Macroeconomics - Assignment Example

The main difference between GDP and GNP is that GDP measures total income in a nation, while GNP measures total income by a nation’s residents. GDP is the more widely relied upon statistic by business, policy makers and the public. The change in GDP is used to calculate whether a nation’s economy is expanding or contracting. As the broadest measure of a nation’s economic activity it indicates the overall health in the economy. As the broadest measure it is heavily relied upon by business and policy makers to plan as well set monetary and fiscal policy.

While the general public may not use GDP because of the effects of GDP on business and policy officials they are impacted as well. For business leaders the main use of GDP is in planning and investment. One way business leaders can use GDP and GNP in combination is to determine where revenue is being earned. By comparing GDP to GNP they can determine whether there is growth in income is coming from domestic or foreign sources. GDP and GNP are also traditionally used in business cycle forecasting.

By looking at the trends and changes in GDP it can allow businesses to plan for turns in the business cycle rather than simply reacting. These decisions have an impact upon the general public in the form of job creation or cut backs by businesses. For policy makers GDP is a signal used in creating monetary and fiscal policy as well as measuring its effectiveness. If the economy is growing too quickly policy makers can apply contractionary policy such as raising interest rates and taxes to cool the economy.

If the economy is contracting they can then use expansionary policy, such as low interest rates, tax reductions and government investment to boost the economy. Government expenditures are of particular importance as they are directly taken into account in GDP. By increasing expenditures the government can turn a recession into an expansion single handedly. This