Based on data released by the Bureau of Economic Analysis on 29 October 2020, US third quarter GDP grew substantially by over 33 per cent quarter on quarter. At first glance, it seems a very strong recovery from the worst-ever economic contraction in the previous quarter. However, if one looks deeper, he may find the economic prospect less promising. With guidance from your economics tutor Singapore in economics tuition Singapore, explain why.

Quarter On Quarter VS Year On Year

Countries like the United States measures its GDP growth quarterly. For example, the above-mentioned GDP growth of 33 per cent was the growth in the third quarter as measured against the second quarter. Quarter on quarter analysis is great in gauging the growth momentum in the short term and identifying seasonal trends. This allows policy makers to monitor closely the country’s economic performance against targets set, identify the gaps and quickly come up with remedy measures to ensure the set targets are met. For the list of countries that adopt quarter on quarter analysis, you may consult your economics tutor Singapore in your economics tuition Singapore class.

In contrast, countries like China adopts year on year GDP growth reporting, that is, comparing the GDP growth against the same period in the previous year. Year on year analysis has its advantages in helping policy makers understand the overall, long term trend by eliminating short term fluctuations. Both quarter on quarter and year on year analyses have their advantages and disadvantages. In consultation with your economics tutor Singapore in economics tuition Singapore, discuss the advantages and disadvantages of quarter on quarter and year on year analyses. In the commercial world, most companies adopt both for a holistic view of their financial performance, taking into consideration both short term and long term trends. You may approach your economics tutor Singapore in your economics tuition Singapore class for a case study.

Limitations Of Quarter On Quarter Analysis

In the second quarter of 2020, the US experienced its worst economic contraction of 33 per cent since the Great Depression in the 1930s. The quarter on quarter growth of 33 per cent in the third quarter was hence on a very low base. Assume the US GDP in the first quarter is 100. A 33 per cent contraction in the second quarter means the US GDP drops to 67 (100X(1-33%)=67). With the 33% quarter on quarter growth in the third quarter, the US GDP does not return to its original level of 100. Instead, the third quarter GDP is around 89 (67X(1+33%)=89.11), which is substantially lower than its original level of 100. I believe this example will help you better understand why many people think that US Q3 GDP growth is inflated. You may sign up for economics tuition Singapore with a reputable economics tutor Singapore should you need a more detailed explanation. Economics Cafe Learning Centre is the best economics tuition Singapore Centre located in Bishan. Its principal economics tutor Singapore, Mr Edmund Quek is widely regarded as the best economics tutor Singapore.

This also shows that in the event of significant short term fluctuations, a year on year analysis is more informative and helpful. After adjustment for inflation, US third quarter GDP was 2.9 per cent lower than last year.

In closing, the country is on track to realise a 4 per cent economic contraction in 2020, its worst full year economic performance since World War II. Moving forward, the economic fallout due to the ongoing Covid-19 pandemic will continue to take its toll and a full economic recovery may take a few years.

Linda Geng

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