Introduction
GDP is the most important indicator of the success of the economy. Despite the rather high coverage of factors, GDP does not take into account the gray market, foreign companies and the welfare of citizens. This indicator is directly related to the business cycle, rising during peaks and falling during recessions. To take into account the current economic situation in a particular country, it is necessary to consider these factors in order to talk about economic growth.
GDP’s Importance
Understanding GDP is important because this factor can give a general picture of the state of the economy in a country. The GDP indicator makes it possible to judge whether the economy is contracting or expanding; it demonstrates threats in the form of recessions and inflation. In addition, GDP helps analyze the impact of economic shocks, price hikes, and taxation plans for planning the economy as a whole (Amacher & Pate, 2019). Since the GDP calculation is a simple and powerful tool, it allows policymakers to take quick action to support economic development.
The Shortcomings of GDP in Measuring a Country’s Economic Health
GDP has limitations and shortcomings that may contribute to irrelevant measurements of the health of an economy. Firstly, GDP is based only on official data. Therefore, it does not take into account the shadow economy, which can have a serious impact in some countries. GDP is limited in terms of geographic coverage: the indicator does consider the profits received by foreign companies in the country, which can be a serious omission (Grishin et al., 2019). The GDP indicator cannot take into account the well-being of citizens. For example, GDP can grow while the well-being of citizens at the same time fall, in terms of increasing inequality or environmental pollution.
Using GDP to Evaluate the Business Cycle
During a downturn, GDP can be a relevant measure of economic performance. If economic growth slows, this may mean that companies are not responding enough to consumer demand, which may result in rising unemployment (Zemtsov, 2020). GDP in this case will also decline while remaining positive. If there is a sharp dip, the economy is in or close to recession. During such a period, GDP also coincides with business cycles: it will fall and may become negative. After business cycles slow down, economic expansion usually follows. In this case, GDP is also correlated and begins to grow slowly. During an economic peak, GDP may behave contrary to the current state of business cycles. During a peak, inflationary pressures can have a negative impact on GDP.
Factors, Affecting the Business Cycle
There are several factors that affect the business cycle. Key factors include employment, inflation, productivity, taxes, and interest rates. High unemployment signals that production is not using its capacity. Low unemployment, on the contrary, can lead to productivity growth and an improvement in the economic situation. Employment is one of the important variables affecting the business cycle that must be taken into account when assessing the situation.
Inflation is also a significant influencing factor that directly affects purchasing power. Periods of high inflation have a negative impact on business cycles because they do not have enough buyers at high commodity prices. Labor productivity is directly measured by GDP, the number of goods and services produced, and the efficiency of workers. Low inflation can be correlated with high productivity; low prices make it more profitable for producers to make more goods and services. The general environment in the country also highly improves productivity. This factor is positively influenced by the level of education, the quality and accessibility of medicine, and the efficiency of resource allocation. Productivity is boosted by advances in technology that enable businesses to produce more goods faster. The business cycle is affected by government policies, which are often expressed in tax increases and changes in interest rates (Cerra et al., 2020). Fiscal policy influences other business cycle variables: employment, inflation, and productivity.
Current U.S. Economy: GDP, Business Cycle, and Economic Growth
To assess the current state of the US economy, it is necessary to take into account GDP indicators and the current stage of the business cycle. Currently, the GDP indicator is 5.67, which is not a maximum but represents a significant increase compared to 2020, the time of the coronavirus pandemic (Koop et al., 2021). The indicator is growing and recovering not only in comparison with the previous period but also with other countries. Growing GDP indicates a stable phase of economic growth. The current stage of the business cycle can be characterized as stable growth. Apart from 2020, when the economy was clearly in recession, the US economy shows stability. Thus, the current phase of economic development demonstrates a high GDP and a favorable environment for development.
Conclusion
Although GDP is limited by official data and foreign companies are not taken into account, this factor is very indicative in assessing the efficiency of the economy. The business cycle is a simple process of evaluating an economy in stages, clearly identifying growth or decline. Both factors are affected by inflation, employment, productivity, and government fiscal policy. GDP and business cycle indicators also correspond to the assessment of the impact of socio-political events on the economy, such as the COVID-19 pandemic.
References
Amacher, R., & Pate, J. (2019). Principles of macroeconomics (2nd ed.). Bridgepoint Education.
Cerra, M. V., Fatás, A., & Saxena, M. S. C. (2020). Hysteresis and Business Cycles. International Monetary Fund.
Grishin, V. I., Ustyuzhanina, E. V., & Komarova, I. P. (2019). Main problems with calculating GDP as an indicator of economic health of the country. International Journal of Civil Engineering and Technology, 10(2), 1696-1703. Web.
Koop, G., McIntyre, S., Mitchell, J., & Poon, A. (2021). Nowcasting ‘True’ Monthly US GDP During the Pandemic. National Institute Economic Review, 256, 44-70. Web.
Zemtsov, S. (2020). New technologies, potential unemployment and ‘nescience economy’ during and after the 2020 economic crisis. Regional Science Policy & Practice, 12(4), 723-743. Web.