Economic Recession

Economic Recession

Article 1:

Summary:

The article by Alan Rapperport analysis the effect of the economic recession and the role of government in a recession, according to this article the gross domestic production in the US was expected to decline by 1.5% in the 2nd quarter this year, however official figures show that the GDP level declined by only 1%. In this quarter the level of GDP declined as a result of the decline in customer spending by 1%, this decline was as a result of the high levels of unemployment in the economy. (Alan Rapperport (2009))

The current recession is considered the longest since 1947 and due to increased government spending the budget deficits this year is expected to reach $1,600 billion. Government spending in the 2nd quarter increased by 11% and this spending affected the car industry and the housing market. Inventory also declined in this quarter and this reduced the GDP by 1.39%, however when aggregate demand increases the inventory level is also expected to increase. According

to the congress budget office the 3 rd and 4th quarter level of GDP is expected to improve due to increased government spending and a 1.6% growth rate is expected. However the recovery process is expected to take longer given that those consumers are faced with high unemployment rate, high debt levels and restricted borrowing. (Alan Rapperport (2009))

Economic analysis:

The article highlights the role of government in a recession, a recession is characterized by high

Economic Recession

unemployment rate, declining GDP level and reduced aggregate demand, from the article expansionary fiscal policy has been used to aid the economy out of the recession. However this has resulted into budget deficits which are expected to reach 11.6% of GDP this year.

Expansionary fiscal policies:

Fiscal policies include government spending and taxation, in a recession an expansionary fiscal policies is used, this policy measure involves increased government spending that help increase aggregate demand. By increasing government spending the level of employment increases and this increases the per capita income, when per capita income is increased then the level of demand in the economy is increased. The following diagram shows the implication of this increase in government spending:

From the above diagram as the level of government spending is increased then the aggregate demand curve shifts upward from aggregate demand 1 to aggregate demand 2, this results into an increase in the level of GDP from Y1 to Y2. From the US economy case the government has increased the level of spending in order to increase the level of employment and GDP. This is evident where the level of GDP in the 3 rd and 4th quarter is expected to increase and the decline in new unemployment benefits claims and the reduction of in the unemployment benefit individuals. (Alan Rapperport (2009))

Increased government spending results into high inflationary pressure in the economy, as a result monetary policies that aim at reducing the inflationary pressure are used, these policies include increasing interest rates and increasing reserve ratios. From the article it is evident that the monetary policy rule used is restricted borrowing which aids in reducing the inflationary pressure. (Phillip Hardwick (2002))

Conclusion:

Economic Recession

The above analysis shows the role of fiscal policies in a recession, it analysis the policy measures that the US government has undertaken and their impacts. It is evident that the level of government spending has increased and this has resulted into increased budget deficit. This measure has helped reduce the level of unemployment in the economy and also has stimulated aggregate demand. The recovery process is expected to take longer given that consumers are faced with restricted borrowing, increased debts and high unemployment.

REFERENCE:

Economic Recession

Alan Rapperport (2009) US GDP contracts by 1% in Second Quarter: published august 27th 2009

Phillip Hardwick (2002) Introduction to modern economics. Prentice Hall publishers: New Jersey.

Article 2:

This article by Dirk Bergen and Hans Langenberg discusses labor productivity, population composition and working hours on the level of GDP. They state that in the future economies may not realize high levels of economic growth due to the ageing process. This is due to the changes in the composition of the population whereby the dependency ratio may increase; they demonstrate the impact of changes in the composition of the population using the Dutch resident case. (Bergen and Langenberg (2009))

The GDP level per capita for Dutch residents increased by almost four times in the last 70 years, this increase in GDP per capita was as a result of the increase in labor productivity whereby labor productivity increased by 1.5% each year since 1975, however working hours did not change over the years and therefore the growth in the GDP per capita was as a result of increased labor productivity. (Bergen and Langenberg (2009))

According to the article working hours depended on the participation rate of labor, the composition of the population and the number of working hours per employed resident. Labor participation rate increased in the 1980’s and this resulted into a rapid increase in the level of GDP per capita, however as a result of reduced working hours the level of GDP increased at a decreasing rate. (Bergen and Langenberg (2009))

Economic Recession

The GDP level per capita is also affected by the composition of the population, for the period 1990 to 2008 the percentage level of GDP per capita declined and this was a result of the increased number of individuals under the age of 15. Statistics show that the ratio of those aged between 15 to 64 years was 8 to 1 in 1950, 4.5 to 1 in 2009 and the ratio is expected to be 2.5 to 1 in 2030. It is expected that if labor productivity increases at the rate of 1.5% each year then GDP growth in 2030 will reach 24 %.( Bergen and Langenberg (2009))

Economic analysis:

Labor is a factor of production, the more an economy utilizes its labor the level of output and employment increases resulting into a higher GDP level. Labor productivity is an important concept in economic growth, an increase in labor productivity will lead to an increase in the level of GDP per capita. From the paper it is evident that Dutch residents increased the level of labor productivity and this resulted into a rapid increase in the level of GDP per Capita. (Phillip Hardwick (2002))

Labor productivity is defined as the total units of a product or service that labor can produce in a given time period, for this reason therefore as the number of units labor can produce in a given period of time increases the output level is expected to increase significantly, this therefore results into the realization of economic growth. . (Phillip Hardwick (2002))

Realization of economic growth as a result of increased labor productivity is also evident from the work of Adam Smith, he states that trade occurs between countries due to differences in labor productivity, he gave the example of two countries where he states that if a country specializes in the production of the good it is more productive in producing then it will gain by trading. For this reason therefore increased labor productivity will result into both comparative and absolute advantage, this will result into improved balance of payment and better terms of trade for a country. (Phillip Hardwick (2002))

Economic Recession

Conclusion:

From the above analysis it is evident that an increase in labor productivity will lead to economic growth, however this must also be accompanied by lower dependency ratio, the number of hours worked will also affect the level of GDP. From the economic theory it is also evident that as a country increases its labor productivity it yields better terms of trade and improved balance of payment. Therefore an economy should device ways to increase labor productivity in order to increase the level of GDP per capita.

References:

Dirk Bergen and Hans Langenberg (2009) growth per capita GDP due to increased labor productivity, published 10th September 2009.

Phillip Hardwick (2002) Introduction to modern economics. Prentice Hall publishers: New Jersey.