We recently received a very good question from one of our readers.
In our Data Watch on GDP last week we wrote that although real GDP grew at a 2.8% annual rate, real GDP excluding government grew at a 4.5% rate. This seemed to contradict our table, which showed that government was a drag of 0.9 percentage points on the growth rate of overall real GDP. If government was a drag of 0.9 points and the overall growth rate was 2.8%, shouldn't that mean real GDP ex-government grew at a 3.7% rate, not 4.5%?
The table was accurate and means that all sectors of the economy excluding government contributed 3.7 points to the real GDP growth rate.
But government purchases (think ships, roads, desks, not transfer payments or salaries) at all levels – federal, state, and local – are equal to about 20% of GDP. In order for 80% of the economy to contribute 3.7 pts to the overall GDP growth rate, that 80% of the economy has to grow at about a 4.5% rate. (We know that 3.7 divided by 0.8 suggests a 4.6% growth rate, but, for simplicity's sake, all of these numbers are rounded to the nearest tenth of a percent, which leads to some minor error.)
To make it even easier to follow, imagine if 90% of the economy was unchanged but some sector representing 10% of it grew at a 10% rate. Then overall GDP would grow 1% and we would say that small segment contributed 1 point to the overall real GDP growth rate.
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