The Gross Domestic Product (GDP) is among the basic indicators necessary for gauging the sustainability of the economy of any given country. It represents the gross value of goods and services that are produced in an economy over a predetermined period. Generally, the gross domestic product is expressed as a comparison to a previous year or quarter. For instance, if the yearly gross domestic product is up 4%, this indicates that the economy has grown equal percentage over the previous year.
The gross domestic product of any economy is measured in two ways. There is the income approach, which is denoted by GDP (I). This method is calculated by adding up the total compensation given to employees, the gross profits of non incorporated and incorporated firms, and the taxes less any subsidies. The other approach is the expenditure approach, which is the most commonly used approach. It is calculated by adding total consumption, government spending , net exports and investment within an economy (Thomas & Evans, 2010).
The federal government is conscious of boosting the economic growth in order to avoid recession. The history of government spending stems from the efforts of President Franklin to curb the problem of unemployment and business and national financial failures. In 1930s, several banks failed, which reduced consumer confidence.
As several Federal departments stagger into an area of low funds, both the leaders of the Congress spend little time in searching for an option to stabilize the budget, but they spend more time in deciding on how to make advantages of their campaign trails. An attempt was made by voting in favor of HConRes67 that required a seven-year balance on the federal budget by the year 2002. This was expected to be implemented by incorporating, with an approximated seven-year tax reduction of 245 billion. With this projection, the U.S. government would have balanced its budget for the first time since 1969. The government spending of the U.S. government has steadily increased from 7% to 40% of the GDP from 1902 to the present. It started in the 20th century at 6.9%. It got a big kick in the First World War, ending at 12% of the GDP in 1920 (Mankiw and Taylor, 2006).
Shortly before the Second World War, the government spending was at 20% of the GDP. In 1945, the government spending was around 53%. However, after WWII, this percentage dropped to 21%, it steadily rose to a peak of 36% of the GDP in the bottom of the recession of 1980 to 1982. Along the mid 30s, the government spending chugged until the mortgage meltdown 2008. The government spending surged to the wartime levels reaching 45% of the GDP after the bank and auto bailouts. The current government spending rests at 40% of the GDP. However, at this percentage, the federal budget has not yet balanced.
Net exports (NX) are the equivalent of the amount of exports in an economy (X) less the number of imports in the same economy (IM). Here, exports include all the goods and services locally produced and transported to foreign economies where they are consumed while imports constitute foreign produced goods and services, but are purchased domestically. It is calculated as NX=X –IM. When exchange rates are high, the exports gain a lot of revenue to the exporting economy as opposed to low exchange rates (Aurangzeb, 2012). For example, Kenya, an East African economy’s exchange rate has been steadily rising and currently rests at $1 goes for KSH 87.73. This is important to the us government since its exports to this country such as clothing, textile, technology and expertise personnel earn much wages as compared to the European continent.
In conclusion, the federal government has constantly avoided recession by boosting the economic growth. The government spending has been a major component of the GDP and the federal government has always maintained favorable quantities in order to balance its budget, though this has never been realized. Exports and imports also have a greater impact on the GDP; however, these components are affected by the prevailing exchange rates.
References
Aurangzeb. (2012). Impact of GDP and Exchange Rate on the Exports of a Country: A Survey for United States. Business & Management Review, 2(14), 12-40.
Thomas, J., & Evans, J. (2010). There's more to life than GDP but how can we measure it?. Economic & Labour Market Review, 4(9), 29-36.
Mankiw G. N. and Taylor P. M. (2006). Microeconomics. Stamford, Connecticut: Cengage Learning EMEA
