GMAT Essays (AWA)

The following appeared in a research paper written for an introductory economics course:
"For the past century, an increase in the number of residential building permits issued per month in a particular region has been a reliable indicator of coming improvements to that region's economy. If the monthly number of residential building permits issued rises consistently for a few months, the local unemployment rate almost always falls and economic production increases. This well-established connection reveals an effective method by which a regional government can end a local economic downturn: relax regulations governing all construction so that many more building permits can be issued."






The excerpt from the research paper is flawed in its analysis. The argument that an increase in building permits will lead to an economic upturn is flawed in that it does not take into account as to whether there is enough demand for the excess supply that the construction industry will produce. Furthermore, the argument assumes that the improvements to a region's economy is solely dependent on the construction industry and its activity.

The argument that relaxed regulations will lead to increased construction activity, which will lead to an economic upturn is dependent on various factors. For example, it is dependent on the assumption that there is land available to build on. Furthermore, this argument does not take into account the fact that relaxed regulations could lead to other problems like shoddy construction. The main issue with this argument is that, in case there is increased activity in the construction industry, it will produce additional commercial and residential space. But this argument does not take into account as to whether there is an inherent demand for this additional space. If there isn't, then this could be the direct cause for another economic downturn, which makes this idea unsuitable.

The argument also hinges on the assumption that an economic upturn in a region is solely dependent on the construction industry in that region. There could be other factors at play as well. An economic upturn could be the result of better fiscal policies, increased infrastructure spending, foreign investment and a host of other factors. Since we cannot conclusively determine whether there are other factors at play, it might not be suitable to conclusively decide that increasing the number of issued building permits will guarantee an end to a local downturn.

This argument could be strengthened by clarifying the supply-demand equation in that region's economy. If there is inherent and continued demand for additional space, then this argument might be a good idea. It would also help to know if the construction industry is the sole contributor to that region's economic activity. As it stands, the argument remains flawed.