Gross Domestic Product
The term gross domestic product (GDP) is an important part of all discussions about the economy. Gross means “total.” Domestic in this context means “within the country.” Product means “goods and services.” Therefore, the gross domestic product is the total value of goods and services produced in a country in one year. You can think of GDP as the total output of an economy. The GDP of the United States is about $15 trillion. China, the next largest economy in the world, has a GDP that is half the size of the US GDP.
GDP is one way that economists measure the health of an economy. Another useful measurement is GDP per capita. Per capita means “for each person.” GDP per capita is simply the GDP divided by the number of people in a country. In the United States, GDP per capita is about $50,000. This means that the United States is one of the ten richest countries in the world. In very poor counties, like the African countries of Zimbabwe and Congo, the GDP per capita is less than $1,000.
In most countries, the population increases each year. The economy, as measured by the GDP, needs to grow along with the population. What happens if the population rises faster than the GDP? The GDP per capita goes down-the country is poorer. That’s why economic growth, or an increase in the GDP, is so important. Yet economic growth can be hard to maintain. Sometimes the economy seems to have a life of its own-a life of ups and downs.
The Business Cycle
During good economic times, businesses do well and it is relatively easy to find a job. In bad economic times, business slows down and it is hard to find a job. Good economic times are called booms, and bad times are called busts. Over time, the economy goes from boom to bust and back again. This boom-to-bust movement is called the business cycle.
On this graph of the business cycle, the vertical line represents GDP. The horizontal line represents time. The graph has no numbers or dates because it represents the business cycles in general.
When the line is rising, GDP is growing. This is a boom period. It is called an expansion because the economy is growing. Eventually economic growth reaches a high point, or peak. Then inflation (a general increase in prices) sets in. Consumer demand slows, and business costs rise.
Then the line goes down. GDP is shrinking. This is a bust period. It is called a contraction because the economy is getting smaller. People spend less, so there is less profit. Some companies go out of business, and other companies lay off workers. When the economy reaches its low point, it is said to have reached a trough.
A deep trough is called a recession. During a recession, unemployment is high. Consumers cannot afford to buy as many goods and services, so some businesses fail. If the trough is very severe and lasts a long time, the trough is called a depression. A depression that occurred almost a century ago changed the country forever-and it affects you today.
The Great Depression
The single worst economic event in US history was a deep trough in the business cycle, or a depression. Today it is remembered as the Great Depression of the 1930s. (Great does not always mean “good.” Here it means “huge” or “enormous.”)
The Great Depression was a period of tremendous economic pain for the country. The GDP in 1932 was only about half of what it had been at its peak in 1929. About 25 percent of US workers found themselves without jobs. In many areas, the unemployment rate was much higher. Banks failed, and people lost their life savings. Homelessness was widespread. Today unemployed people may receive unemployment benefit checks.
They can use Electronic Benefit Transfer (EBT) cards to obtain cash and food. Some of them receive Social Security benefits. In the early 1930s, however, these programs did not exist. People depended on family, friends, and charity.
What did government officials do about the Great Depression? Initially, they did nothing. Most economists believed that the business cycle was self-correcting-that is, they thought the trough would fix itself. During previous economic contractions, workers who had lost their jobs were willing to take jobs that paid lower wages. Businesses hired them. Production increased, and an economic expansion began.
Yet the Great Depression dragged on. Millions of Americans were miserable. A major problem was that businesses would not hire anyone, even if the workers were willing to work for nothing but food. Business owners felt there was no point in hiring more workers because there was little demand for goods and services. People were buying very little. The Great Depression seemed endless.
Then entered an economist named John Maynard Keynes.
Keynesian Economics and the New Deal
John Maynard Keynes (1883-1946) was a British economist. During the Great Depression, he wrote a book stating that governments should use their powers to manage economies. Economists had previously argued that government should stay out of economic affairs. Their approach, called laissez-faire [less’ -ay fair’], is French for “let it be.”
Keynes believed that recessions and depressions were caused by a lack of demand. Not enough people had money to buy goods and services from businesses. Keynes thought that government spending could provide the demand for businesses. This would stimulate economic activity and thereby end the depression. These ideas are called Keynesian economics.
In the United States, President Franklin Delano Roosevelt created policies that used Keynes’s ideas. President Roosevelt’s programs and federal actions designed to counter the hardships of the Great Depression were called the New Deal.
The New Deal included the Works Progress Administration (WPA), which employed people in construction and the arts. Employees of the Public Works Administration (PWA) built public works, like bridges. The Federal Deposit Insurance Corporation (FDIC) protected people’s savings when banks failed. The Social Security Act, a key part of the New Deal, provided income to elderly and disabled Americans.
Never before had the federal government played such a direct role in the economy or in the lives of individual citizens. Since the New Deal, the power of the federal government and its role in public and private affairs has grown tremendously.
In 2008, the United States fell into the worst economic trough since the Great Depression. Called the “Great Recession,” this economic contraction devastated tens of millions of Americans. In response, President Barack Obama pressed for passage of the American Recovery and Reinvestment Act of 2009, a large government spending program to help revitalize the economy.