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1 1 (October 30, 2020)

handle is hein.crs/govdclf0001 and id is 1 raw text is: K. Updated October 30,2020 Introduction to the U.S. Economy: GDP and Economic Growth As a result of the Coronavirus Disease 2019 (COVID-19) pandemic, economic activity declined rapidly in the United States in early 2020 and remains below pre-pandemic levels, despite gross domestic product growth being positive in the third quarter of 2020. The speed of the economic recovery and projections oflonger-termgrowth are of concern topolicymakers due to the connection between the economy's performance and the overallwell- being of Americans. This In Focus provides an introduction to the U.S. economy, includinghow economists measure its performance and the factors that influenceits long-run trajectory. Economic activity includes any actions involved in the production, distribution, and consumption of goods and services. Figure I. Circular Flow of Resources Flo) e'-rs for fcnd. 1cdoend capitai Businesses Households 0ay.ects for ccods ann services Notes: This is a simplified representation of the economy. Other sectors, including the government, financial sector, and importsand exports, can also be represented asflows within the economy. Economists generally view economic activity as a circular flow of resources. As shown in Figure 1, businesses purchase their factors of production-land, labor, and capital-fromhouseholds toproduce goods and services. Households then use the income earnedfrombusinesses to purchase goods and services. Income that households choose to save remains in the circular flow ofresources; it is dis tributed to businesses through the financial s ector in the form ofloans rather than through consumption spending. Mesrsot EzCtom 1C 8C Ativity The standard measure of economic activity is gross domestic product (GDP), which is calculated in the United States by the Bureau of Economic Analysis (BEA). GDP is defined as the total value of all final goods, services, and structures producedby anation's economy during a specified period-in other words, the total value of the economy' soutput. GDP can be measured in two differentways. The expenditures approach calculates GDP by summing all expenditures on goods and services by finalusers. Expenditures are divided into five categories: (1) consumption (expenditures by household s), (2) investments (largely expenditures by businesses), (3) government spending, (4) imports, and (5) exports. Because GDP is a measure of domes tic production, this approach subtracts imports from exports to arrive at net exports. Alternatively, GDP can be calculated through the income approach in which GDP is calculated by summing all income earned within the economy, including wages, rental income, interest income, and profits. Measurements of GDP produced through the expenditure approach and income approach are equivalent because the final market price of a good or service should reflect all of the incomes earned and costs incurred throughout theproduction process. Pottia& GDP and Economnk Prfor ce GDP is often used as a measureof economic health. One of the ways in which economic performance is often measuied is by the output g ap-the difference betweenrealGDP and potential GDP. Potential GDP is an estimate of the highest sustainable level of output the economy can produce. When actual output is above its potential, it can signal that the economy is overheating (expanding at an unsustainable rate). When actual outputis below its potential, it can signal les s than full employment and potential recessionary conditions. Econrn§c Growth in economic activitybrings about benefits to economic actors, anditis the predominantmeasure of changes in materialliving standards. In general, as GDP grows, individuals' incomes increase, as does the production of goods and services; individuals not only have access to more goods and services but also have income to purchase those goods and services. However, GDP growth does not give any indication ofhow income growth is distributed within the economy. In the near term, growth in economic activity is largely governed bythe business cycle, which shifts from expansionary phases to contractionary phases (recessions) and to recoveries. Policymakers canuse monetary and fiscalpolicies to affect aggreg ate demand (i.e., total spending) in an effort to diminish the volatility of changes in economic growth due to the business cycle. However, these policies are unlikely to have large impacts on the long-termgrowth rate of the economy. For further information on the business cycle, refer to CRS In Focus IF10411, Introduction to US. Economy: The Business Cycle andGrowth. To affect the economy's long-termgrowth rate, it is important to focus on the supply side oftheeconomy yg

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