Question

What was the problem facing policymakers in 1961? Was there a "production gap"? Assume a GNP growth rate of 3.3% (approximately the U.S. long-run average real GDP growth rate) starting in 1955 and project forward using a Google Docs spreadsheet or Excel document.

*Please show work in Excel. Thanks!

Answer 1

Production Gap is an economic term which shows us the deviation of actual industrial production in a country from the expected potential production . It occurs when there is under utilization of resources in the economy . Yes there existed a production gap when Kennedy assumed the presidency in January 1961 .

As per the historical data , GNP in 1955 was 438 billion dollars . Potential GNP with 3.3% growth rate anually . There was also recession and unemployment in the economy . If we see the growth rate of 3.3% , then after 6 years in 1961 potential GNP = 515 billion dollars ( approx) . The real was about 487 billion dollars .

Hence cearly there was a gap of 27 billion dollars ( approx) .

The critical issues and assumptions of tax cut debate are : a) with existing deficits , tax cuts will widen the fiscal deficits . Tax cuts would be a riskier method to balance the budget .