Why There Is Good Reason to Believe That the Economy Is Currently Very Healthy

Why there is Good Reason to believe that the Economy is Currently Very Healthy

Every day, we turn on our TVs and we flip past CNN to hear an economist talk about how good or how bad the economy is doing. We are all not economists, so how do we know who to believe. What ways can be used to tell if the economy is doing good or bad? Well, there are a few ways that can be good indicators that we all can look at to decide for ourselves how the economy is doing, and based on the indicators, I would say that the economy is doing just fine.

The first indicator is Gross Domestic Product (GDP). The GDP is the total market value of all final goods and services purchased in the U.S. in a given period of time (usually given in annual or quarterly periods). There are two measures of GDP. The first is nominal GDP. This is GDP before it has been adjusted for inflation. The second is real GDP. Real GDP is better indicator of how the economy is doing because it has been adjusted for inflation. This is important because this adjustment allows GDP figures from one year to be compared to those from the next. Real GDP is an important indicator to keep track of because it provides very broad information as well as very detailed information. Data given in GDP reports reflect income as well as the way money is spent. Consumption coverage includes durable and nondurable goods, structures, and services. Also, data by sector are available for detailed subcomponents. Because of the detail available in the reports, there is detail given about supply and demand conditions as well.

When looking at GDP reports and figures, the figures are usually between 2 and 5%, but the long run trend in GDP is 3%. In the fourth quarter of 2006 we had GDP growth of 2%. This figure is a little low when compared to the long run trend, but it is still acceptable. In the first quarter of 2007, we had GDP growth of 2.5%. (bea.gov) (This is a little better, still not our long run trend, but we are getting closer to what it is supposed to be. Because it is still in our short run trend of 2-5%, I would say that it is fine.

The second factor that helps us decide the state of the economy is the rate of unemployment. When we have more people with jobs earning money, it stimulates the economy because when people have more money, they spend more money. With consumption accounting for 2/3 of total GDP, it is fair to say that income and GDP are related directly. One would think that we would like the rate to be zero, but this can never be, even if we have full employment. The reason we can never have 0% unemployment is because it is hard to account for those who are just entering the job market. These are people who are just becoming old enough to work and those who have recently graduated college or trade school and are now looking for a job in their field. A comfortable unemployment rate would actually be 4-6%. Presently, the unemployment rate is 4.5%. (bls.gov) This is steady with the unemployment rate of the fourth quarter of 2006. To see