Measuring Economic Health Memo Essay

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Measuring Economic Health Memo Essay

Teacher 7 Re: GDP and the Business Cycle – Economic Health Memo GDP and the business cycle are closely tied together. But how much? Is GDP actually good at predicting the future of the market?
GDP is different from GNP. GDP is the domestic product: It is all the things and services that were produced domestically, no matter who owned them, even if it was foreign buyers. GNP, meanwhile, is the amount held by the nation, including the value of its overseas investment. GDP is about the borders of the nation, GNP about the national ownership. But both are used to predict the business cycle.
GDP is designed to help firms manage uncertainty (Roubini). By getting a feeling for how the whole economy is doing, business managers can decide whether or not to pursue risky policies or batten the hatches and wait for things to get better. In general, markets go through boom-bust cycles about every twenty years (Mead, 1992). Measuring Economic Health Memo Essay. Knowing how GDP is doing now helps to predict if were in a boom or a bust, which is important to the business cycle.
However, GDPs value as an economic indicator, and therefore a predictor of the business cycle, is coming under attack now. Roubini, for example, points out that, The best advice I can give you is to realize that there is an unavoidable amount of uncertainty in the economy.Measuring Economic Health Memo Essay.  This is even more true of firms and their financial statements. So what do we do? My choice is to get out of this game altogether, but not everyone has this option—a firm, for example, has to forge ahead the best it can. The first thing you should know is that theres a lot of uncertainty out there, and no amount of commercial forecasting is going to change that. Roubini is saying that GDP isnt ever for certain: It can be determined one year then the same year can be revised a whole percentage point later! Its hard to predict things like wars or terrorist attacks.

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In fact, GDP is very easy to game (Ritholtz, 2010). [Y]ou simply under-report inflation, and GDP appears to be better than it is. Since inflation depends on counting the value of a good last year, and doing so across many goods to make sure that its not just one or two goods that grew in price for other reasons, theres a lot of subjectivity and uncertainty in making it.
GDP is also not as helpful as it could be because it positively counts negative externalities (Ritholtz, 2010). That means that pollution, which is a bad thing, is counted as a good thing because it makes people spend money to go to the doctor or buy new houses to move. If you buy a car, the GDP goes up. Measuring Economic Health Memo Essay. If you cut a tree, the GDP goes up. But if you preserve the tree, the GDP does not grow. Now you have to decide whether you need the tree or the GDP (Sharma, 2010). Measuring Economic Health Memo Essay.
Thus, it is hard to use the GDP to predict the business cycle, and economists are looking for a better indicator of economic health.
Works Cited
Gertner, J. (May 13, 2010). The Rise and Fall of the GDP. New York Times.
Hinton, J. (December 21, 2010). The GDP Dilemma. Suite101. Retrieved from http://www.suite101.com/content/the-gdp-dilemma-a324027 . Accessed 1/7/2011.
Mead, W.R. (1992). World Policy Institute.
Ritholtz, B. (May 15, 2010). The End of GDP? The Big Picture. Retrieved from
http://www.ritholtz.com/blog/2010/05/the-end-of-gdp/ . Accessed 1/7/2011.
Roubini, N. Business Cycle Indicators. Retrieved from http://pages.stern.nyu.edu/~nroubini/bci/bciintroduction.htm . Accessed 1/7/2011.
Sharma, D. (September 28, 2010). The Green Chomsky on the hunger crisis. Online Journal. Special Reports. Retrieved from http://onlinejournal.com/artman/publish/article_6379.shtml . Accessed 1/7/2011.

Gross domestic product can be defined as the monetary value of all finished goods and services that are produced within a country within a specified time period. It is typically evaluated on a yearly basis and comprises all the consumption that has been recorded from the private sector and public sector, the value of investments, a total of imports and exports and government expenditures in a given region. Measuring Economic Health Memo Essay.

It is a monetary measure of the production of the economy that is valued using the prices from a specific selected base year. For example, each year, the economy’s production will be evaluated basing on the prices that existed in 1996 (Auerbach 36).

This helps in ensuring that the prices that are being used for evaluation are held constant, thus the only reason that would lead to an increase in the value of GDP would be a higher production cost from the nations businesses.

Business cycle on the other hand refers to the cyclical fluctuations in real domestic product (Lawrence & Koehnk 53). The business cycle plays is significant during the evaluation of Gross Domestic Product.

The economy’s health at the national, state and local level is usually reflected at the rate of in GDP which is commonly referred to as economic growth which grows over time and varies from time to time from strong growths to weak growths i.e. economic slowdown (Auerbach 68). The stability of fiscal policy depends on the number of government agencies, where by a large number of government agencies favors its stability.

Such agencies and bodies mostly deal with interest, tax rates and government spending with an objective of trying to control and regulate the economy. Regulation of the flow of money is one of the major roles of the Federal Congress reserve; regulation of cash flow plays an important role in minimizing inflation rates (World Bank 76).

The Federal Reserve Act has a provision for monetary policy with a specific interest of effectively promoting facilitating price stability (Lawrence & Koehnk 46). Measuring Economic Health Memo Essay. In order to achieve these goals, it is important for the economy to be financially stable first. The internal Revenue Service is tasked with the responsibility of taxing the citizens.

In scenarios whereby the policies are altered by the government agencies, the production rates can rise or depending on the nature and implementation of the policy. For instance, the current government is trying at all costs to convert to green energy and the probability for it providing and giving subsidies to business is high (Auerbach 57).

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This will help business to employ more people. The effects of fiscal policy decisions on the employment and production economy are very many and affect the behavior of individual businesses and households. Let’s take a look at some of them (World Bank 22).

The impact that the increase in the basic rate of income tax or merely an increase in the rate of contribution towards national insurance is far fetching (Lawrence et al 45). Alternatively, the effect might encourage less work since the high tax imposed acts a distinctive to work (Lawrence & Koehnk 16).

Conclusion

Gross development product usually is the determining factor of a country’s economy. Therefore to have a steady GDP, the government has to ensure that appropriate policies are in place in order to boost the economy. Measuring Economic Health Memo Essay.

Works Cited

Auerbach, Alan.. Fiscal Policy: Lessons from economic research. Massachusetts: Massachusetts Institute of Technology. 1997. Print

Gitman, Lawrence and Michael Joennk. Personal Financial Planning. London: Cengage. 2007.Print.

Uphoff, Norman and Warren llchman. The Political economy of development: theoretical and empirical contributions. California: University of California Press. 1972. Print.

World Bank. World Development indicators 2003. Washington: World Bank Publications. 2003.Print. Measuring Economic Health Memo Essay.