Question

Reflect on and relate to what you have learned so far in the course with respect to your ability to calculate gross domestic product and its impact on the economy’s business cycle, unemployment, and inflation; using gross domestic product formulate recommendations for a government’s role in achieving full employment in an economy.

Answer 1

Gross Domestic Product of a nation refers to the market value of all the final goods and services produced within an economy. The Gross Domestic Product of a nation significantly impacts the business cycle that the economy is currently operating in and also the level of unemployment and inflation in an economy. As the Gross Domestic Product of a nation increases, the economy enters the recovery phase of the business cycle and as it reaches the potential level of GDP, the economy enters into boom phase of the business cycle. As the GDP of the nation declines the economy moves into recession and when it falls below a certain minimum percentage then the economy enters into depression. When the economy is in recovery and boom phase the unemployment rate is decreasing because labor demand increases and inflation rate is increasing as aggregate demand in the economy increases. On the other hand, when the economy is in depression or recession phase of the business cycle, then unemployment rate increases because of fall in labor demand and inflation rate decreases because of fall in aggregate demand.

The Government intervention plays an important role in achieving full employment in an economy. The expansionary fiscal policy or increase in government expenditure and decline in taxes is used by the government to cover the recessionary gap in the economy as it helps in increasing the level of GDP in the economy. On the other hand, contractionary fiscal policy is used by the government by reducing government expenditure and increasing taxes to cover inflationary gap in the economy as it reduces the level of GDP in the economy. Thus, government intervention can help in achieving full employment both in the case of recession as well as in boom.