Measuring the Economy’s Performance Prepare a 4-6 page analysis by answering the questions below. Be sure to cite your references using APA format. For this assignment, you should use the information...

MEASURING THE ECONOMY’S PERFORMANCE 1
Gross Domestic Product (GDP) is the summation of all the goods and
services produced within the borders of a country during a given period of time
and value of which is expressed in terms of money. It aggregates the country’s
total income and the total expenditure on its output of goods and services. Even
though co
elation between the income and happiness is not certain, it is
generally believed that a country with large amount GDP can better satisfy the
demand of its people. GDP is basically a widely used index to measure the
strength of an economy.
Gross Domestic Product is the market value of all final goods and services
produced within an economy in given period of time
1
. GDP is the most
important flow variable in economics. A Flow variable is one which is measured
per unit of time. GDP as a flow variable means it is measured during a period of
time, a year or quarter. A country is better off when there is an increase in GDP
without a change in general price level. GDP includes not only all goods and
services that are marketable but other non marketable such as defence or
educational services provided by the government. GDP can be viewed in three
different ways i) the production approach sums the addition of value at different
stages of production, ii) the expenditure approach adds up the purchases of
goods and services made by its end users iii) the income approach sums the total
income generated by each factors of production during the production process
(N Gregory Mankiw, 2000). GDP fail to include some productive activities that
clearly add to the level of well being of individuals. One of the important
omissions from GDP is an estimate for the value of home- production like
services rendered by house wives to their family members which are not
marketable. On the other hand GDP takes into account activities that do not add
to the level of development or to the well being of people to the extent that their
market values actually reflect.
Annual growth rate of GDP was negative in the year 2008 and it was -
0.3%. It plummeted further to a negative growth rate of -3.1% in 2009. This was
2.4% and 1.8 respectively for the years 2010 and 2011. In 2008, US economy
faced a major financial crisis that leads the economy into a deep economic
ecession. When the recession aggravated some major financial institution
collapsed in the economy. Second half of 2008 witnessed collapse some large
MEASURING THE ECONOMY’S PERFORMANCE 2
intermediaries which were believed to be ‘too big to fall’. Liquidity dried up in
the financial market, stock market indexes crashed, companies laid of the
employees. This all took a beat on real economic activities that lead to the
negative growth of GDP in the US. Financial crisis well know as sub-prime
crisis and recession thereafter in the US spread to many foreign nations which
pulled the whole world into deep economic crisis. It is reported that Gross
Domestic product is expanded by 3.10 % for the third quarter 2012 (Source:
www.bea.gov/index.htm).
The positive growth in real GDP in the third quarter was primarily due to
increase in private inventory investment, federal government spending, and an
upturn in residential fixed investment. Federal government spending was
supplemented by an increased public expenditure by local government also
helped the economy to recover from the sad state of economic affairs. GDP can
increase in two ways. Either by an increase in general price level otherwise
known as inflation or by an increase in the actual quantity of goods and service
produced. In economics we call the value of goods and services measured at
cu
ent price as nominal GDP. GDP measured at cu
ent price may be
misleading and it cannot actually reflect the change in the well being of a
country. When we measure GDP using cu
ent price and if there is an increase
GDP, it may be due to increase in inflation. In such a situation it would be
misleading to say that the economy’s well being also increased. To avoid such a
misleading interpretation economist use Real GDP, which is the value of goods
and services measured using a base year price which is constant. When prices...