Question

examine the trend of GDP growth over the past few years. What stage of the business cycle is the U.S. economy currently in given the trend of GDP growth? What components of GDP tend to decline significantly during recessions (particularly during the 2008 recession), and what GDP components rise during expansion? In other words, what aspects of GDP are mostly affected when the economy slows down? and why?

Answer 1

GDP growth rate is the rate which shows the gross domestic product rates prevailing in a country during a particular time period. The current GDP growth rate of UNITED STATES is around 3.2% in the first quarter of 2019.

Even in the past, the GDP has shown spectacular results in US. United States has the largest GDP growth single handedly over the globe. The GDP growth rate was 2.2% in the last quarter of 2018.

The trade has been increasing day by day. This definitely causes the growth rate to increase by a considerate amount. The GDP rates were pretty good till 2008 when the financial crises occurred. GDP rates fell to -0.1% in 2008 from 1.9% in 2007 and 2.9% in 2006. This had a bad impact till 2009. But Since then, the growth has been immense and growing and fluctuating to a little extent.

Given the trends, the US economy is in the expansion stage of business cycle. It has been like that from around 8-9 years now.

Following Components of GDP tends to fall during recession-

1. Personal consumption expenditure- At the time of recession, there is a very limited money supply available in the economy. People have less money and that affects their personal consumption expenditure.

2. Exports- The same reason lies for the exports also. Exports are reduced at such a time because the economy couldn’t afford to produce for foreign markets.

Following Components of GDP tends to grow during expansion-

1. Personal consumption expenditure- Expansion is totally the opposite of recession. Personal consumption expenditure tends to rise when people have more money. This happens, especially when an economy faces expansion immediately after the recession.

2. Government expenditure- Government starts to expand their expenses for the development of economy during the expansion phase. If the economy is facing a situation when there is a phase of expansion immediately after the recession, then the government will have their expenditures increased on the recovery too.