Gross Domestic Product (GDP) and Fiscal policies of a country are the indicators of economic development of that country. Higher GDP growth and lower interest rates and tax rates always show the economic strength of a country. Business cycle is directly linked with GDP whereas the fiscal policies control the business activities and consumption of goods Use of Gross Domestic Policy (GDP) to measure the business cycle Gross Domestic Product (GDP) is the most important rating scale to measure the economic activities of a country.
It depends on demand, production and income. When the demand increases, the production also will increase. Income of the people also should be increased in order to increase the consumption of goods. “GDP is the measured of the sum of all domestic and foreign effective demand for national goods. Domestic demand is the sum of household, government, and firm expenditure (respectively called: consumption, public expenditure, and investment). Foreigners buy national goods as exports” (Gross Domestic Product) GDP growth always an indication of the strength of an economy.
In some cases, the domestic production may not be enough to cater the needs of the domestic consumers. In such cases the country may require to import goods from other countries. For example, American market is believed to be a huge one which often has the space for imports because of the excessive demand. Better demand always a positive sign for the business cycle. In short, higher GDP growth is always good for the business cycle. Role of government bodies in determining national fiscal policies Fiscal policies are determined by the government bodies alone.
For example, the interest rate of financial sector in a country is controlled by a government body in many countries. For example, in India, all the banking activities were regulated by the Reserve Bank of India (a government body). Tax rates and government spending on different departments will be determined by some other government bodies like a planning board, parliament or congress in the case of United States. Fiscal policies were formulated by a government after reviewing the economic activities.
For example, the current $700 billion bailout package by the US government to aid the private companies especially the automotive sector is the best example for government spending. Government cannot stay away from the market since many of the employees have lost their jobs which forced the government to change their fiscal policies by increasing their spending in this sector. Effects of fiscal policies on the economy’s production and employment Fiscal policies can affect various tax rates, interest rates and government spending, in a country in different ways.
These policies are formulated in order to control the economy of a country. Whenever the tax rates increase, the manufacturers will be forced to increase the price of the goods they produced and the consumption of the goods will get reduced. Same way, a hike in interest rates will also affect the manufacturing sector negatively since consumers and the manufacturers will be forced to reduce their financial activities with the financial institutions. For example, most of the consumers rely on bank loans to purchase a vehicle.
If the banks increase their interest rates of the loans, consumers will reduce their activities and the car manufacturers will experience dip in their sales. Moreover, any negative effect in the manufacturing sector will increase the unemployment as the manufacturing units will be forced to terminate some of the employees in order to cut down their expenditure and to stay in the market. Thousands of people have lost their jobs because of the current financial crisis. References 1. Gross Domestic Product, (n. d),Retrieved on July 13, 2009 from <http://users. teilam. gr/~ekritsa/GDP. htm>