Question

The coronavirus crisis brought the U.S. economy to a halt, and although economic activity has partially resumed, many anticipate a contraction in gross domestic product for 2020 (particularly between April and June). Refer to section 10-3 (The Components of GDP) from our textbook, and explain which of those components you believe is contributing the most to the downturn in economic activity? Is there more than one component that has been particularly hit? Explain your position using proper economic theory as a good foundation for your response, but making sure your own opinion and evaluative remarks stand out (i.e.: your opinion and remarks need to make economic sense!)

Answer 1

Components of GDP constitute Private Consumption, Government spending, Investments and Net exports.

Private consumption is the main driver of the U.S economy consituting more than 70% of total GDP share. This is contributing most to the downturn as consumers are saving and not spending more than necessary, because they are unsure of the future going ahead. Plus the unemployment rate has been high, further reducing the ability to spend.

Yes, there is more than one component, mainly investments by firms and exports as firms have started to decline the share of investments because of the uncertainty around sales picking up, as the current capacity could also not be utilised because of the downturn, which reduces the chances of enhancing capacity utilisation in the long run.

Global trade activity has come to a standstill, affecting the exports as every other country is suffering from this pandemic, which reduces the chances of GDP being driven because of other country's growth through exports. Thus all other components are also drastically hit, except government expenditure as it is spending in line to revive the economy through cheap credit acess and investments when there are private investments lacking in the economy. Providing healthcare and social benefits so that the economy doesn't contract as severely as expected and revival is easy.