purchases which are made to replace existing items which might have spoiled or damaged are not included in the GDP
calculation
• The only purchases which are counted or included in GDP calculation are those which creates new consumer goods
• The main controversy when incorporating investments into the GDP calculation arises when choosing the purchases to be included into the equation.

The Components of GDP
Government expenditure (Dubé, Hitsch & Rossi, 2018)
• This component gives the summary of all the government spending both on goods and services.
• The spending includes purchases on intermediate goods and all the wages and salaries it pays to its workers
• The purchases made by the government are treated as final products while the transfer payments made by the same government to the households and firms are
considered as part of the GDR.
• This is mainly done to avoid double counting since consumption or recipient investments in the transfer payments is included in the C and I
• Double counting in this component of GDP has been the main controversy despite of the efforts made by the economists to avoid including transfer payments made
by the government to the households.

The Components of GDP
Net Exports (X – M) (Dubé, Hitsch & Rossi, 2018)
• The Net export which is obtained by subtracting the country’s imports from its exports denotes the difference between the country’s domestic spending on foreign
products and the foreign spending on its local products
• imports are not subtracted because they are harmful to the economy but because they are already included under the consumption component and including them
will lead to doable counting
• Imports which are overlooked in the calculation of net imports have led to double counting when evaluating the GDP
• Double counting or failure to subtract some of the overlooked imports has been the main controversy in the GDP calculation because it gives biased results.

The US GDP between 2001-2005
• According to the Word Banks report on US GDP growth, the GDP kept a positive trend between 2001 up to year 2005
• The economic climate was favorable for business activities which kept the economy progressing. In regard to consumer
expenditure, it kept increasing because citizens were busy transacting in different ventures of the economy and realizing profits
which enabled them to afford consumer goods and services
• Government employees were being awarded good and favorable salaries because the government was collecting revenues and
which also enabled them spent on basic commodities like food and healthcare services (Katz, Kroft, Lange & Notowidigdo, 2016).

Continuation………
• Gross investments kept increasing because the companies and other state agencies were making enough profits to purchase on
products which could help them increase production on consumer goods (Katz, Kroft, Lange & Notowidigdo, 2016).
• The number of startups within the country increase and also stock markets expanded in size
• The unemployment rates within the country continued to decline since the unemployed population was gradually securing job
opportunities in the new startups.
• Also, Government expenditure which included purchases on intermediate goods and payments of wages and salaries increased as
well because it was collecting enough revenue from the business organizations and other avenues which were doing quite well in
terms of profitability. Ultimately, the net exports index increased because of the favorable business environments which enabled
the local producers to produce more and hence reducing the trade deficit of the country.

The US GDP under Great Crisis 2007-2009
• The economic growth rate which had been observed in US from 2001 began to deteriorate in 2006 (Katz, Kroft, Lange & Notowidigdo, 2016).
• This was as a result of great economic crisis which was slowly hitting the whole world following the combined asset price bubbles in the real estate sector as well as the
credit bubble that was causing excessive leverage.
• Revenues and profits realized by business organizations began to decline and that saw those organizations began to cut back on hiring new employees while others entirely
frozen the hiring.
• In their attempt to cut on costs and improve their bottom lines, they stopped buying new equipments, curtailed on research and development and also stopped new product
rollouts.
• Expenditures on marketing and advertisement were highly reduced to cope with the deteriorating economic factors. These cost cutting approaches affected other businesses
which provided raw materials and services for the big organizations and that saw some of them close down.

The Impacts of Great Crisis 2007-2009 on GDP
components
The impacts of 2006-2009 crisis on Private Consumption Expenditure
• Due to the insecurity which came alongside the onset of the crisis, both large and small business organizations stopped hiring
new employees while others were forced to fire some of the employees to cut on the operational cost.
• The unemployment rates increased hence increasing the dependency rate.
• Compared to the state before the onset of the crisis where the rates of unemployment were slowly declining, this reverse trend
saw most of the citizens cut on spending because of insecurity and that lead to a decline in consumer expenditure.

The Impacts of Great Crisis 2007-2009 on GDP
components
• The impacts of 2006-2009 crisis on Investments (de Foy, Lu & Streets, 2016)
• Due to the decline in revenues, the stock prices ended up declining as well.
• Dividends on the other hand slumped and in some extreme cases disappeared completely.
• This was closely followed by some institutional investors selling and reinvesting their proceeds on different sectors.
• Business organizations which were the backbone in the US economy were left with very little to only pay for their operational cost and that’s all.
• Many of business organizations were not able to invest and that implied a decline in the investment component of the country’s GDP

The Impacts of Great Crisis 2007-2009 on GDP
components
The impacts of 2006-2009 crisis on government expenditure (de Foy, Lu & Streets, 2016)
• As a result of the great crisis, most of the business organizations registered a decline in profitability,
• Others recorded loses while others run bankrupt.
• Since business organizations are among the main sources of government revenue through taxes, the deterioration in business
climate lead to a decline in the government revenues.
• As a result, the government was forced to reduce its expenditure following the decline

The Impacts of Great Crisis 2007-2009 on GDP
components
The impacts of 2006-2009 crisis on Net exports (de Foy, Lu & Streets, 2016)
• As a result of the decline in revenues realized by business organizations, the stock prices ended up declining as well.
• Dividends on the other hand slumped and in some extreme cases disappeared completely.
• This was closely followed by some institutional investors selling and reinvesting their proceeds on different sectors.
• As a result, business organizations which dealt with exports cut off on their production due to lack of resources.
• This therefore saw the trade deficit of the country increase as compared to the case before the crisis.

References
de Foy, B., Lu, Z., & Streets, D. G. (2016). Impacts of control strategies, the Great Recession and weekday variations on NO2
columns above North American cities. Atmospheric Environment, 138, 74-86.
Dubé, J. P., Hitsch, G. J., & Rossi, P. E. (2018). Income and wealth effects on private-label demand: evidence from the great
recession. Marketing Science, 37(1), 22-53.
Katz, L. F., Kroft, K., Lange, F., & Notowidigdo, M. (2016). Addressing long-term unemployment in the aftermath of the Great
Recession. Long-Term Unemployment After the Great Recession: Causes and remedies, 25.