Economics

It is to my belief that no one can possibly predict the future of the economy. Because of this we are faced with many questions that cannot be easily answered. Will the economy recover drastically or simply continue to increase moderately? Or could the economy in turn go into a recession? "There's been plenty of good news about the U.S. economy... employment is expanding (2.4 million new payroll jobs in the last year); inflation remains low (less than a 2 percent rate in the past quarter); the stock market is higher (up 11 percent on the Dow from its November low), and business investment is impressive (rising at a 14 percent rate in late 2004)." (1) It is my opinion that unless something drastic happens in the world today, positive or negative, the economy will continue to increase at a modest rate. Even though no one quite knows which way our economy is heading, there are many economic concepts designed to help measure positive and negative changes that can show us how well we are or are not doing. These concepts include examples such as gross domestic product (GDP), business cycle, and unemployment rate.

It is only human nature to want economy growth because it will lead to higher incomes and higher living standards. In order to see which direction our economy is heading and measure our economic performance, a system was invented that measures the value of all final goods and services produced within a country during a specific period of time, usually a year. This system it called gross domestic product (GDP). These figures are closely watched by those in the business and financial communities to measure our economy's growth.

GDP is a measure of the economy's output. It is measured by counting all final goods and services once and only once that are produced during a current period, within the country. GDP can be measured by totaling the expenditures on goods and services produced during a specific time frame. This is referred to as the expenditure approach. Conversely, GDP can be reached by adding the income payments to resources suppliers and the other costs of producing those goods and services. Production of goods and services can be costly because it requires resources that cannot be used else where. These expenses generate incomes for resource suppliers. Therefore, this method of calculating GDP is referred to as resource cost-income approach.

When GDP is measured by using the expenditure approach it contains four components: 1. personal consumption, 2. gross private consumption, 3. government consumption and gross investment, and 4. net exports to foreigners. When adding these four components the total is equal to GDP. Personal consumption is the largest component of GDP. It consists mostly of nondurable goods and services such as food, clothing, entertainment, and medical and legal services. These items are consumed in a short period of time. Personal consumption also consists of durable items that last for longer periods of time such as appliance and cars. Gross private consumption is the production or construction of goods that will provide for the economy in future. Business plants and equipment are examples of gross private consumption because they will produce goods and services in the future. Government Consumption and Gross Investments are expenditures on items such as office supplies, law enforcements, and veteran's hospitals. These purchases are valued at the cost to taxpayers rather than their value to those receiving the goods and services. Net exports are total exports minus imports. In recent years, net exports have been negative. This shows that we are buying more goods and services from foreigners than we are selling to them.

When using the Resource Cost-Income Approach to measure to GDP it is equal sum of the following three components: 1. aggregate income (compensation of employees, income of self-employed proprietors, rents, profits, and interest), 2. non-income cost items (indirect business taxes and depreciation), and 3. net income of foreigners. Self-employed proprietors take a risk by owning their own business while also providing their own labor services. Their earnings contribute to two-thirds of GDP. Machines, buildings, land and other physical assets contribute to the production process. Rents, corporate profits, and interest are payments to people who provide either the physical resources or the money required for the purchase of physical assets. Rents are payments to the resource owners in return for allowing others to use their assets during a period of time. Corporate profits are compensations earned by stockholders who have taken the risk of the business responsibility. They provide funds that a firm uses to purchases resources. Interest is a payment to a conglomerate that extends loans to producers. Indirect business taxes are taxes on the sale of a good that increases the cost of the good to the consumer. The wear and tare of machines used to produce goods make the machines less valuable. Even though the machine declines in value it does not involve a payment to the owner. Therefore, an estimate called depreciation is made based on the expect life of the resource. The net income of foreigners is derived from the income of foreigners in the United States minus the income that Americans earn abroad.

GDP was designed in order to develop a better understanding of output overtime. This is important because expansion in the production of goods and services that people value is the source of higher incomes and living standards. However, when comparing GDP across periods of time, the nominal value or money values of GDP may increase as the result of either expansion in the quality of goods produced or higher prices. Because only higher prices will improve our living standards, it is very important to distinguish between the two. When comparing GDP and other income measures across periods of time, price indexes are used to adjust the nominal values for the effects of inflation. Inflation is an increase in the general level prices of goods and services over time. However, the data can be adjusted for the effects of inflation and reflect real wages or real GDP. This data is almost always of interest, when comparing GDP over different points in time.

Price indexes indicate what is happening to the general level of prices. One of the most widely used price indexes is the consumer price index. It was designed to compare the cost of purchasing an item bought by consumer during a specific period with the cost of purchasing the same item during an earlier period.

Even though GDP measures current output and

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