Question

In what ways do GDP figures drive government policy

Answer 1

GDP is a very essential indicator of a country's economic well being. Therefore it's growth is absolutely essential to ensure that economic well being of the residents of the country does not deteriorate. Government policy aims to do this by various policy measures which we will try to examine through an example.

Suppose there is a decline from 8% to 5% in the GDP growth of a country which is usually a cause for worry for policymakers. Suppose upon scrutiny and study it is found that a lack of demand in the economy is what initiated the decline in growth of GDP. Now, the government must swing into action to correct this disequilibrium through policy decisions. The government, to stimulate demand, usually follows an expansionary policy. This is means that the government needs to take actions which will put more money in the hands of the public so that they go out and buy more goods and services. They can do this by decreasing income tax which will put more money in the hands of the public. The government can also increase transfer payments or provide employment under welfare schemes (witnessed in countries like India) to stimulate demands.
These are few of the policy decisions that the government can take to boost GDP growth.

The working of an economy is often complex due to its intricacies. But we can essentially bring it down to understand that:

1. when GDP growth figures are low, the government may follow an expansionary policy to stimulate spending in the economy,
2. If the GDP growth is rapidly fast, then the government may follow a contractionary policy to avoid unwanted inflationary tendency (rapid rise of prices) and heating up of the economy. This they can do by reducing the spending power of the public. by, for example, cutting taxes.