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Describe the effect on gross domestic product, employment, and inflation of each of the...

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cathy-cobb | Honors

Posted November 5, 2013 at 3:13 AM via web

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Describe the effect on gross domestic product, employment, and inflation of each of the following:

(a)war, (b) elimination of environmental regulations, and (c) cut in the welfare benefits.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted November 5, 2013 at 3:29 AM (Answer #1)

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First, we should note that any action that increases GDP is likely to increase the level of employment.  Actions that raise GDP can also, if they go too far, cause an increase in inflation rates.  So, a factor that causes an increase in GDP will also cause an increase in employment (usually called a decrease in unemployment) and may also cause an increase in inflation.  Now, let us look at the three things you ask about.

The impact of a war depends on a lot of things.  If the war happens in a country, it is likely to decrease GDP and employment.  If, by contrast, it is a large foreign war, it might increase GDP and employment because more people will be needed to make the war materiel that is needed.  This is what happened, for example, when the US became involved in WWII.  The US needed to make so much weaponry and other military equipment that employment skyrocketed and the GDP grew very fast.  This would likely have led to inflation if there had not been rationing and if people had not bought so many war bonds.

Elimination of environmental regulations would likely also increase employment and GDP.  With no regulations, more people would be employed in things like fracking and building pipelines and mining coal.  This would increase GDP and employment.  The negative impacts of these things (pollution and such) do not decrease GDP even though they are bad for the country.

A cut in welfare benefits might increase employment and GDP.  If people could not get welfare, they might be forced to work.  If this happened, more people would be employed and GDP would rise.  This assumes, though, that the people now on welfare would be able to get and keep jobs.  A cut in such benefits might also decrease GDP a little bit.  If the people who had been on welfare could not get and keep jobs, they would no longer spend as much money because they would have neither jobs nor welfare.  The decline in their spending power could have some negative impact on GDP and employment if there are enough people who lose enough in the way of welfare benefits.

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