The Measure of Economic Health
ECO203 Principle of Macroeconomics
November 19, 2018
A index of the country's entire output retail sales, construction spending, manufacturers shipments and farmers harvest. The better the country and its citizens are doing the more the GDP grows. It has made a enormous difference to track what's happening with the economy through indexes like GDP such knowledge can enable a quick and informed policy response, which took Shape as s big stimulus package in the past. GDP statistics are calculated a dozen times a year on the fifth floor of a modern office on L street in Washington. Steve Landefeld huddles with a group of staff members and review a large pile of data compiled by his agency, the bureau of economic analysis apart of the US department of commerce. For an entire day they work under lock down only certain personnel are allowed in and out the men and women with landefeld spend the day following a process that halls been refined over the past 50 years. The groups goal is to come up with a single number than explain it in a press release.No one in the room says the number out loud by tradition they aren't to reveal that number. Nominal GDP refers to a county's economic output without an inflation adjustment, while real GDP is equal to the economic output adjusted for the effects of inflation.
Shortcomings of GDP
GDP was seen as a way to measure whether the target growth rate was being achieved but some serious shortcomings occurred figures like GDP are useful in macroeconomic analysis if they are not regarded as a precision instrument and may be lethal if it is. All production is summed in terms of their market prices, only the value of the final goods is included and only the output of productive factors located in a particular nation is counted. Already some of the shortcomings of GDP as a measure of social welfare can be inferred. Government spending alongside other voluntary market transactions detracts from GDP usefulness as a measure because of the government expenditures being unnecessarily beneficial to social welfare. Or at least not as beneficial as their cost would indicate. Money is coerced it is not taken voluntarily by contracting individuals in order to satisfy their ends and therefore increase their total welfare. GDP also fail to discount those economic activities that do not directly raise individual welfare. Military spending is the most obvious example of such an activity. They are not valued for their own sake 15% of the nations GDP increases over the course of two years because of the increase of military spending which does not mean the nation is consuming and investing more. Failure to account for productive non market activities is another shortcoming because a mother raising a child is a important activity. That is not accounted for in the GDP and it can increase social welfare. Making judgements on the economics health by using this would be way off especially since they aren't taking everything into consideration.
Evaluate business cycle
As the economy goes through business cycle changes, these positively or negatively affect GDP. During a contraction, economic output slows, usually due to decreased demand for products and services, an increase in the cost of raw materials or both. This means that companies are not making as many products or offering as many services. As a result, companies will begin to lay off employees and the unemployment rate begins to rise. Since GDP is a measure of the value of economic output and during a contraction output decreases, the GDP also decreases. Even though the GDP decreases during a contraction, it is still positive. An economic trough occurs after a contraction. A historically high national unemployment rate and low economic output usually mark this trough, which often signals that the economy is already in or heading toward a recession. Unlike a contractionary phase in which the GDP decreases but is still positive, during a trough the GDP is negative. A negative GDP means that economic output does not grow at all. After the "rock bottom" of an economic trough, expansion is its recovery. If the economy grows for two or three consecutive calendar quarters, it indicates that it is beginning its recovery and GDP begins to increase. The reason economists do not consider the economy to be in a recovery and an expansionary phase after only one quarter of growth is because some types of economic growth are temporary. Examples of temporary economic growth are the holiday shopping season or when the U.S. conducts a census and hires workers for a short period.
Factors that affect the business cycle
At times of high unemployment, factories are underutilized, output is lowered and the economy can suffer to the point of recession. Conversely, low unemployment can result in higher productivity and an improved economy. Employment is just one variable, Inflation occurs when the average prices of goods and services rise. The purchasing power of consumers is weakened as wages and salaries fall in relation to the cost of goods; people spend less and the economy suffers. Times of high inflation have a negative effect on the business cycle. Labor productivity is measured in terms of a country's Gross Domestic Product, the output of goods and services produced by labor or the effectiveness of its workers. Governments often choose to change fiscal policy in an attempt to improve the business cycle; increasing taxes and changing interest rates are ways to do this. Fiscal policy can have an effect on other variables such as employment, prices and economic growth, which can in turn affect your industry or business.
Health of current US economy
Since 2009, we have seen an average GDP growth of only 2.1% while previous expansions saw growth closer to 3%. Slow growth has made this economy very stable and kept inflation at bay, but it has also left investors feeling less than thrilled about their returns. current unemployment numbers have been below 5% for the past 6 months. This is well below the 50-year average of 6.2%, and is also below the generally accepted full employment rate of just over 5%. However, full employment by itself does not always mean an expansion is ending. Healthy economies can last years at or near full employment as long as inflation is under control. Naturally, the aging population of the US works to counter act wage growth meaning that our economy is most likely seeing healthy wage growth that will help continue this expansion. Because our economy has been growing slowly through the entire expansion, many investors don't feel like the economy is in as good of shape as it is. It is tempting to try and time the market to seek higher returns. The long slow growth has made it hard to forecast market trends, but it isn't all bad. Slow growth is keeping the economy from overheating and it is very likely to see continued growth.
Carty, Sue-Lynn. (n.d.). What Is the Relationship Between Gross Domestic Product and the Business Cycle? Small Business - Chron.com. Retrieved from http://smallbusiness.chron.com/relationship-between-gross-domestic-product-business-cycle-21751.html
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