GDP and the Economy: Final Estimates for the First Quarter of 2007

GDP and Gross Domestic Purchases

In addition to gross domestic product (GDP), another related measure of economic growth-gross domestic pur- chases-is included in the national income and product accounts (NIPAs).

GDP measures the market value of final goods and ser- vices produced by labor and property in the United States, including the goods that are added to, or subtracted from, inventories. GDP is defined as the sum of consumer spend- ing, business and residential investment, inventory invest- ment, government spending, and exports less imports.

Gross domestic purchases is defined as GDP less exports plus imports. It measures domestic demand for goods and services regardless of their origin. Exports represent foreign demand for U.S. goods and services. Subtracting exports from GDP yields a measure of expenditures that focuses on domestic buyers. Imports can be viewed as the value of goods and services that exceed the domestic supply and that expand the consumption and investment alternatives for domestic purchasers.

Differences between GDP and gross domestic purchases reflect patterns in imports less exports: As imports exceed exports, gross domestic purchases exceeds GDP.

For annual and quarterly estimates of these measures, see NIPA tables 1.4.1 and 1.4.3-1.4.6.

For more information on GDP and gross domestic pur- chases, see also "A Guide to the National Income and Prod- uct Accounts of the United States" on BEA's Web site at <www.bea.gov/bea/an/nipaguid.pdf>.

Source Data for the Final Estimates

The final estimates of gross domestic product for the first quarter of 2007 incorporated the following source data.

Personal consumption expenditures: Retail sales for Feb- ruary and March (revised) Quarterly services survey for the first quarter (new).

Nonresidential fixed investment: Construction put in place for February and March (revised). Quarterly services survey for the first quarter (new).

Residential fixed investment: Construction put in place for February and March (revised).

Change in private inventories: Manufacturers' and trade inventories for March (revised). Producer Price Index for January (revised).

Exports and imports of goods and services: International transactions accounts data for October 2006 through March 2007 (revised).

Government consumption expenditures and gross investment: State and local government construction put in place for February and March (revised).

GDP prices: Export and import prices for January, February, and March (revised). Unit value index for petroleum imports for March (revised). Prices of single-family houses under construction for the first quarter revised).

Measuring Corporate Profits

Corporate profits is a widely followed economic indicator used to gauge corporate health, assess investment condi- tions, and analyze the effect on corporations of economic policies and conditions. In addition, corporate profits is an important component in key measures of income.

BEA's measure of corporate profits aims to capture the income earned by corporations from current production in a manner that is fully consistent with the national income and product accounts (NIPAs). The measure is defined as receipts arising from current production less associated expenses. Receipts exclude income in the form of dividends and capital gains, and expenses exclude bad debts, natural resource depletion, and capital losses.

Because direct estimates of NIPA-consistent corporate profits are unavailable, BEA derives these estimates in three steps.

First, BEA measures profits before taxes to reflect corporate income regardless of any redistributions of income through taxes. This measure is partly based on tax return information from the Internal Revenue Service; BEA uses tax accounting measures as a source of information on profits for two reasons: They are based on well-specified accounting definitions, and they are comprehensive, covering all incorporated businesses-publicly traded and privately held-in all industries. BEA also uses other sources of information to estimate pretax profits, including information from the Census Bureau.

Second, to remove the effects of price changes on inventories valued at historical cost and of tax accounting for inventory withdrawals, BEA adds an inventory valuation adjustment that values inventories at current cost.

Third, to remove the effects of tax accounting on depreciation, BEA adds a capital consumption adjustment CCAdj). CCAdj is defined as the difference between consumption of fixed capital (the decline in the value of the stock of assets due to wear and tear, obsolescence, accidental damage, and aging) and capital consumption allowances (tax return depreciation).

Corporate Profits by Industry

Industry profits are corporate profits by industry with inventory valuation adjustment (IVA). The IVA removes the effect of prices on inventories. The IVA is the difference between the cost of inventory withdrawals at acquisition cost and replacement cost. Ideally, BEA would also add the capital consumption adjustment (CCAdj) for each industry. However, estimates of the CCAdj are only available for two broad categories: Total financial industries and total nonfinancial industries. For more information about BEA's methodology, see "Corporate Profits: Profits Before Tax, Profits Tax Liability, and Dividends" at <www.bea.gov/bea/mp_national.htm>.

1. "Real" estimates are in chained (2000) dollars, and price indexes are chain-type measures.

2. Each GDP estimate for a quarter (advance, preliminary, and final) incorporates increasingly comprehensive and improved source data. More information can be found at <www.bea.gov/bea/about/infoqual.htm> and at <www.bea.gov/bea/faq/national/gdp_accuracy.htm>. Quarterly estimates are expressed at seasonally adjusted annual rates, which show the value of an activity if the quarterly rate were maintained for a year.

3. In this article, "consumer spending" refers to the NIPA series "personal consumption expenditures (PCE)," "inventory investment" refers to "change in private inventories," and "government spending" refers to "government consumption expenditures and gross investment."