Introduction

The economy may be compared to the human body, whereby it can either be healthy or unhealthy. Healthy and unhealthy human bodies have the same volume of blood but different circulation. Therefore, the health of a human body can be determined by how good its blood circulation is at any given moment. Similarly, a nation’s economy may have a lot of money but with poor circulation. The rate at which money moves from one business or person to another is significant for any country. A healthy economy is one whose distribution of money is good enough to cater for the needs of the citizens.

The economic health can be measured using various techniques, which will give a specific type of results. One of the measuring instruments is the Gross Domestic Product (GDP). It is the monetary worth of the final services and products within a given country(Diacon&Maha, 2015). Some of the areas included in the GDP include the public and private consumption, investments, the costs of constructions, and some private inventories. Another measure of economic health is the business cycle, which refers to the rise and fall of the economic growth over time. The third factor is economic growth, and this may be described as the increase in the economy’s capacity in service and goods production. Therefore, the three factors mentioned are important in the analysis of how well a country’s economy is growing. This paper will discuss the importance of these factors in measuring the health of the economy and use them to determine the state of the United States’ economy.

Importance of GDP

One of the primary significance of GDP is the fact that it helps in the determination of the present economic state (Thiry, 2016). It is used by most if not all, countries to determine their current state. For example, the recession is usually defined using the GDP number. A fall in GDP number for two consecutive quarters is what is called a recession. A slowdown in the economy may also be determined by checking whether there is a constant decrease in the growth rate of the GDP number. Therefore, the GDP number may be used to determine whether the country is heading in the right direction economically or not.

The Gross Domestic Product number is also essential in determining how effective the government policies are, and whether they are worth the investments. Government policy may have two or no effect on the GDP number. The introduction of the new systems may lead to an increase in GDP. It is an indication that the new rules are working, and that the government should continue implementing them. If the GDP, however, drops, then it shows that the policies are not as effective, and the government should make some changes or scrap them off to allow the economy to grow.

Also, most analysts refer to the GDP number of a country to compare its economy to another. Economies of several nations can be ranked using this analytical instrument either from the largest to smallest or the other way round(Fritsch, 2017). The relative size of a country’s economy can also be concluded. For instance, since the GDP of the United States is 14 times that of India, it is safe today that the economy of the United States is 14 times larger than India’s. It is, therefore, quite easy to know how much a country needs to add to ensure constant growth.

Shortcomings of GDP

The main disadvantage of using GDP as a measure of a countries economy is the fact that incorporates the government expenditure alongside other transactions within the market. It detracts the usefulness of the GDP an instrument for measuring the economic growth. This detraction is because the government’s spending is not necessarily of much importance to social welfare. There is no perfect way of measuring the value of the government services as a factor of other goods because of the coerced transaction. The price of these government services is not dependent on the market.

Another disadvantage of using GDP to measure the government’s economy is the existence of the black market(Diacon&Maha, 2015). The black market or the underground economy is the transaction that is done and not recorded formally. These transactions are customarily used while trading in illegal products and services like drugs and prostitution. The scale of this unrecorded economy varies between countries. It makes up the most significant part of the economy of some countries, while others have done much to subsidize it. Therefore, GDP does not include these underground transactions in the analysis, making it difficult to come up with an accurate figure.

An increase in the quality of products due to advancements in technology is also not included in the GDP (Thiry, 2016). Technology, especially the smartphones, has made it easier for one to access a variety of manufacturers and retailers of the same product. As such, it is possible for one to obtain a quality product without having to deal with inflated prices. An example of this is the smartphones. Today, there are many smartphone manufacturers, and due to the competition, some companies produce high-quality phones at much lower prices. The GDP does not incorporate these advancements in the calculations.

Evaluation of Business Cycle

            The business cycle is the phases of economic growth. These phases include the troughs, economic contractions, and the expansions. GDP, on the other hand, is the total worth of services and goods in the market. The two are related in the sense that as the phases occur during the economic growth, the Gross Domestic Product is also affected (Jones &Klenow, 2016). Therefore, the changes in GDP may be used as the resulting factors of the phases in economic growth. There are four parts in a business cycle, and they include; economic trough, peak, contraction, and expansion.

GDP is a measure of the economic output’s value. Therefore, a decrease in GDP means that there is a decrease in the number of economic products. It is as a result of the contraction phase of the business cycle. During this phase, there is a slowdown in the output, which is usually a result of reduced demand and a rise in the cost of the raw materials. As such, companies do not offer as many products and services as before, which might lead to loss of jobs and the economic output drops.

During the trough phase, the GDP is negative. The negative sign signals that the economy is either already in recession or heading towards that direction (Fritsch, 2017). The next phase features the economic recovery, and there is a constant increase in GDP. If the GDP continuously increases for at least two quarters, then it shows that the economy is in the expansion phase. The GDP will continue to rise even when the economy has reached its peak. At this point, the direction is bound to change, and sooner or later, it will head towards the contraction phase again.

Factors Affecting the Business Cycle

            Four factors directly affect the business cycle; employment, inflation, productivity, taxes, and interest rates. High unemployment may lead the economy to recession because most resources are underutilized (Diacon&Maha, 2015). On the other hand, low unemployment improves the economy due to high productivity. However, unemployment may not have that much of an effect is the people displaced were replaced with the machines. Inflation weakens the consumer’s purchasing power, and people will tend to spend less even on the basic needs. It negatively impacts the business cycle.

High productivity means a rise in GDP, which an indication that the economy is on a positive ride. Low productivity, on the other hand, ensures that the consumer’s demands are not met adequately, which is not good economically. Changes in the amount of taxes and interest rates charged by the government and other bodies impact the business cycle. Such policy changes affect employment and prices.

The health of the U.S. Economy

            The GDP of the U.S. in the third quarter of 2018 saw a growth of 3.4%, which followed an expansion of about 4.2% (Brynjolfsson et al., 2018). However, the economic growth of the country is still in the same state. There is slow growth in employment, but the consumption is still stable. Despite the low employment rate, the United States’ economy remains quite healthy as seen in the GDP growth. The business cycle is also in its expansion stage, which is a good sign for the Americans. The slow growth in employment could be due to increased use of machines in factories.

Reference

Brynjolfsson, E., Diewert, W. E., Eggers, F., Fox, K. J., &Gannamaneni, A. (2018). The Digital Economy, GDP, and Consumer Welfare: Theory and Evidence. In ESCoE Conference on Economic Measurement, Bank of England (pp. 16-17).

Diacon, P. E., &Maha, L. G. (2015). The Relationship between Income, Consumption and GDP: A Time Series, Cross-Country Analysis. Procedia economics and finance, 23, 1535-1543.

Fritsch, M. (2017). The theory of economic development–An inquiry into profits, capital, credit, interest, and the business cycle. Regional Studies, 51(4), 654-655.

Jones, C. I., &Klenow, P. J. (2016). Beyond GDP? Welfare across countries and time. American Economic Review, 106(9), 2426-57.

Thiry, G. (2015). Beyond GDP: Conceptual grounds of quantification. The case of the Index of Economic Well-Being (IEWB). Social Indicators Research, 121(2), 313-343.

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