Aggregate Economic Output Levels in U.S
To gauge the US’s macroeconomics, the aggregate output must be decomposed into potential output and the output gap. Tracking the growth of aggregate output is essential in how fiscal policy and long term projections are affected.
To effectively measure the US’s aggregate economic output levels, you must look at the GDP or Gross Domestic Product and GDI or the Gross Domestic Income.
Alongside the country’s aggregate output and income, macroeconomics address fundamentals on labour force productivity, competitive and comparative advantages, inflation rates, and price level.
What is the US aggregate economic output?
Also known as real GDP, aggregate economic output is the quantity of finished goods or services produced by the economy. This output can be impacted by the country’s economic health, whether the conditions have a domestic or international origin.
Aggregate economic output is inversely proportional to aggregate demand, which is the total demand for the gross domestic product at any price and time.
As such, aggregate output is measured as the total worth of goods and services created within a fiscal year in the US. The sum income total of all workers in the US economy is measured as aggregate income.
When gauging the US’s aggregate economic output levels, we can estimate the measure of total goods and services value as sold to the end-users. Production costs and income payments, alongside the sum of value addition in each production stage, lead to a real GDP estimation.
In concept, all the metrics track the same macroeconomic phenomenon — only the timing, comparison techniques, and data sources can vary.
How are aggregate output and the country are GDP related?
Over the long term, aggregate output or GDP will equal aggregate demand when price level adjustments are made.
The aggregate economic output represents the goods and services being sold at market prices and within the country’s borders. These metrics exclude any income from outside the US and are criticized for being inherently preoccupied with indiscriminate production and consumption.
Another shortfall is that Gross Domestic Product calculates the depletion of natural resources, pollution, and unpaid environmental costs as positive factors.
To counter the nominal GDP figures and arrive on aggregate output or real GDP, the rate of inflation is factored in. Without this, GDP can be raised by the monetary value with no conceivable economic output or production.
Using the Keynesian Theory to Assess Aggregate Economic Levels
The Keynesian model was developed by john hicks in 1937 and is still used to calculate aggregate economic output or real GDP. Mr Hicks was a disciple of John Maynard Keynes, a keen economist, and his model can be used to assess short-term interest rates.
The Keynesian theory begins with recognizing the following:
Y = Y a d = C + I + G + N X
- Y is the aggregate or supplied output.
- Yad is the aggregate demand.
- C is consumer expenditure.
- I is the invested capital on physical assets or planned inventory.
- G is government spending.
- NX is net exports minus any imports.
The Keynes model continues to elaborate that:
C = a + (mpc × Yd)
- Yd is disposable income that’s above a.
- A is the autonomous expenditure by consumers, including food, shelter, clothing, and other essentials.
- Mpc is the marginal consumption propensity, which equals consumers’ expenditure on an extra income dollar or disposable income. Mpc is a constant and is bounded by 0 and 1.
For instance, during the great depression, I or investment dropped to $38 billion from $232 billion. You can calculate aggregate economic output using the Keynesian model.
As expressed by Y = (a + I) × 1/ (1 − mpc), aggregate output fell by $232 – $38 = $19 billion. But since the marginal consumption propensity was less than 0, the fall was more than $194 billion.
The equation is made more realistic by adding NX (exports minus imports). Aggregate output Y is increased by NX’s rise, denoting an increase of export times the expenditure multiplier over imports.
Taxes, Government Spending, and US Economic Output
Another increase to Y is positive government spending or G. Taxes, however, must be factored into G, as consumers will face a reduction in income. To align the equation with G spending that’s derived from taxes, the consumption function must be:
C = a + m p c × (Y d – T)
Since the multiplier will expand g, the effect of government spending always stays above T or taxes. T is multiplied by mpc, which is below 1, but G is acted on by a multiplier that’s still greater than 1. Increasing government spending funded by taxes will increase Y or aggregate output when a short analysis is done.
According to Keynes, when the levels of recession are high in the US, the government should cut taxation, causing Y to rise exponentially. In extreme economic downturns, a government can borrow its spending rather than taxing, essentially increasing G without risking an increase of T or C.
Applying Macro-economic Models to Assess Aggregate Output Levels
At times like the great depression, the US government responded to the economic turmoil by increasing tariffs. This policy was called beggar thy neighbour and, in retrospect, ended up beggaring everyone.
The policymakers were thinking that increasing tariffs would decrease imports and, in return, increase exports minus imports (NX) alongside aggregate or supplied output.
The idea was that the US’s trading partners would face decreased NX and be beggared by reducing aggregate output. This plan backfired when the other nations increased their tariffs in retaliation, leading to the loss of ability to import for the US.
Understanding and using a macro-economic model such as the Keynesian theory requires a firm grasp of how the average price affects the quantity of all the goods and services produced in an economy.
Based on the profits they expect to make, businesses make investment decisions on the quantity to supply. The selling price of a firm’s goods or service outputs and the inputs of raw materials or labour also determine profits.
Therefore, at each price level, an aggregate supply tells the total GDP output that the company will make and sell. These price levels are not inclusive of intermediate goods or services, which are inputs to the production process. They are the price of the outputs of an economy for final goods or service supplies.
A macro-economic model with an aggregate supply curve will show supply reaction to the final output price levels while input prices remain constant.
The Keynesian economist will stand by the theory for GDP equalizing long-term aggregate demand and output using long-run equilibrium. For simplicity, it’s assumed that the price level is equal to one. Other potential issues faced when interpreting aggregate output as GDP include denoting that wealth consumption, as opposed to production, is the driver for economic growth.
Underneath the total expenses calculated as aggregate output, there are efficiencies disguised in the production structures. The nature of how, when, or where what goods were created is not a consideration that aggregate output.
There are no differences between the productions of $100,000 worth of baby diapers to $100,000 worth of smartphones. As such, aggregate economic output is an unrealistic gauge of wealth or living standards in the US.