GDP, Economic Cycles and Macroeconomic Measurement, Essay Example

Global energy sources are one of the most hotly debated issues in our country. While some people argue in favor of natural energy sources like wind and water power, there is still a market for fossil fuels. Regardless of which energy source is preferred, a large portion of our GDP accounts for energy representation. The economy and energy representation have an interesting relationship in this nation; generally, a large increase in the price of energy sources have indicated a troubled economy. At the same time, a troubled economy leads to high prices; it’s difficult to determine the cause and effect in this situation. According to the Institute for Energy Research, total energy expenditures account for 8% of the total GDP (IER, 2010). Therefore, it is one of the greatest contributing factors to the success of our economy and politicians should treat energy issues more carefully.

Energy representation influences several sectors of the economy. The primary sector accounts for the resources that are harvested from the Earth; in this instance, this accounts for power we retrieve from wind, water, and oil. The secondary sector of the economy accounts for manufacturing finished goods (Rosenburg, 2007). Once harvested from natural resources, energy sources need to be refined and converted from mechanical energy to electrical or heat energy that can be used. Many processing plants are available for this purpose. The tertiary sector of the economy describes the service industry; people are needed to market and deliver this usable energy to consumers. The quaternary and quinary sectors involve research and government involvement respectively. There is currently a great deal of research and government investment that deals with improving the ways we currently gather and generate energy.

The GDP defines the market price of a good or service within a particular country during a specific time period. This value usually represents a country’s standard of living and therefore the status of its economy. The components of the GDP by expenditure include consumption, investment, government spending, exports, and imports.  Energy consumption is the amount of energy that is used by the country overall in addition to how efficient these sources are. This component is related to the GDP because it indicates requirements for standards living in a specific economy. It is important to note that energy standards are extremely different for countries with different economies and ways of life; for example, the United States is more likely to have a larger measure of energy intensity compared to a third world nation that may not use air conditioning or heating systems on a regular basis. Other factors that would influence energy consumption include conversation projects and transportation needs, in addition to unexpected energy fluctuations that result from natural disasters or power outages. Total energy consumption is generally measured using wattage.

The investment component of GDP is used to predict the future productivity of an economical factor. This includes three types of investment: non-residential investment, residential investment, and change in inventories. Non-residential investments are made on a marketable good or service and account for the equipment necessary to maintain a business, residential investments are made paying for the cost of a building or its rental price, and change in inventories are relevant to firms who hold on to a product to be sold at a later time. In the case of energy representation, non-residential investments, residential investments, and change in inventories are relevant. Many different energy sources exist, the most popular of which are wind, petroleum and oil, and water. Non-residential investments for water wind energy would be the wind turbines and accompanying machinery, while for petroleum and oil these investments would include drilling. Non-residential investments for water power would include watermills. Residential investments for all three of these energy sources would include the physical plants where workers control the conversion of natural energy to electrical energy; this would include refineries. Change in inventories investment accounts for the amount of energy that needs to be held while water for consumer need.

The government spending component of GDP is the total sum of expenditures on the good or service. In this situation, government spending is mainly on research to find new and cleaner energy methods. Currently, the Obama administration is working on new ways to harvest natural energy that includes the creation of advanced solar panels and improved wind farms. The exports section of GDP is irrelevant here; any oil or petroleum that we drill for, we use ourselves. In the future however, we may be able to export our technological knowledge. The import component of GDP is relevant; we import a large percentage of the fossil fuels we used from the Middle East and other nations.

Oil price shocks, such as the 1973 oil crisis, negatively impact our economy due the increased availability of this energy source. Since there is a high level of demand but small amount of product, the price of oil increases exponentially. This slows GDP growth for several reasons; inflation becomes a major concern and oil companies and private citizens who have large investments in these companies accrue account deficits (Masouros, 2013). Despite these issues, oil price shocks inspire many countries to find alternative energy sources in addition to other drilling locations.

The connection between oil prices and inflation is so intimate because energy is very connected to modern living. Since it is used for transportation, heating, and basic electrical needs, the increase in the price of oil impacts many essential activities by making even the simplest need, like cooking dinner, more expensive. In turn, this impacts job opportunities and employment; if a company believes they need to prioritize keeping the prices of their energy products low, they will need to find ways to become more efficient with a smaller staff. This will result in layoffs and hiring freezes in refineries, power plants, car companies, and many other industries that rely heavily on energy costs.

References

IER. (2010). A Primer on Energy and the Economy: Energy’s Large Share of the Economy Requires Caution in Determining Policies That Affect It. Institute for Energy Research. Retrieved from http://www.instituteforenergyresearch.org/2010/02/16/a-primer-on-energy-and-the-economy-energys-large-share-of-the-economy-requires-caution-in-determining-policies-that-affect-it/

Masouros, PE. (2013). Corporate Law and Economic Stagnation: How Shareholder Value and Short-termism Contribute to the Decline of the Western Economies. Eleven International Publishing, pp. 60-62.

Rosenburg, M. (2007). Sectors of the Economy. Retrieved from          http://geography.about.com/od/urbaneconomicgeography/a/sectorseconomy.htm