The Measure of Economic Health

The Measure of Economic Health

ECO203

Principles of Macroeconomics

Introduction

Within this paper, I will discuss the importance of GDP and examine the shortcomings of GDP in measuring a country’s economic health. I will be exploring the GDP’s use in evaluating the business cycle and what factors would affect the business cycle. Lastly, I will determine the health of the current U.S. economy by its GDP, business cycle, and economic growth. Understanding the measurement of economic health is essential to making informed financial decisions such as loans, debt, and savings.

GDP’s Importance

It is essential to understand what GDP is and how to measure this. GDP is Gross Domestic Product, and it is estimated over some time, say one year. “GDP measures the monetary value of final goods and services—that is, those that are bought by the final user—produced in a country in a given period of time.” (Callen, 2018) Gross domestic product counts for goods and services, defense, and education even. GDP also accounts for foreign owned factories as long as it is in the United States. The GDP can be considered in three different ways: production, expenditure, or income. GDP is important because it allows economists and others to understand the size and performance of our economy.

Shortcomings with GDP

When we look at a country’s health with a GDP, we see a number produced on a page. What we cannot see is how the affected citizens feel. “GDP is not a measure of the overall standard of living or well-being of a country.” (Callen, 2018) For example, we see an increase in production, which will lead to an increase in supply; however, we don’t know the burden that manufacturing has on our eco-system or noise the plant produces. The United Nations employs a Human Development Index, which will account for such factors as life expectancy and education.

GDP Relations to Business Cycle

The business cycle is the progress tracker of the GDP. The business cycle generally measures the rise and fall of gross domestic product. The fluctuations in a business cycle are from households, businesses, and governments, and they are not always consistent. “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) There are six stages of all business cycles: 1. Expansion, 2. Peak, 3. Recession, 4. Depression, 5. Trough, and 6. Recovery. The National Bureau of Economic Research in the United Stated measures our business cycles.

Factors to Affect Business Cycles

Many reasons would affect a business cycle; the four most common ones are employment, inflation, productivity, and interest rates. When there are times that unemployment is high, there are factories unused. When we have times of low unemployment, the economy progresses with higher yields of products. When the cycle encounters times of inflation, the price of goods and services increase, and the purchasing power is taken away, and people spend less money. “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.” (Banton, 2018) Governments often try to improve economic health by raising or lowering taxes. Policies can affect the purchasing power of individuals’ salaries, as well as overall employment and product prices. A change in any of these variables will impact the business cycle positively or negatively.

State of the U.S.

“Real gross domestic product (GDP) increased at an annual rate of 2.1 percent in the third quarter of 2019, according to the “second” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.0 percent.” (BEA 2019) We are currently in the expansion phase of the business cycle, which usually lasts about five years or so. Some economists are warning about a recession due to the statistics. According to trading economics, the third quarter grew by about 2.1 percent. It is expected to grow another 1.9 percent by the year 2020. (Trading, 2019)

Conclusion

Gross domestic product or GDP, for short, is essential to measure a country’s health of its economy. With GDP you can analyses the monetary value of all final goods and services produced but you cannot use GDP to see how the changes affect the citizen. The GPD is used with conjunction with business cycles to see how the country is performing in segments at a time, these segments are usual in booms and busts. Several reasons occur to affect the GDP’s business cycles, such as employment and productivity. The current state of the United States economy is healthy, and most studies show us in the expansion phase. Understanding GDP and business cycles will lead citizens to informed decisions about policy and purchasing power.

References

Tim Callen December 18, 2018. Gross Domestic Product: An economy’s All Retrieved from https://www.imf.org/external/pubs/ft/fandd/basics/gdp.htm

Will Kenton October 9, 2019. Business Cycle Retrieved from https://www.investopedia.com/terms/b/businesscycle.asp

Caroline Banton April 13, 2018. Four Variables That Affect the Business Cycle Retrieved form https://yourbusiness.azcentral.com/four-variables-affect-business-cycle-10375.html

BEA 2019. U.S. Economy at a Glance Retrieved from bea.gov/news/glance

Trading Economics 2019. United States Growth Rate Retrieved from https://tradingeconomics.com/united-states/gdp-growth