Evaluating Economic Health: GDP, Business Cycles, and the U.S. Economy
The Measure of Economic Health Gross domestic product (GDP) is defined as the value of final goods and services that are produced in a country's territories within a certain time period, usually a year. Assess GDP's importance. Examine the shortcomings of GDP in measuring a country's economic health? Discuss using GDP to evaluate the business cycle. Examine factors that may affect the business cycle. Evaluate the health of the current U.S. economy by its GDP, business cycle, and economic growth.
The gross domestic product (GDP) is the monetary measure of the market value of all the final goods and services produced in a specific period by countries. In many cases, a country will measure its GDP across one year. GDP is used to measure the economic health of a country. In so doing, it is important to understand the merits and demerits of this economic measure. The merits make it suitable to use in measuring economic health, while the shortcomings make it unsuitable. The merits have to outweigh the demerits to make it credible and reliable. This paper evaluates all that and discusses the role of GDP in evaluating the business cycle. The gross domestic product of a country can clearly paint the picture of the strengths and weaknesses of the country's economy, from which the economy's health can be determined.
Benefits of Computing the GDP
There are many benefits of computing the GDP, which can be summarized as the importance of the measure. Through the GDP, one can understand the size of the economy and how it is performing. Investors are also interested in a country's GDP; it helps them understand the level of investment that such an economy can support. Everyone wants to see an economy that is doing well and progressing. As such, they will observe the GDP to see the economic growth. The interpretation of an economy doing well is one whose GDP figures increase from one year to the next. Therefore, the GDP is important in evaluating the general health of an economy. Nonetheless, using GDP to measure a country's economic health has its shortcomings.
Shortcomings of the GDP as a Measure
Shortcomings are the faults and failures of an approach, and GDP as a measure of economic health has plenty of them. When one looks at the shortcomings, they are convinced that GDP should not be the best approach to measure a country's economic health. Some of these shortcomings include;
The GDPs consideration is only on the goods and services that go through the official and official markets, largely ignoring the informal economy.
There are many important factors of the economy held constant when using GDP as a measure of economic health, including but not limited to environmental quality, inequalities in income, education levels, and inflation, among others.
GDP treats the replacement of depreciated capital the same as creating new capital, hence making erroneous summations.
Due to such shortcomings listed above, the GDP does not give a clear picture of the country's economic health under consideration. It leaves a lot to be desired to get a precise figuration of a country's economic ability. Regardless of the shortcomings, it is still used in evaluating the business cycle.
The Business Cycle
The business cycle is a series of economic expansions and contractions, showing the high and low moments of business. These moments occur cyclically or in repeat mode across different times. Using the GDP to evaluate business cycles can help explain the expansions and contractions. When a country is experiencing high GDP levels, businesses are also likely to experience a surge and show the expansion. In other times, GDP will fall because of prevailing economic conditions, and the business cycle will show a contraction or a low moment. The GDP and business cycle operate similarly, where one is directly proportional to the other. It is highly unlikely to find that the GDP and business cycle show an inverse relationship. Beyond the GDP, there are critical factors that affect the business cycle.
Changes in business cycles occur due to different factors prevailing in the market. Among the factors include business decisions, interest rates, consumer expectations, and external issues. A business decision is likely to improve or reduce productivity and performance. For instance, a firm may introduce a new human resource management system that employees dislike. Such a business decision may lead to reduced performance and a low point in the business cycle. Interest rates determine the ability of businesses to borrow and pay back debts. When interest rates are high, most businesses cannot access loans, hence putting a contraction in the cycle. A business that meets consumer expectations is likely to witness an expansion in its cycle. Consumers are important stakeholders, and their satisfaction is paramount.
The United States is an almost 23 trillion-dollar economy (2022) in GDP. The country has experienced steady growth over the years, rising from 16.2 trillion dollars a decade ago in 2012. In this time, businesses have experienced highs and lows, with strangled performance in 2020 and 2021 caused by the Covid-19 pandemic. Nonetheless, businesses have started recovering well and are experiencing an expansion in their cycle. The United States economy has consistently grown over the last decade at about 3% per year. Since the recovery from the 2008 financial crisis, the country has experienced significant growth.
In conclusion, the measure of a country's economic health covers a lot to complete. Suppose that the economic diagnosis of a country was to be undertaken; GDP alone cannot be enough as the criteria to determine its health. The GDP on its own may not be a true reflection of a country's economic position. There are so many other factors like cost of living, inflation, and social-economic issues that contribute to the health of an economy. Economic planners and drivers in a country must beware of all the contributing factors and consider them in proclaiming the economic position of a nation.
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