Factors that Define a Healthy Economy

1461 words (6 pages) Business Assignment

10th Jun 2020 Business Assignment Reference this

Tags: Business AssignmentsEconomicsGDP

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One thing economists, private investors, journalists, and business owners all have in common is their recognition of a constantly changing economic state of health. The economic state of health can be put into terms of advances or declines in prosperity. These terms of classifying economic improvement or decay are most clear when they are quantified, and this process of turning these terms into statistics is an important determinant of the state of the economy. Advances or declines in prosperity can be equated to an increased monetary value of goods, or a running record of commodity prices, both of which can be used to alter monetary policy, the financial foundation of an economy.  The Gross Domestic Product (GDP) and Consumer Price Index (CPI) are two of the most important economic indicators of the price of living for consumers and producers.

The first economic indicator that measures the state of wealth for a nation is the GDP. The GDP takes into account all the valued goods produced and run through by a country for a particular length of time. This value of goods is reached after considering consumer spending, spending by businesses and government, housing investment, and net exports. (Money, 2014) The Department of Commerce U.S. Bureau of Economic Analysis (BEA) is responsible for recording GDP data for the U.S. It is calculated through this formula: GDP = Consumption (food, clothing) + Government Expenditures (education, transportation) + Investment (homes) + Exports – Imports (net exports). (Investing answers, n.d.) For the purpose of this paper real GDP and not nominal GDP will be used. Calculating GDP in the U.S. is important because it can predict a recession if the value of goods decrease for an extended period of time, or inflation, an overall increase in the price level of goods and services. (Investing answers, n.d.) According to the BEA, the chart below depicts a 2% increase of GDP in the 2nd quarter of 2019, which runs from April to June. (2019)  Amadeo writes an ideal GDP growth per quarter is anywhere between 2-4% so this growth is ideal (2019). This healthy growth may encourage investors to make important financial decisions like investing in the stock market. On an international scale, a high GDP can indicate when a country is growing, and currently the top 3 countries are the U.S., China, and Japan. Taking a closer look into China will give us a broader scope into how countries calculate their wealth, and how much wealth that may be. China uses the National Bureau of Statistics of China (NBS) formally used to indicate western standards of GDP in 1993. (Shobhit, 2018) The GDP is based off the following sectors of agriculture, forestry, husbandry, and fishing; mining and quarrying, manufacturing, electricity, gas, and water; construction; transport, communication, wholesale, retail trade, and catering; banking and insurance; and real estate. The economy experienced a growth of 1.6% in the 2nd quarter of the fiscal year of 2019, compared to a growth of 1.4% in the first quarter, as seen in the chart below. (Trading economics, n.d.) According to the FAS, the World Bank describes this growth from a country other than the U.S. as “the fastest sustained expansion by a major economy in history.” This means China is a global economic force that has the power to become the U.S. most crucial trading partner in commercial goods. Overall, the GDP can be used as an economic profile to quantify the growth of a country’s economy.

The next economic variable that can be used as a sample account of the state of an economy is the CPI. The CPI hones in on 200 of the most essential and used goods in a market, and samples the complete prices of these goods over a specific length of time. The method of tracking any changes in the price of commodities is used to reach conclusions about the rate of inflation, if any. This is important for investors; if the inflation rate rises too high the real value of goods will decline as the original and raised price of a commodity are dependant on one another.  The U.S. Department of Labor’s Bureau of Labor Statistics is responsible for releasing a monthly report on these documented prices paid by consumers for goods, and their respective standard of living. (AAII, n.d.) CPI is calculated by the formula CPI = Cost of Market Basket in Base Year/ Cost of Market Basket in Given Year ×100. (Chen, 2019) The CPI-U is a more general index focusing on aspects such as houstingm mapping out about 87% of the United States’ population.

The CPI-W is a more specific index and focuses more on hourly wages earned by specialized workers and commercial goods such as food and clothing, accounting for 32% percent of the U.S population. (BLS, 2016) In the U.S. The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in August after rising 0.3 percent in July, the U.S. Bureau of Labor Statistics reported today. Over the current fiscal year since January, the all items index increased 1.7 percent. This increase in CPI is considered good for the government and businesses, as both find this a favorable window of time to conduct business agreements, sign contracts, and exploit payments during this inflation tax, since the real wage these entities must pay is technically less than rates of market change when the projected versus actual value of a dollar decreases. Alternatively, the CPI can be used to calculate deflation, which is worse for an economy as consumer demand and wages can decrease, and governments and business entities alike are discouraged from making investments as real monetary profits are lessened. An example of this is in Chad,  where the inflation rate recorded as -2.80 percent in July of 2019., according to the chart from Trading Economics. This deflation is harmful to Chad’s economy, as wages are decreasing and the unemployment rate is projected to rise to 6.10 percent in 2020, from the current rate of 5.78% (Trading Economics in Chad, n.d.) Overall, the GDP and CPI are the most general economic variables used to describe the state of wealth in a country. They quantify the value and price of goods over a period of time. The crucial profiling it creates put into terms advances or declines in prosperity in the economy.

References

  • (AAII, n.d.). Retrieved from https://www.aaii.com/investing-basics/article/the-top-10-economic-indicators-what-to-watch-and-why
  • (Amadeo, 2019 June 27). How Fast Should the Economy Grow? Retrieved from https://www.thebalance.com/what-is-the-ideal-gdp-growth-rate-3306017
  • (BEA, 2019) Gross Domestic Product. Retrieved from https://www.bea.gov/data/gdp/gross-domestic-product
  • (BLS, 2016) News Room – Frequently Asked Questions. (2016, December 29). Retrieved from https://www.bls.gov/newsroom/faqs.htm
  • (Chad Inflation Rate. n.d.) Retrieved from https://tradingeconomics.com/chad/inflation-cpi
  • (Chen, 2019 September 6). Consumer Price Index – CPI Definition. Retrieved from https://www.investopedia.com/terms/c/consumerpriceindex.asp
  • (CPI chart, 2019) Consumer Price Index – August 2019. (2019). News Release. Retrieved from https://www.bls.gov/news.release/pdf/cpi.pdf
  • (Investing answers, n.d.) Gross Domestic Product (GDP). Retrieved from https://investinganswers.com/dictionary/g/gross-domestic-product-gdp
  • (Money, 2014) What are economic indicators and why are they important? Retrieved from http://www.moneysocket.com/economic-policy/what-are-economic-indicators-and-why-are-they-important
  • (Trading economics, n.d.) China GDP Growth Rate. Retrieved from https://tradingeconomics.com/china/gdp-growth
  • (Trading economics in Chad, n.d.). Retrieved from https://tradingeconomics.com/chad/unemployment-rate
  • (Shobhit, 2018). How China’s GDP Is Calculated. Retrieved from https://www.investopedia.com/articles/investing/042215/how-chinas-gdp-calculated.asp

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