What are the shortcomings of using the GDP to measure the nation’s economic wellness?
The Encyclopedia Britannica (2009) defines GDP as “The total market value of the goods and services produced by a nation’s economy during a specific period of time. It includes all final goods and services.” GDP is the value of a nation’s economy after all goods are produced and services provided. There are several reasons why using GDP as a standalone indicator of the nation’s economy is not always the best measure of economic health. For instances, GDP does not take into account such factors as the effect of environmental damage caused by consumerism and depletion of scarce resources.
GDP also does not give credit to work performed by volunteers who add to the overall “well-being,” of a nation. Also, GDP greatly underestimates the value of goods and services provided by public entities such as the military, and or civil servants. Most of the work performed by these establishments are never sold as a “good or service,” rather only the wages earned by the employees get factored into the GDP. However, the benefits provided by public works or a secure nation contribute greatly to the overall ability of private business to operate at a profit and thus contribute to the GDP. For example, the truck that carries products to the market travels over a highway that was built with public money. Those products contribute to the current GDP; without the roads, those goods could not get to the marketplace. The market needs goods to be delivered to promote economic growth. However, the all important road is not counted in the current GDP. The investment of that public road was counted a long time ago and does not go toward the current figures.
An article filed by The Proletariat’s News (2009), reports a major flaw in the use of GDP they state that:
The major concern with using GDP as an indicator of economic health is that it considers mostly consumer spending and consumption, not the production of goods and services. Indeed, consumer spending is generally held to account for approximately 70% of GDP. However, since the production of goods, and not the consumption of goods, is what constitute real wealth, an increase in GDP signifies mostly an increase in spending and consumption, not an increase in real economic prosperity. (page 1, Para 6)
We can clearly see from the examples given that the use of the GDP is not the most viable indicator of a nation’s economic health.
What are some government’s fiscal policy options for ending a recession in the economy?
When there is a recessionary trend in the U.S. economy, “a recession is defined as two consecutive quarters of negative growth.” One of the first things that politicians do is increase government spending. By doing this the hope to enact the “multiplier” effect and create more money in the economy.
According to an article in the web journal, It’s Time to Make Money (2009):
The actual policy that the government employs to end a recession is known as: Expansionary fiscal policy. Generally speaking expansionary fiscal policy is an increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing demand and expanding real output. The goal of expansionary fiscal policy is to close a recessionary gap, stimulate the economy, and decrease the unemployment rate. A good example of how expansionary fiscal policy works is through military spending. During periods of war, government spending increases significantly, this causes a decrease in unemployment and a rise in the GDP. (Para 4)
Expansionary fiscal policy is not always so “cut and dried,” When the government spends mass amounts of money, they also incur massive amounts of debt. If these deficits go “un-checked,” they will hold future taxpayers with the burden of the interest on the borrowed money; furthermore, huge deficits will also lower the value of the dollar against other currencies and may even induce “run-away” inflation. Unfortunately, the government cannot control individual consumption choices, thus they do not have absolute control of the behavior of consumers. If households decide they would rather save more money rather than spend it on consumer goods; expansionary fiscal policy may have some “hiccups.”
Suppose you are a member of the Board of Governors of the Federal Reserve System at a time when the economy is experiencing a sharp and prolonged inflationary trend. What monetary policy options would you recommend and why?
If I were a member of the board of Governors during a period of prolonged inflation I would analyze and refresh myself with the prevailing conditions which caused the inflationary trend. Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each dollar a household earns buys fewer goods and services. A chief measure of price inflation is the inflation rate, which is the percentage change in a price index over time.
Knowing that inflation can have negative effects on the economy. I would recommend that we take immediate and decisive action to control the rate in inflation. The most effective way to do this is to decrease the amount of money supply. The first step would be to increase the discount interest rate that the Federal Reserve charges banks for overnight lending. This will discourage commercial banks from making loans to business and individuals, thus cutting the supply of money available to them. The importance of controlling excessive growth of the money supply cannot be overstated. It is widely understood that a sustained period of inflation is caused when money supply increases faster than the growth in productivity in the economy.
Although not within the purview of the Board of Governors, I would support a policy which made available more natural resources such as fuel and oil. Hoarding of scarce resources and supply of basic materials can create a false sense of “under-supply,” thus causing the supply curve to shift to the left. If there is a decrease in basic materials the rate of inflation will likely move upward and consumers will be left with less disposable income to purchase goods and services. However, the number one method to ease a prolonged inflationary trend is to curtail the money supply.
Fiscal policy, increasing government expense to end recession. (May 8, 2009). It’s Time to
Make Money. Retrieved October 10, 2009 from http://www.beginnermoneyinvesting.com increasing_gove.htm
Why GDP tells us nothing about economic progress. (January 20, 2009) The Proletariat
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Wesbury, B. S., & Stein, R. (2009) The recession is over. Forbes.com. Retrieved Aug, 31 2009,
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