The U.S. Economy Shrank for the First Time in 3 Years

Answer the following questions to check your understanding of the story.

Which approach to calculating GDP is the news clip using?

a) The income approach

b) The economist-approved approach

c) The expenditure approach

d) The government statistical approach

Wrong! - What is the income approach to measuring GDP? Are the “government statistical approach” and the “economist-approved approach” methods used to calculate GDP?

That's Right! - The news clip mentions the four expenditure components used under the expenditure approach to calculating GDP: personal consumption expenditure (C), gross private domestic investment (I), government expenditure on goods and services (G), and net exports (X – M).

According to the news clip, is the U.S. economy in a recession?

a) No, because a recession requires two consecutive quarters of negative real GDP growth.

b) Yes, because imports grew by a much greater percentage than exports grew.

c) No, because consumption expenditure, the largest component of real GDP, increased.

d) Yes, because government expenditure decreased.

Wrong! - Is a recession defined by changes in consumption expenditure, government expenditure, or net exports? How is a recession defined? When is the U.S. economy in a recession?

Well Done! - A recession is defined as a period during which real GDP decreases—its growth rate is negative— for at least two quarters.

The news clip reports that real GDP decreased for the first time in three years, in the first quarter of 2025. With only one quarter of negative real GDP growth, the U.S. economy is not in a recession.

Which components of real GDP contributed most to its fall in the first quarter of 2025?

a) A small increase in consumption expenditure and investment.

b) A decrease in government spending and a small increase in exports.

c) A large increase in imports and a decrease in government spending.

d) A large increase in imports and an increase in consumption expenditure.

Wrong! - The expenditure approach to calculating GDP (Y), sums consumption expenditure (C), investment (I), government expenditure on goods and services (G) and net exports (X – M).

Y = C + I + G + X – M

Use the equation to determine what changes in the components of GDP contribute to its fall in the first quarter of 2025.

Good Job! - The expenditure approach to calculating real GDP (Y), sums consumption expenditure (C), investment (I), government expenditure on goods and services (G) and net exports (X – M).

Y = C + I + G + X – M

The increase in imports (M) and the decrease in government spending on goods and services (G) decreased real GDP.

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