Question

A discussion question is as follow: please provide a response:

thanks for giving a clear picture on GDP figures. I was hoping you will add figures for US GDP in the second quarter of 2020 to ascertain the impact of Covid-19 on the US economy and the world overall. The US real GDP has shrunk 31.4% in the second of 2020 and yet to release the third quarter figures. This is comparable to five years of economic growth wiped out in a single quarter. I will expect the GDP to continue to decline but not too drastic. The US remains the world biggest economy in nominal GDP terms. IMF has advocated for more US government stimulus. According to IMF economist Gita Gopinath, “$2.2 trillion CARES Act approved in March would increase growth in the world's biggest economy by two percentage points next year, over the 3.1 percent GDP rise currently forecast.” (Scott and Touitou, 2020). Republicans have argued that increase in the stimulus increases debt and leads to wastage which has led to current impasse in Congress. Arguments whether to approve $1.8 trillion or 2.2 Trillion with the Democrats. Do you think the assertion by the economist is accurate and what are your thoughts?

Thank you

Answer 1

Introduction:-

The world economy, today is going through one of its toughest phase from an economic view point. The main reason for this is the economic recession which the Corona Virus Pandemic has caused and as establishments remained shut, and people were forced to stay within their homes, the economy shrunk and saw reduced expenditure due to which the economy of the United States has been deeply impacted.

When people spend lesser amount of money in the economy, producers cannot produce goods or services in similar quantities that they used to earlier. This results in unemployment in the country which has clearly been the case in the United States as well. As the economy shrinks in size, more problems such as low growth or even negative growth which came in the United States at -31.4% GDP growth is created.

GDP refers to Gross Domestic Product which is the final value of goods and services produced in a country during a year. The GDP estimate for USA being at minus 31.4% suggests that production in the economy is extremely low as compared to the previous year, and producers would be making significant losses.

Now coming over, to the thoughts over the assertion here by the economist, details are as follows:-

Case Details:-

As economic revival plans in the United States are implemented and businesses are allowed to open up again, the country has provided a 2.2 Trillion Dollar grant to the public with the use of the Cares Act which stands for Corona-Virus Aid, Relief and Economic Security Act.  

This Aid comes as an economic relief package wherein the key benefits of the plan are that it allows for a 1200$ per person credit into ones account, 350 Billion $ Funding to Small Business owners and about 500 Billion $ Assistance to large enterprises.

Due to this extension of credit as well as help to small as well as large enterprises, the aggregate or total demand for goods and services is expected to go up because people will have 1200$ extra in their pockets to spend on goods and services.

As this happens, producers would be able to produce in higher numbers and the GDP which as stated stands for the value of final goods and services produced in a country would also begin rising as due to higher demand, higher quantity of goods is produced.

As this takes place, economic recession would begin to shrink. With the US Economy opening up and economic stimulus package which is granted by the United States government, the country will see growth again as people begin demanding more and the supply is also lifted. This will indeed lead to higher growth levels than the current level and economic progress will take place.

Now, coming over to the apprehensions of the Republicans in the case, we believe that even when the debt of the United States of America will rise due to the expenditure in Corona Virus Pandemic, this can be recovered later and is necessary in order to facilitate current economic development which has been severely dented by the Corona Virus Pandemic. Unless the market receives this stimulus package it would become very difficult to increase demand even if the economy opened up since people were largely unemployed due to low production levels.

Final Conclusion:-

The economist has correctly calculated that the United States economy would grow over a period of time and come out of recession due to the expansion strategy followed by the government and the Cares Act which provides direct money in the hands of common public as well as small and big companies alike.

Thus, we see that as expenditure will increase due to the added cash flow in the country, people will start demanding more and the production of final goods and services in the country will increase. Even if debt in the country is higher for a small amount of time as alleged by the Republicans, this is vital in maintaining an economy wherein people spend money and the government later can pay of the debt easily.

In fact, as advocated by the International Monetary Fund, the government can increase its debt and economic stimulus at this point. This is because as more people will have additional money in their hands, they will go on increasing their demand for goods and services and this will further help in business owners accumulating profits and getting out of this deep recession.

The only way of getting out of the recession is to increase expenditure so that consumers consume more and producers are benefitted from the same.

Please feel free to ask your doubts in the comments section if any.