Question

Describe the measure of Gross Domestic Product (GDP). Discuss the use of GDP to evaluate the business cycle. What factors will affect the business cycle? Discuss in Detail

Answer 1

Gross domestic product is a measure that tells the value of final products & services produced in a particular geographical area within the given time period. GDP reflects the economic activity and it is an indicator of the different stages of the business cycle, the economy is going through.
GDP level increases when the economy is expansion stage of the business cycle and GDP level decreases with the recessionary stage of the business cycle. It means that GDP is positively correlated with the business cycle of the economy. An increasing growth rate or the decreasing growth rate of the GDP tells the status of the business cycle. On this basis, the government and the central bank ( Federal Reserve in the USA) take corrective actions and put the economy back on track by affecting the different stages of the business cycle. Hence, with the evaluation of GDP of different periods, business cycle stages can be assessed.
There are different factor that affects the business cycle. The first factor is the unemployment level. If the level of the unemployment is at the natural level. Then, the economy is going through the expansion phase and the aggregate demand is very high in the economy. The second factor is the fiscal policy. Fiscal policy, such as increase in spending and decrease in the taxes, will cause the increase in the aggregate demand and economy will move out of recession or recover and enter into the phase of expansion. The third factor is the inflation rate. A higher inflation comes from increase in the price of the factors of the production. It will decrease the production & slow down the economy. Accordingly the business cycle phase changes. The fourth factor is the monetary policy and its manipulation of the money supply and interest rates. It will encourage or discourage the spending and business cycle will be affected. Besides, the level of disposable income, tariff applied on products, also affect the business cycle.