Chapter 6 - Determination of National Income

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Summary :
At the end of 2008, United State’s GDP contracted at 6.2%. This is the fastest pace the economy decreased in 26 years. A majority of this downgrade is due to consumer spending, which makes up around two-thirds of economic activity in the United States. People stopped shopping for cars, furniture, appliances, clothes and other goods. Due to this the businesses also reduced in spending and inventories. Economists predict that consumers and businesses will continue to cut down on spending. This contributed to the rocky start to America’s economy this year. Vanishing jobs, sinking house market and investments also contributed to consumer’s cut back. Companies are slashing payrolls and production for lack of consumer spending. Right now, President Obama is planning to use a $787 billion recovery package to jump start America’s economy.

Connection:
The connection between this article and the text book is the change in GDP due to household savings and investment. In the United States, households are saving their money and reluctant to invest due to the dwindling stock market. When households start saving their money, less cash flows into the business sector. In reaction, businesses lessen production of goods and starts forwarding less money to households in form of wages, interest and rent. This is what the US companies are doing; they are reducing their spending, laying off workers and slashing payrolls. All of this reduces the flow of money in the circular flow resulting in a lower GDP. In this case United State’s GDP contracted 6.2% mostly caused by the lack of consumer spending and increase household savings.

Reflection:
The United States is in a recession that is almost as bad as the 1980’s deep recession. However, people are still not spending money instead they are saving which will not help the economy. Many people are keeping their money for they are afraid they will loose their jobs. If consumers don’t purchase or invest, the money will not flow into the business sector. Which results in the lay offs and reduction in pay rolls by businesses. Even though President Barack Obama is using a recovery package to stimulate the economy, it won’t be enough. People will just save the extra money they have and the recession will just worsen. Therefore, I think that people should start using their money to stimulate the economy. However, the question is how will economists convince people that spending will actually help the economy?