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1 1 (January 8, 2019)

handle is hein.crs/govxzh0001 and id is 1 raw text is: Cnrin al Rtea' SeIc S Updated January 8, 2019 Introduction to U.S. Economy: GDP and Economic Growth The amount of economic activity within the country is one of the main concerns for policymakers. Whether economic activity is growing, known as an expansion, or shrinking, known as a recession, can provide significant insight into the well-being of a country's inhabitants. For this reason, the growth rate of economic activity and the determinants of that growth are the subject of much research in the field of economics. What is Economic Activity? Economic activity includes any actions involved in the production, distribution, and consumption of goods and services. Households purchasing goods and services, businesses purchasing new factories and paying wages, and government spending is considered economic activity. Figure I. Circular Flow of Resources Payments for iand, labor and capital Businesses Households Payments for goods and services Notes: This is a simplified representation of the economy. Other sectors, including the government, financial sector, and imports and exports, can also be represented as flows 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-from households to produce goods and services. Households then use the income earned from businesses to purchase goods and services. Income that households choose to save remains in the circular flow of resources; it is distributed to businesses through the financial sector in the form of loans rather than through consumption spending. Measures of Economic Activity The standard measure of economic activity is gross domestic product (GDP), which is calculated in the United States by the Bureau of Economic Analysis. GDP is defined as the total value of all final goods, services, and structures produced by a nation's economy during a specified period-in other words, the total value of the economy's output. GDP can be measured in two different ways. The expenditures approach calculates GDP by summing all expenditures on goods and services by final users. Expenditures are divided into five categories: (1) consumption (expenditures by households), (2) investments (largely expenditures by businesses), (3) government spending, (4) imports, and (5) exports. In calculating GDP, the value of net imports (imports less exports) is used. Alternatively, GDP can be calculated through the income approach. Under the income approach, GDP is calculated by summing all income earned within the economy, including wages, rental income, interest income, and profits. Total income earned within the economy is often referred to as national income. Measurements of GDP produced through the expenditure approach and income approach are equivalent because the final market price of a good or service will reflect all of the incomes earned and costs incurred throughout the production process. Economic Growth Growth in economic activity brings about benefits to economic actors, and it is the predominant measure of changes in material living standards. In general, as GDP grows, individuals' incomes increase, as does the production of goods and services. So as economic activity increases, individuals not only have access to more goods and services, but they also have more income to purchase those goods and services. However, GDP growth does not give any indication of how income growth is distributed within the economy. Economic growth is fueled by a number of factors, and which factors are most important differ depending on the timescale with which policymakers are concerned. In the near term, growth in economic activity is largely governed by the business cycle, which shifts from expansionary phases, to contractionary phases (recessions), and to recoveries. Policymakers can use monetary and fiscal policies to affect aggregate 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-term growth rate of the economy. For further information on the business cycle, refer to CRS In Focus IF1041 1, Introduction to U.S. Economy: The Business Cycle and Growth. To affect the economy's long-term growth rate, it is important to focus on the supply side of the economy instead of factors that impact demand within the economy. In the long run, the rate of economic growth is largely dependent on the economy's ability to increase its productive capacity over time. Determinants of Long-Term Growth The long-term growth rate is largely determined by the amount of physical capital, human capital, and the rate of technological change in the economy. https://crsreports.congr

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