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How to Measure the Health of the Economy

Table of Contents

Use of gross domestic product in the business cycle
National fiscal policies
Effects of fiscal policies
Spending and taxes
References

Use of gross domestic product in the business cycle

Gross domestic product is used to measure the total income and output which have been produced in a given year in a country. Its obtained by adding all the cash inflow and outflow together so as to come up with the total amount of income and output produced in an economy. The GDP also includes the expenditures made in an economy. On the other hand, business cycles are the ones that indicate a Patten of the economic performance in a country. This comprises the economic contractions, trough, expansion, and peak. The GDP is greatly affected by these cycles. GDP is used to measure economic performance and be able to identify if the economy is falling under any of the business cycles. Calculation of the GDP will give us the economic level of the country and it also categorizes it to one of the business cycles over a given period of time.

National fiscal policies

The government bodies have a responsibility to play in coming up with the appropriate fiscal policies. Fiscal policies include government spending. This covers the raising of such money through the use of taxes and borrowings. The government treasury is the one that plays a major role in the raising of such amount of money to be used by the government. The tax rate is normally arrived at and presented for use annually when the budget for a particular economy is being tabled. The amount to be used by the government for spending is raised by either borrowings or increasing the tax rate and vice versa.

Effects of fiscal policies

The economy is influenced by the fiscal policies which are in place. The production levels and the employment rate fluctuate depending on the fiscal policies in place. If the government increases the tax rate, the production level will be reduced as most producers will shy away from increasing their production. The employers also will be reducing the rate of hiring more employees hence there is a decline in employment as well. This is because the employer will not be able to expand its operations as the high taxes charged will mean that the more the employer produces the higher the tax. This also has a negative effect on the economy. When the rate is low, there will be an increase in the employment of people hence the contribution to the economy is increased. This will also include the government which will increase the infrastructure by hiring more people to work on them. This will contribute a lot to the economy (Mankiw, 2007).

Spending and taxes

The fluctuations in government spending will affect production and employment. When there is an increase in government spending, there is an increase in the amount of money in circulation. This means that the people also will be having more money in their pockets to spend. This will result in a rise in manufacture and the rate of employment. On the other hand, taxes when increased will affects production negatively and employment. This is because the money will be moving from the hardworking group of people to the government which will only spend them. This is not economic and the producers will decrease their production rates and employment so as to avoid the high tax rates. The increase in spending will reduce the economic growth of the other sectors which could have used it as additional resources.

References

Mankiw, N.G. (2007). Principles of Economics. 4th ed. South-Western: Thomson

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