South-Western College Publishing - Economics  
Fourth Quarter 2004 GDP Revised Upward
Subject Measuring Economic Activity
Topic National Income Accounts
Key Words

Gross Domestic Product, Investment, Consumer Spending, and Exports

News Story

The Gross Domestic Product (GDP), the official measure of total goods and services produced in the economy in a given year, reportedly grew at an annual rate of 3.8 percent for the final quarter of 2004. This figure was revised upward from the 3.1 percent report a month earlier.

The GDP measure reflects the spending from consumers, businesses, government, and from the foreign sector (as indicated by net exports.) Consumer spending was revised downward, business spending was revised upward and exports accounted for nearly half of the total .7 percent upward revision.

Consumer spending waned near the end of the year where a 4.2 percent revised figure fell below the third quarter's 5.1 percent gain.

When combined, residential and nonresidential investment spending provided a large boost to the economy in 2004. Single-family home sales fell slightly by 0.1 percent in the final month, but sales were still running along at a healthy pace. Relatively low mortgage rates apparently continued to support the nation's housing markets.

New business investment was also strong in the fourth quarter, with nonresidential spending growing at a 14 percent rate and spending on new equipment and computer software increasing by 18 percent. Economists view these increases as signs that business decision makers are optimistic about the economy.

The largest revision to the GDP figure came from the foreign sector. Statistics Canada made a $1.4 billion error, underestimating United States exports to Canada during November. This rather huge mistake resulted in a narrowing of the official trade gap and indicated that net exports were greater than previously reported.

The final report showed that the economy grew at 4.4 percent in 2004, significantly better than the 3 percent increase in 2003. The growth in the U.S. economy in 2004 was the strongest since 1999, when the economy grew at 4.5 percent.

Questions
1.

Discuss why residential construction is considered to be a part of investment spending.

2. Explain how lower interest rates increase spending on single-family.
3. What is meant by the term "net exports"? How does this factor influence the GDP equation? How does the strength or weakness of the dollar affect that equation?
Source Reuters, "Data Paints Stronger Picture of Economy," The New York Times Online February 26, 2005.

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