Goods, Economic Booms and Future Path of the US

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What is the difference between a final good and an intermediate good? Give one example of each. How are they treated in GDP calculations?

Intermediate goods are goods that are used for production purposes. Fuels and raw materials are examples of intermediate goods. Intermediate goods are non-durable and are meant to be used within a year. Conversely, finished goods are those goods that are used for investments and final consumptions. Cars, vegetables, and fruits are some examples of finished goods. Some goods can be categorized as either intermediate or finished goods depending on their use.

For instance, a sugar that is used to make biscuits is regarded as an intermediate good, but the sugar that is directly used by consumers is regarded as a finished good. Intermediate goods are not included when calculating the Gross Domestic Product because their inclusion can render to double addition. It is only the value of finished goods that are used to calculate GDP (Upadhyaya, 2012).

Give three reasons why real GDP is not an adequate measure of a nation’s well being. Despite these limitations, do you think real GDP is a useful statistic? Explain your answer

Gross Domestic Product is the measure that is used to determine the economic well-being of a country. GDP is calculated using three methods: the income, expenditure, and product method. GDP is calculated using the income method by summing the total income that producers receive. GDP is calculated through the expenditure method by adding the total expenditure of consumers and buyers. GDP is calculated by the production method by calculating the total value of goods and services produced in a country. GDP per capita is derived from the GDP and is taken to indicate the standard of living of the people.

The GDP per capita that is derived from GDP is not a reliable value because of the weaknesses that are associated when calculating GDP. For example, by using the GDP to calculate the GDP per capita, the GDP derived does not factor in the economic disparity of the nation residents. Similarly, the GDP does not take into account the underground activities that residents use for saving tax as well as considering the economic aspects of voluntary productions while calculating GDP.

Also, the GDP cannot be used to give the well being of a nation because it does not consider the quality of goods produced, but only the quantity produced. GDP is a good attempt by the economist to represent the economic well being of a country.

Nonetheless, the economist should consider addressing the aforementioned weaknesses present in GDP to make it more accurate and reliable. For example, the economist should consider factoring in voluntary productions when calculating the GDP. Therefore economists should try to come up with a more accurate method that they can use to indicate a country’s economic status. Similarly, the GDP calculated should clearly show how the welfare as well as the standard of living of people changes as the GDP changes (Thadani, 2012).

The federal government uses fiscal policy to regulate government spending. The government increases its spending during the economic downturn and decreases it when the economy is booming. Government spending can be classified as a transfer of payment, discretionary as well as current government spending. Transfer of payment is the spending that the government makes to the welfare and social security systems such as a pension, child benefits as well as funds for the unemployed and aged.

Transfer of payments is the payments that the government makes to assist the low households to be in a position to afford minimum standards of living. Discretionary is a part of the U.S. Federal budget. The value of discretionary spending is determined by the president and Congress. It entails everything that is not included in the mandatory budget. The mandatory budget comprises two-third of the Federal budget and consists of mandatory programs that the law requires to offer specific benefits such as Medicare and social security. Discretionary spending entails government spending on services such as education, health, and security. In the 2010-11 financial year, the discretionary spending was $ 1.306 trillion that accounted for 38% of the total spending.

The largest allocations were disbursed to health and human services which comprised of $ 84.4 billion as well as education that consisted of $ 64.3 billion. The existing budget deficit mainly resulted from increased military spending but the stimulus package. The increase in the transfer of payment recently is as a result of the rise in the payments of social security systems such as Medicare and funds to support the large number of Americans who are unemployed.

How many recessions have occurred? Can you identify particular economic or other events that coincided with those recessions?

In the last 50 years, the United States of America has experienced approximately 6 economic recessions that were triggered by various events. For example, the recession that was experienced in 1973-1975 and lasted for three years was caused by a quadrupling of oil prices and was worsened by high government spending because of the Vietnam War. In 1980 another recession was caused by the energy crisis because of a problem in the production of oil in Iran.

The recent economic recession in the United States of America that occurred in 2008 and lasted for 2 years was caused by the mortgage crisis. Falling house-related assets resulted in a global financial crisis that caused the collapse of many large United States Financial institutions (McAfee & Lewis, 2009).

How many “booms” have occurred? Can you identify particular economic or other events that coincided with those recessions?

After the recession of 2000, the United States Federal government increased government expenditure to stimulate economic activity by increasing the aggregate demand, supply, and employment opportunities. Also, the government reduced taxation to encourage people to spend. These interventions stimulated economic activity in the United States. Many Americans opted to invest in real estate and approached financial institutions to finance them to buy houses.

Because of the high demand for houses and the strong economic status of many Americans as a result of the booming economy, the prices of houses escalated from 2001 onwards, and by 2006 they had reached the peak value (Fletcher, 2005). In mid-2006, house prices started decreasing and interest rates increased which resulted in the economic downturn that started in December 2007 which marked the end of the economic boom (Dean, 2005).

Given this analysis, make a prediction about the path of the U.S. economy over the next five years. Use historical evidence to support the predictions that you make

The United States of America’s economy is moving from an economic recession of 2008. The economy is moving from a deficit that resulted when the Federal government used the reserve to provided a stimulus package to spur economic activities in the country (Foldvary, 2007).). The economy of the United States of America is not likely to experience any recession in the next five years because the Federal government is closely monitoring the performance of the economy to ensure that there is no inflation or recession shortly (Amedeo, 2012).

Reference List

Amedeo, K. (2012). The US Economy. Web.

Dean, B. (2005). The Housing Bubble. Prentice Hall, New York.

Fletcher, J. (2005). House Prices Pumped Up: Rising Rates and Mortgages. New York: Collin.

Foldvary, E. (2007). The Depression of 2008. Berkeley: The Gutenberg Press.

McAfee R.P. & Lewis, T. (2009). The US Economy: Introduction to Economic Analysis. New York: Prentice HALL.

Thadani, R. (2012). Gross Domestic Product. Web.

Upadhyaya, K. (2012). What is the Difference Between Intermediary and Final goods? Web.

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