The Volatility of Gross Private Domestic Investment Spending

This Activity Exercise is appropriate for Principles of Macroeconomics, has no class size limitations, and is designed for completion in one 50 minute class period. The preparatory work can also be captured and evaluated by the instructor. It is the third in a sequence of five Activity Exercises designed by the author to explore basic macroeconomic principles and their measurement. The five Activity Exercises are: Unemployment Rate (1), Consumer Sentiment (2), Gross Private Domestic Investment Spending (3), Housing Starts Leading Indicator (4), and Investment Spending Multipliers (5).

Overview

The Activity Exercise Volatility of Gross Private Domestic Investment Spending can be used as an applied exercise examining the levels of Investment spending, over time. Ideally, preparation for the Activity Exercise will familiarize students with the importance of Investment spending (and capital formation) for growth in the real GDP. The Activity Exercise asks students to carefully examine the effects of changes in Investment spending on aggregate growth.

Instructor can elect to lead students through the process of creating the appropriate FRED chart, or have students perform that to submit as a prep exercise. See "10 FRED Activities in 10 Minutes," Mark Bayles, Federal Reserve Bank of St. Louis, 2016 ( This site may be offline. )

Expected Student Learning Outcomes

At the completion of this Activity Exercise, students will be able to identify the volatility of Gross Private Domestic Investment Spending (I) in the Real GDP compared to the relative stability of Real Personal Consumption Spending (C)

Information Given to Students

You are a summer intern at the Bureau of Economic Analysis (B.E.A.), in Washington, DC. A fellow intern from another university says her macroeconomics professor taught that Gross Private Domestic Investment spending was the most volatile component in the equation where Real GDP = C + I + G + (X – M). Her professor also claimed that it could take years for the economy to recover from a severe decline in the level of Gross Private Investment Spending.

You decide to consult the data to investigate the volatility of Gross Private Domestic Investment spending and whether it can take years to recover from a severe decline in this form of spending. After you investigate, you conclude that:

A. Since 1998, the level of Gross Private Domestic Investment spending SOMETIMES took more than two years to recover to its previous level after a quarterly decline.
B. Since 1998, the level of Gross Private Domestic Investment spending NEVER declined in a single quarter.
C. Since 1998, the level of Gross Private Domestic Investment spending ALWAYS recovered to its previous level within one year after a quarterly decline.
D. Since 1998, the level of Gross Private Domestic Investment spending NEVER recovered to its previous level within one year after a quarterly decline.

The Volatility of Gross Private Domestic Investment Spending (Microsoft Word 2007 (.docx) 135kB Jul16 18)

D. Is the correct answer, from the data in the FRED table.

A. This response could generate debate. But in the 2001 recession it did take more than 8 quarters for the level of I to recover.

B. Not true.

C. Not true.

Instructor can elect to lead students through the process of creating the appropriate FRED chart, or have students perform that to submit as a prep exercise. See "10 FRED Activities in 10 Minutes," Mark Bayles, Federal Reserve Bank of St. Louis, 2016 ( This site may be offline. ) .

Considering quarterly observations of data from 1998 to the present, students can be encouraged to investigate how changes in Gross Private Domestic Investment are correlated (or not) with changes in Real Personal Consumption spending.

Students should also be encouraged to note how the volatility in I spending is correlated with the expansion and contraction of the real GDP.

Suggested Debriefing Discussion Questions:

What factors contribute to the volatility in Gross Private Domestic Investment
spending?
Why are changes in Personal Consumption spending less volatile?
How does the relative stability in changes over time in the level of Personal
Consumption support the macroeconomic model for the Consumption
Function?
What is the relationship between changes in Gross Private Domestic Investment
spending and the expansion or contraction of growth in the American
economy?
Why does it take so long for the level of Gross Private Domestic Investment
spending to recover after a recession?
Are changes in the level of Gross Private Domestic Investment spending a leading
indicator of whether the growth of the American economy is changing from a
period of expansion to one of contraction?
With regard to influencing the behavior of producers, what other factors might
contribute to broad changes in willingness to undertake new investments in
their businesses?

Students should be able to articulate: 1) the importance of capital formation for economic growth, 2) the volatility of Gross Private Domestic Investment relative to Personal Consumption spending, and 3) the role of changes in Gross Private Domestic Investment spending in business cycle expansions and contractions. Instructor evaluation can be formulated through formal examination questions or presentation.

Watch the Kahn Academy video "Investment and Consumption"

Read OpenStax, Chapter 6: "The Macroeconomic Perspective," Chapter Introduction and Section 6.1 Measuring the Size of the Economy. Download for free here.

PREP ASSIGNMENT (may be submitted in advance):

Instructions for accessing and manipulating FRED data are found in "10 FRED Activities in 10 Minutes," Mark Bayles, Federal Reserve Bank of St. Louis, 2016 ( This site may be offline. )

Access the FRED chart of data for Gross Private Domestic Investment (GPDI)

Add a line for Real Personal Consumption Expenditures (PCEC96)

Reformulate the chart from 1998 to the present.

Save the completed chart for future reference.