GDP and the Business Cycle; Government Financial Bodies, How Fiscal Policies Impact Production and Employment This memo will address three issues commonly discussed when talking about the economy. First, it will explain and describe how gross domestic product can be used to measure the business cycle. Second, it will describe the roles of the government bodies that are responsible for determining national fiscal policies. Third, it will explain how national fiscal policies impact the economy's production and employment. Specifically, it will examine how changes in government spending and taxing impact the economy's production and employment. Considered together, these three explanations should lead to a better understanding of fiscal policy at a national level.

Gross domestic product (GDP) is the monetary value of all of the finished goods and services that are produced in a country within a specific time period, usually each year. It includes all items, whether produced or consumed publicly or privately. It is a measure of production rather than of consumption. For example, a car that is manufactured in 2011 but sold in 2012 would be included in 2011's GDP, not 2012's GDP. This is an important distinction because while GDP is used as a proxy measure for the business cycle and for the financial health of the country, production and consumption are not the same and should not be confused.

The problem with GDP as an economic indicator is that it is often used incorrectly. GDP data often emphasize exchange...

GDP is represented as the sum of consumer spending, housing and business investment, net exports, and government purchases. Behind this accounting facade lurks the truth: GDP is generated by individual labor combined with both proprietors' and business capital, raw materials, energy, and technology in a myriad of different industries" (Anderson, 2002). One of the reasons for this is that, on its own, GDP is not a strong measure of continued economic health. Goods are produced in anticipation of consumption; therefore, the good produced in a specific year are based on economic projections. In an economic downturn, those produced goods are not exchanged, which can lead to an excess in supply and actually exacerbate economic troubles.
There are a number of different government bodies that are responsible for determining national fiscal policies. They fall into two broad groups: government bodies and the Federal Reserve Bank. The government has several different entities that help formulate fiscal policy, including the President and his administration and Congress. The Office of Management and Budget (OMB) is the executive department in charge of fiscal policy-making as well as ensuring the fiscal policies dovetail with other national policies. The OMB handles, "Budget development and execution, a significant government-wide process managed from the Executive Office of the President and a mechanism by which a President implements decisions, policies, priorities, and actions in all areas (from economic…