A country’s economy is a complex matter which consists of solid interlinkages between its elements that sometimes have apparent contradictions. One of such is an issue with unemployment when it exists even when the economy is at «full employment». Moreover, the methods of governmental control are sometimes harmful to the economy when overused or used improperly. Also, the traditional measures in economics such as CPI and GDP are often misunderstood. In fact, using CPI as an ultimate measurement for inflation rate might be biased, and GDP cannot serve as a definitive indicator of living standards. This paper will attempt to explain and resolve the listed issues using theoretical and practical knowledge about U.S. economics in order to acknowledge what causes them and if there are any gaps in the system.
One of the sharpest problems today is global unemployment and its assessment. A discrepancy often exists between employment rates and the actual percentage of the adult population who have jobs. According to the theory of economics, unemployment is calculated by dividing the number of unemployed people by the number of people who form the overall labor force. The labor force is created by people who are of proper age and physical abilities to work and are not occupied by other services (PBS News, 2010). However, the definition of unemployed is somewhat complicated since only people who have been searching for a job within the last four weeks are counted as unemployed in the U.S. (PBS News, 2010). This limit creates a critical gap in the calculations.
Considering all the mentioned concepts, a person who has no job but has paused his search for more than four weeks (due to discouragement or other reasons) is now categorized as a marginally attached worker (PBS News, 2010). This category of citizens is not a part of the unemployment rate equation. Therefore, if all unemployed people stop their job search, it will lead to a zero-unemployment rate but still high costs of unemployment. Although the government will not spend money on unemployment payments for those citizens, there still will be a decrease in goods and services, which leads to lost income – these are the costs of unemployment. As it can be seen, in order to resolve the issue of unemployment in the country and increase revenue, it is essential to consider the category of marginally attached workers.
The next issue to observe is the part of the government in the state’s economy. The previous paragraph already mentioned unemployment payments, but there are also such factors as tax revenue and government spending that influence economic stability. First of all, governmental spellings are a part of the GDP (Khan academy, 2012). Funding the military and police forces, health insurance, educational institutions, and other state objectives takes a relatively large amount of money. Therefore, by managing its spending, the government is able to raise the GDP, which influences the state of economics. Secondly, taxes have an important role in the process since they define the size of the state budget and its ability to spend. Taxes depend on the level of employment and the general income of citizens. A way of balancing economics is to raise taxes on the wealthy and create a redistribution of money (Principles by Ray Dalio, 2013). This strategy is effective for managing the budget deficit but dangerous in terms of the public mood because it can provoke social protests and conflicts (Principles by Ray Dalio, 2013). Overall, the state of the economy is susceptible to the levels of tax revenue and government spending, so it is vital to keep them balanced.
All of the mentioned above matters influence different economic indexes, the first of which is CPI – an indicator commonly used to measure the inflation rate. The consumer price index examines the basket of goods and services of an average citizen and the average prices for them (Khan Academy, 2009). Theoretically, if the prices increase, the CPI would identify that inflation occurs and calculate its percentage. However, the process of inflation has additional implicit components, and CPI itself has major assumptions, so it cannot be used as the only measurement for inflation. For example, the «housing» category in the CPI uses a complicated concept of rent equivalent for house owners, which is taken from a theoretical evaluation of property prices (Khan Academy, 2009). This measure does not represent the actual rise in housing prices, and since they take a large part in most people’s spending, the CPI becomes a significantly inaccurate and biased measure. Additionally, inflation is dependent on the wholesale and producer price indexes and government social security payments, which are all linked to the level of the CPI. Consequently, one imperfection in this index leads to a chain of miscalculated assessments, making the rate very debatable.
Another index that is of great importance for understanding a country’s economic state is the GDP, which is often perceived as the indicator of standard of living. There is a widespread misinterpretation of the GDP as an ultimate calculator of people’s spending throughout life, which allows one to judge their life quality when, in fact, the measures of the GDP are very limited. Indeed, the categories included in the GDP are close to an adequate assessment of living standards. They are generally able to correctly show the difference in life quality between low and high-income countries. However, various things influence people’s living standards that cannot be bought and counted (Khan Academy, n.d.). For example, the GDP does not include such significant parts of people’s well-being as leisure time, environmental cleanness, and social equality (Khan Academy, n.d.). Those factors are crucial when comparing countries with the same level of income but different socio-political environments. For this exact reason, the Human Development Index was created: a metric that includes measures of life expectancy, education, and others to determine standards of living (Hall, 2021). Evidently, there is a lot more to the concept of life quality than just per capita income.
To summarize, all the concepts that were discussed in this paper have their gaps and imperfections. The method of evaluating unemployment does not count discouraged or demotivated people, and government spending has a lot wider influence on the economy than people are used to thinking. Traditional measures used for assessing the state of the economy are also somewhat unfair since the CPI has a serious problem with housing prices, and the GPD does not include non-material factors in the definition of living standards. Nevertheless, economists make constant corrections and modifications to their practice and introduce various new methods to improve the global approach to economics.
References
Hall, M. (2021). How Does GDP Affect the Standard of Living?Investopedia.
Khan Academy. (2012). Components of GDP. GDP: Measuring national income [Video]. YouTube.
Khan Academy. (2009).CPI Index, Inflation [Video]. YouTube.
Khan Academy (n.d.) How well GDP measures the well-being of society. Khan Academy.
PBS News. (2010). Khan Academy: How to Calculate the Unemployment Rate [Video]. YouTube.
Principles by Ray Dalio. (2013). How the Economic Machine Works[Video]. YouTube.