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The Measure of Economic Health

Introduction

GDP's Importance

Gross Domestic Product (GDP) is the entire worth of the economy's output in goods and services over a specific period (Amacher & Pate, 2019). GDP is a measure of the economy's overall health. GDP allows policymakers and central banks to determine whether the economy is declining or increasing, whether it requires stimulus or restraint, and whether concerns such as a recession or out-of-control inflation are imminent (Picardo, 2021). GDP is significant for the economy because it can forecast changes in the economy based on established indicators.

Shortcomings of GDP

Although GDP has been used to gauge the general health of the U.S. economy since 1944, there are significant disadvantages to relying solely on GDP to assess a country's economic well-being. GDP exclusively considers products and services generated within a country's borders over a year, regardless of whether residents or resident immigrants created them. National GDP estimates hide significant differences in output, employment, and earnings throughout a population. Financial transactions and transfer payments are also excluded from GDP calculations because they do not represent current production. GDP does not account for environmental quality. The expenses of pollutionsuch as cleaning up, backtracking, or switching production methodscan not yet be defined and factored into the GDP equation. GDP data alone do not reflect income distribution or financial wealth disparity, which can be quite unequally distributed among the population, even in sophisticated economies.

Using GDP to Evaluate the Business Cycle

The business cycle was coined in the nineteenth century to describe a pattern of ups and downs in output, employment, and prices (Amacher & Pate, 2019). Economic business cycles are the unpredictable phases of economic activity that include recessions, troughs, expansions, and peaks. The GDP is affected positively or negatively when the economy goes through business cycle fluctuations (Bass, 2016).

Factors that may affect the Business Cycle

The many business cycles can be influenced by factors such as employment, inflation, productivity, taxes, and interest rates. When factory capacity is underutilized, the output is reduced, and the economy suffers to the point of recession when unemployment is high. Low unemployment, on the other hand, can lead to increased productivity and a more robust economy. Employment is only one factor to consider, and its impact should be weighed with other factors (Banton, 2018). Inflation is defined as a rise in the average price of goods and services. Consumer purchasing power is diminished as earnings, and salaries fall compared to the cost of goods; people spend less, and the economy suffers as a result. Each country has its rate of inflation, which influences worldwide exchange rates and import prices. Cash holders usually suffer during periods of inflation as their money loses value. Inflationary periods have a negative impact on the business cycle (Banton, 2018). Labor productivity can be measured as a country's GDP, the production of goods and services produced by labor, or the efficiency of its workers. Some analysts believe that low inflation and high productivity are linked and that when prices are low, manufacturers create more. Other factors, such as increased health and resources, can also boost productivity. For example, higher education and training can lead to a more productive workforce. Technology also boosts productivity by allowing employees to work more quickly (Banton, 2018). Governments frequently alter fiscal policy to improve the business cycle; examples include raising taxes and adjusting interest rates. Fiscal policy can influence other factors like employment, prices, and economic growth, all of which can impact businesses. Changes in any of these variables might cause changes in a business cycle, which can influence an industry (Banton, 2018).

The health of the U.S. Economy by its GDP, Business Cycle, and Economic Growth

In the first quarter of 2021, GDP climbed by 6.4 percent, reflecting sustained economic recovery due to establishments reopening and government reaction to the COVID-19 epidemic. Through the Coronavirus Response and Relief Supplemental Appropriations Act and the American Rescue Plan Act, households and businesses received government assistance payments in the first quarter, including direct economic impact payments, expanded unemployment benefits, and Paycheck Protection Program loans (Gross Domestic Product | U.S. Bureau of Economic Analysis (BEA), n.d.). The Business Cycle Dating Committee of the National Bureau keeps track of U.S. business cycles. The timeline shows when economic recessions and expansions occurred, as well as their peaks and troughs. When economic activity rises and then troughs, a recession happens. Between the low and the peak, the market is expanding. Most recessions are temporary; expansion is the typical state of the economy. The time it takes for the economy to return to its prior peak level of activity or trend direction, on the other hand, could be rather long. According to the NBER timeline, the most recent peak occurred in February 2020, capping a record-long expansion that began after the trough in June 2009 (Business Cycle Dating, n.d.). A rise in real output per capita is defined as economic growth. A rise in real production per capita indicates that the average individual now has more goods and services and a higher standard of living than they did previously. It is often thought that a growth rate of 3%-4% per year is the greatest that can be sustained for an extended period of time. Higher productive resources or technological advancements are required to generate more production. A combined rate of 3% to 4% change corresponds to an achievable rate of change in these two main drivers of economic growth (Amacher & Pate, 2019).

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