Measuring Economic Health

Measuring Economic Growth

One of the most important measurements in any country's economy is the Gross Domestic Product or GDP. GDP is the measurement of a nation's market value of all final goods and services produced in that country during a period of time, usually one year. The Gross Domestic Product measures only the value of final goods and services, or goods and services that are purchased by their final user, therefore the unit may not be claimed in production elsewhere. Intermediate goods or services are not included in the GDP as there are used to produce another product, which is calculated into the GDP. GDP is broken up into four major categories: investment, consumption, government purchases and net exports. GDP can also be measure by an economy's total income which is the sum of the economy's profits, rent, wages and interest. GDP can also be measured from an economy's total household income. The theory states that household incomes are spent in the economy which is borrowed by firms and the government.

Government Effects on GDP

The government affects GDP through monetary and fiscal policies. The Federal Reserve controls monetary policy by managing the money supply and interest rates. By managing the money supply and interest rates the Federal Reserve controls the flow of money between lenders and borrowers. Fiscal Policies are changes in federal tax rates and government purchases made to achieve policy objectives. Congress and the President shift the GDP through tax cuts and increasing purchases, which in turn causes the GDP to rise. By doing the opposite and decreasing purchases and increasing taxes, the GDP decreases. An increase to household income taxes reduces the amount of available income to spend, whereas increasing business taxes reduces the firm's profitability of investment spending.

Conclusion

In conclusion, GDP is essential in measuring an economy's total production for the year. GDP is affected by the government and the tax rates they establish for households, income tax, or business taxes. GDP rises and decreases depending on fiscal policies and household incomes. The less people have to spend the less the demand will be for goods and services