How does the United States trade deficit gross domestic prod

How does the United States trade deficit, gross domestic product, the employment rate, and the inflation rate impact the economy and relate to the business cycle? Why is it difficult to predict changes in the business cycle?

Solution

Trade deficit measures the excess of imports over exports. During economic boom, aggregate demand rises faster than aggregate supply and so, import demand rises faster than export demand. This increases trade deficit. During recession, aggregate demand falls, leading to lower import demand, causing trade deficit to rise.

Durinng economic boom, aggregate demand rises faster and so, GDP increases. This leads to higher economic growth. During recession, aggregate demand and GDP both either slows down or starts decreasing, leading to lower growth.

During boom, as aggregate demand rises, firms expand output to meet higher demand. This results in higher demand for labor, so employment increases. In recession, demand falls, causing firms to curtail output and cutting jobs, so employment rate falls.

Finally, as aggregate demand rises faster than aggregate supply during boom, an excess demand or shortage is caused in the market, which leads to higher inflation. But during recession, aggregate demand slows down, causing lower price level and lower inflation.

It is not always possible to predict changes in business cycle, because such changes are caused by numerous economic parameters, which makes it difficult to keep track of such signals of change in business cycle. At the same time, economic indicators are reported ex-post, that is, after the economic event happens. So economists are able to view only ex-post historical data to evaluate changes in business cycle, which might have actually started much earlier than the time when such indicators are reported.