Accordingto McConnell (2008), Gross Domestic Product (GDP) is a measure of the totalmarket value of final goods and services produced in given a year. The main purpose of calculating the GDP isto determine economic productivity, as it is states in the article “Chapter5 National Income Accounting: Measuring Output,” 2007. GDP evaluatesexpenditures about gaining factors (income). The article discusses changes inPuerto Rico’s economy and the solutions different authors have recommended. Also,it makes a comparison between the Puerto Rican and US GDP and the islands dependency.When referring to nominal and real GDP, an analysis of fiscal growth revealsthat fiscal policy is critical in the determination of solutions to economic wellbeing.
Puerto Rico’s economyhas had many downfalls since the 1970s, in contrast to increases in the 50s and60s. The articles suggested that this downfall was a consequence of US dependencyand low labor force participation. Additionally, both articles conclude that theheavy reliance on benefit programs lowered labor rates on the island. As of2000, at 31 percent, Puerto Rico had the lowest employment to population ratioin the Americas and the Caribbean.The articles strongly state that raisingemployment is crucial to restoring economic growth and failure will result in areduction in GDP for years to come.
It is important to compare GDP measurementsin Puerto Rico and in the United States. In the US, consumption (2/3 of GDP) isthe main component, investment, government spending and the net exports. Theprocess excludes investment or public area inventory changes (University of Phoenix,2015). In contrast, Puerto Rico, follows the same method of measurement forGDP, they use the domestic investment component in a distinct perspective.Mainly because fixed domestic investments and inventory changes provided byboth the private and public sectors of the island’s economy.LaBossiere’sarticle, “Who Is Responsible for A Living Wage” states: “…either employers canpay employees enough to live on or the taxpayers will need to pick up the tab.
“The issue is, if employers pay all their employees a living wage instead of thestablished minimum wage, this could lead to a higher unemployment. Since mostsmall business would not be able to assure many medium salaries; they willemploy fewer workers. This fact could negatively impact the country’s overalleconomy.Similarly,Derek Thompson in his article, “This is the American worker’s saga” says that thestuff people are making is getting cheaper, but the stuff people need isgetting more expensive. That’s why people in Puerto Rico feel so squeezed.LaBossiere’s article reflects every aspect of what Thompson emphasizes in thatthought. He makes a clear point that the worker-class struggles each day moreand more to keep up with the essential necessities, but work much more hoursthan in previous decades and, paradoxically, live in desperate poverty. Lowincome families hardly can pay for the main necessities: shelter, food, andhealth care.
The goal of raising employment throughgovernment stimulus and fiscal policy is attained through public transfers fromthe United States. These transfers represent 25 percent of Puerto Ricansincome. The federally sponsored Food Stamp Program was put in place in 1975.
Soto-Class& Lamba-Nieves state that the way this and other federal programs wereintroduced and administered caused labor force participation to decline. The article hypothetically speaks of asingle mother with 2 children. It states that if she has no income andqualifies for all transfers, she would earn more in entitlements than if sheworked part time 20 hours per week. Also, she would only earn $37 per monthmore if she worked full time at minimum wage. This demonstrates the negative effect that fiscal policy hadincentivizing Puerto Ricans to not work.
The article also states that the lowemployment rate of Puerto Rican males can be attributed to several factors;emigration of highly employable candidates to the US for higher wages, thelucrativeness of disability insurance and NAP (Nutrition Assistance Program)transfers from the US federal government (Soto-Class & Lamba-Nieves, 2006).Moreover, in the article, “Chapter 5National Income Accounting: Measuring Output”, a contrast between nominal andreal GDP was not directly discussed, so other studies where needed to develop acontrast. A study concluded that the economic growth in Puerto Rico in thedecade of the 80’s decade had a GDP of an average 0.3% (Soto-Rodríguez,2014). The GDP percentage is consistentwith the findings of the Federal Reserve Bank of New York, which took intoconsideration the 4.8% average inflation ratio for that period.
Accordingly, by considering the inflationratio the percentage in question is the real GDP and not nominal. The difference between one and the other isthat the real GDP takes into consideration the inflation ratio to find growthand nominal does not.GDP Growth in Puerto Rico has remainedstalled since recent years, 2006 according to the conclusions of a studyconducted by Enchautegi and Freeman (2006, 181). The economic growth study shows that avariety of factors did contribute, which was that the GNP was increasing muchless rapidly than the GDP and the employment growth remained alarming since2006. As far business cycles and economicforecasts Puerto Rico has an uphill battle.
According to Maria Enchautegi and Richard Freeman in the year 2000Puerto Rico only had 31% of its population employed, a disturbing figure, whichbecame the lowest employment to population ratio in the Americas (2006, 152). Close ties between the advancetechnologies and conditions in the United States has helped Puerto Ricanslifestyle. However, financialcomparisons with GDP growth, years of economic ups and downs that were a resultof US territory status financially damaged Puerto Rican culture. This isbecause Puerto Rico ties their government with the US federal government andmany American traditions.
Therelationship between Puerto Rican income and consumption is such that low-incomelevels will never halt consumption (just reduce) and are generally a result ofa high unemployment rate. Consumers will draw on future income or savings; inother words, credit or savings to support the household income. The income-saving relationship in Puerto Ricois relatively low, since 25% of the residents receive federal funds as personalincome, which does not allow much room for savings. The federal funds are the main cause of thedepressed labor force participation that is conducive to poor savingsrelationships, which in term develops high interest rates when consumers usecredit to compensate the household income. The multiplier effect in Puerto Rico refers to the increase in the finalincome which arises from the spending injection of the autonomousconsumption.
Every dollar that is spentas a marginal propensity to consume, therefore, consumption will exceed incomefor the lowest earning segment of the workforce.