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The Health of the Economy According to the Gross Domestic Product and the Business Cycle

Info: 1040 words (4 pages) Essay
Published: 22nd Mar 2021 in Economics

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Abstract                                                                                                                             

Gross Domestic Product of the economy is used to indicate both, growth and consumption levels. These two components are especially important when determining the health of the economy. The GDP measures all goods and services rendered during a set time and price according to the market. Using the GDP is not a perfect system, but it is still the best way to make assessments and predictions about the economy and determine the phase of the business cycle. Without these tools it would be impossible to understand the economic activity of a nation. In this essay I address the GDP and its shortcomings. Finally, I explain the business cycle and analyze the health of the United States Economy according to data retrieved from the National Bureau of Economic Research.

Keywords: (GDP) Gross Domestic Product, Business Cycle,

The Health of the Economy

“Gross domestic product or GDP is one of the most common indicators to track the health of a nation's economy (Collin, 2018)”. GDP refers to the total dollar value of all goods and services produced over a specific time period and is often referred to as, “the size of the economy (Collin, 2018)”. Economist’s use these figures when monitoring the health of Economies and while they are assessing the GDP, Investors use data from the GPD as a guide in determining investments in stocks and bonds. For example, in the last ten years the U.S. economy has had a growth rate over 2%. If the annual GPD has a growth rate between 2 and 3 percent, the economy is growing and is in an expansion phase. If the (GPD) is below the 2 percent for a period of at least 6 months, then the economy is experiencing a recession. The lower the (GPD), value in stocks decrease and the workforce suffers from lower wages all of which indicate a bad economy.

Shortcomings of the (GDP)

Although the GPD is indicative of economic growth it is also, riddled with shortcomings that detract from its importance. An example is the inclusion of Government spending and its a key issue because its prices are not decided by then market. The (GDP) assesses all monetary expenditures of a country and this has caused debate over expenses which are unnecessary and others that are excluded altogether. Some have argued over its validity especially when it comes to social welfare. There are issues with the GDP, and it is certainly not a perfect system. Reflected in the GDP is the Defense Departments spending. If a country was preparing for war  increased spending on vital military supplies and stock up on artillery however, they would not necessarily be better economically. economy would show significant increases while the whole of society is not doing well. GPD) because purchases of tanks and artillery increases the consumption in the economy.  While defense services may be necessary to allow other economic activities to flourish, they are not valued for their own sake. Besides the inclusion of Government spending, the GPD excludes all economic activities that are not directly tied to the market. In fact, it does not account for any unpaid work whatsoever and fails to discount economic activities that do not raise social welfare. Also, certain destructive events or activities can increase GDP while decreasing overall social welfare.

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The Business Cycle.

However, the (GDP) still has significant advantages and to better understand this, we must consider the business cycle. Typically, business cycles are “measured using the rise and fall in the real gross domestic product (GDP) or the GDP adjusted for inflation (Kenton 2019)”. “The business cycle, also known as the economic cycle or trade cycle and is reflected by four phases, expansion, peak, contraction and trough. “All economy’s go through these phases however, the length of time in each varies (Kenton 2019)”. “The business cycle is characterized by expansion and contraction. During expansion, the economy experiences growth, while a contraction is a period of economic decline. Contractions are also called recessions (Kenton, 2019, para. 5) ”. Currently the United states is still in the expansion or growth phase. When expansion occurs, increases in employment, incomes, production, and sales allow a steady flow in the money supply and investment is booming. A nation’s GDP rises or falls according to the business cycle. Businesses and economies go through these cycles. However, the length of time spent in each phase varies. According to the National Bureau of Economic Research, the economy’s business cycle is determined by both, monthly indicators and quarterly GDP growth rates (Kenton 2019)”. In addition, the Federal Reserve manages business cycles with monetary policy. “The federal government wields tools of fiscal policy while both try to keep up consumer confidence (Kenton, 2019)”.  Fiscal Policy can affect the business cycle by intervening in monetary policies. This can occur when the economy is expanding too quickly, central bankers will take steps to help tighten the money supply like raising interest rates. If the economy is slowing down lower rate will increase the money supply. Critics believe that if central bankers stopped intervening that the economy would no longer have these cycles.

References

  • Collin, T. (2018). Gross Domestic
  • Product (GDP). Economy. doi:
  • 10.6027/06038d41-en
  • Kenton, W. (2019). Business Cycle.
  • Retrieved December 10, 2019, from
  • https://www.Investopedia.com
  • Solow, R. M. (2005). Rethinking Fiscal
  • Policy, Oxford Review of Economic
  • Policy, 21(4), 509–514, doi:
  • 10.1093/oxrep/gri028
  •     https://doi.org/10.1093/oxrep/gri028
  • Amacher. R, and Pate. J
  • Principles of Macroeconomics,
  • Second Edition.
  • https://content.ashford.edu/books/Amacher.5279.18.1

 

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