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Measuring business cycles

GDP is very important in measuring business cycles. The most common definition of a recession is two consecutive quarterly declines in the GDP is the total of all goods and services produced within a country (Caplin & Schotter, 2008). This definition may be considered as simplistic by many because it measures national economic performance according to a single, although important, economic statistic. In short, by looking at only one aspect of national economic activity—the GDP—an evaluation is made of the whole economy. Thus GDP is an important measure.

However, it can lead to a wrong conclusion. A more detailed definition of a recession is the one used by the National Bureau of Economic Research (NBER), a nonprofit organization regarded as the official agency for the measurement of business cycles. According to the NBER, a recession is “a period of significant decline in total output, income, employment, and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy” (Feldstein,1991) However, even this definition of recession relies markedly on measurement of GDP.

The roles of government bodies that determine national fiscal policies Government bodies determine the fiscal policy of any nation (Turley & Matthew,

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2000). They are sometimes automatic stabilizers to the economy and sometimes a discretionary fiscal policy is required. Both these are set by the government bodies (usually the Congress or the President). As economic activity fluctuates, fiscal expenditures and taxes respond automatically in ways that stabilize the economy (Caplin & Schotter, 2008).

For example, during an economic slowdown, government spending on unemployment benefits rises automatically as the unemployment rate rises. This increase in spending is automatic in that it does not require explicit actions by Congress or the President. Similarly, tax payments decline automatically when the economy goes into a recession (Feldstein, 1991). In addition to the automatic responses of fiscal policy, governments may make discretionary fiscal changes in the face of an economic downturn.

The stimulus package recently approved by the Congress is a perfect example of this discretionary fiscal policy. The bailout is another perfect example. The effects of fiscal policies on the economy’s production and employment Fiscal policies can have a tremendous impact on production and employment of a country. Expansionary fiscal policy aims to boost demand and output in the economy either directly, through greater government expenditures, or indirectly, through tax reductions that stimulate private consumption and investment spending (Caplin & Schotter, 2008).

Contradictory fiscal policies can have a reverse impact on production and employment. By raising taxes or reducing government expenditure, government can drastically reduce production and employment (Feldstein, 1991). Expectations of future fiscal actions, and not just current expenditures and taxes, also can affect the economy. The distinction between current changes in spending or taxes and expected future changes is important because households and firms consider future economic conditions, as well as current conditions, in making their spending decisions (Caplin & Schotter, 2008).

A tax cut, for example, leaves more disposable income in the hands of households. If the tax cut is viewed as temporary, though, it may have a much smaller effect on household spending than a permanent tax cut would. In contrast, some temporary tax changes can have larger effects on spending than permanent changes (Turley & Matthew, 2000). For example, an investment tax credit that temporarily lowers the cost of investment projects can lead firms to schedule their spending to take advantage of the tax credit.

Government spending can have a similar impact. An increase in government spending results in an increase of jobs thereby increasing production and employment.

Reference list Caplin, A. & Schotter, A. (eds. 2008). The Foundations of Positive and Normative Economics. New York: Oxford University Press. Feldstein M. (1991). The Risk of Economic Crisis (National Bureau of Economic Research Conference Report). University Of Chicago Press Turley M. & Matthew M. (2000). The Study of Economics: Principles, Concepts, and Applications. 6th ed. Dushkin/McGraw-Hill.

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