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Rapid Economic Growth Reported
Subject Gross Domestic Product
Topic National Income Accounts
Key Words Gross Domestic Product, Consumer Spending, Investment Spending, Exports, and Business Inventories
News Story

The U.S. economy grew in the three months that ended in September at an annualized rate of 7.2 percent of GDP, according to the U.S. Commerce Department. Most economist view the latest report as a sign of strength in the economy that has not been seen since 2000, but many still warn that the economic growth is likely to lose some of its momentum in the months ahead as the effects of the recent surge in mortgage refinancing and the tax cuts wear off.

President Bush and his aids have continually said that the tax cuts passed by the administration would eventually take hold and jump-start the sluggish economy and create new jobs. This latest report is the message they needed to confirm their predictions. "The president's package put money in the hands of consumers," said N. Gregory Mankiw, chairman of President Bush's Council of Economic Advisers. "It's hard to determine the exact cause and effect of any particular economic change, but certainly there's lots of reason to believe that what we saw in this quarter is attributable to the president's job-and-growth package."

Consumer spending soared as purchases of expensive items, known as durable goods like cars, rose 26.9 percent. Consumers also continued to refinance their housing, which, because of lower monthly payments, releases disposable income to be spent on other purchases. The export market was also hot, as foreigners bought American-made goods at a surprising clip and U.S. firms increased their spending on new capital equipment and technology. One of the most encouraging signs for the future was the report that business inventories declined by $36 billion in the quarter as consumers bought more than businesses expected. A drop of this magnitude suggests that firms were caught off guard, and will need to gear up production to replace and increase inventories.

The possibility that economic growth is finally strong enough to cause firms to hire new workers offers the hope that the long economic downturn has finally ended.


(Updated November, 2003)

Questions
1.

Define Gross Domestic Product (GDP).

2. Discuss the role of business inventories as a predictor of economic activity.
3. Identify and define the four major components of spending that make up GDP.
Source David Leonhardt, "Economy Grew at 7.2% Rate in 3rd Quarter, Fastest Since 1984," New York Times Online, October 30, 2003.

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