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GDP Will Recover, But Will We?
Subject National Income Accounts
Topic Productivity and Growth
Key Words GDP, Economic Growth
News Story

The destruction and damage that occurred on September 11, followed by one of the largest one-week losses in the stock market has naturally raised questions about the effect of the terrorist attacks on the economy. One way to address these questions is to look at the economic impact of natural disasters, such as hurricanes and earthquakes. The evidence is that gross domestic product (GDP) quickly recovers. Whether the terrorist attacks will have a more profound effect in reducing consumer confidence is unknown. A destructive war or severe restriction in international trade are other possibilities that could significantly impact the economy.

Gross domestic product measures the value of all goods and services produced in the United States in a given year. GDP is used to measure production and aggregate income. GDP per capita, adjusted for price changes, is a measure of our standard of living. GDP is not a measure of well-being. Subtractions are not made for the pain and suffering inflicted on the attack victims or their family and friends. Nor is there any adjustment made for the significant loss of property and people. Output is lost when a disaster occurs, but buildings and machines are rebuilt and output quickly recovers. When an earthquake struck Kobe, Japan, in 1995, 100,000 buildings were destroyed, 300,000 people were made homeless and 6,500 people were killed. Within 15 months of the earthquake, manufacturing output had returned to 98 percent of its pre-earthquake level. One reason for the quick recovery is that the true wealth of an economy are its people and their knowledge and skills.

The extent to which disasters such as the Kobe earthquake can provide insight into the impact of this tragedy on the U.S. may be limited. An earthquake, hurricane or other such natural disaster is not the same thing as a terrorist attack. Newark never fully recovered from the riots in the 1960s, in part because the underlying faith in the government and market was shaken. Americans' resolve to unite and their belief in the American system seems to have been strengthened. Any forecasts of economic growth must recognize that there is a great deal of uncertainty in the economy.

(Updated October 1, 2001)

Questions
1. One source of economic uncertainty is consumer spending. What percent of GDP is attributable to consumer purchases? What would be the impact of a significant drop in consumer confidence?
2. Another source of uncertainty is the government sector. What percent of GDP is attributable to the government sector? The government's response to the disaster is to increase government spending by at least $40 billion. How does an increase in spending affect GDP?
3. As a result of the terrorist attacks, the U.S. could conceivably act to restrict immigration. What would be some of the likely impacts of reduced immigration?
4. It is argued that gross domestic product measures output and production, not well-being. Do you agree? Disagree? Explain your answer.
Source Alan B. Krueger, "Gross domestic product vs. gross domestic well-being," The New York Times, September 20, 2001.

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