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Why GDP May Not Reflect Attempts to Restore the Economy

Assume that the economy is already in a recession, and both the President and Congress have decided to do something to restore the economy. Both agree that lowering taxes would not be a good idea, but do believe that it is in the best interest of the economy to increase government spending in defense, education & infrastructure.

The President and Congress change the budget accordingly, but after 18 months, GDP only increased by three quarters of the expected amount. What factors might be responsible for this situation?

Some of my thoughts:

I figure some factors that may have influenced GDP negatively would be: the war on Iraq and maybe also hurricane Katrina. For all the people that were devastated by Katrina, many lost jobs and now even today still have no real means of income. If they do have income, they do not have expendable income. Also the war on Iraq is costing our country so much. With gas prices at all time highs and taxes being raised here and there, many of us cannot afford to go out a spend freely. Financial responsibilities was primarily given to the military. One more obvious reason for the GDP not increasing is unemployment.

I am having a hard time with this because our GDP has actually risen and is in the trillions. Any assistance you could provide me would be great.

Solution Preview

While Gross Domestic Product (GDP) has been used as an indicator of national progress in most of the world, it isn't a perfect reflection of the state of the economy. It measures only expenditures, regardless of their reasons. Thus, unemployment may have no effect on GDP, and the contribution made by household or volunteer work are ignored. In addition these statistics are often flawed. See for an opinion of how far off they may be. Many negative things, such as divorce and crime, serve to increase GDP. Therefore one possible explanation for the lower than expected GDP would be that society has improved.

Natural disasters ...

Solution Summary

Reasons why Gross Domestic Product (GDP) may not increase as desired.