American Economy over the Last Two Years - Essay Example

?Running head: American Economy over the Last Two Years American Economy over the Last Two Years Insert Insert Grade Insert 12 April 2011 American Economy over the Last Two Years Success of American Government and the U.S. Federal Reserve been in running the American economy The American economy has experienced an economic crisis for the last two years particularly in 2009 when the whole economy experienced financial shocks and losses in the financial and capital markets. The volatility of the American economy financial market was increasingly becoming risk prone with evidence of losses being experienced in investments made. In addition, the financial and capital markets were reacting to global economic recession as stock prices continually went down. The loss of investors’ morale to invest and become active in the capital and financial markets has had a great negative impact to on the overall American economy. The economic crisis can be closely attributed to the decline in collective economic power of consumers, businesses, and investors. In the fiscal year of 2009 and 2010, several Americans lost their jobs, a phenomenon that negatively impacted on consumer and household spending, although Obama’s job creation plan had reduced the rate of joblessness significantly through investment in new infrastructure. The government’s investment in infrastructure has however created a negative impact on the countries budget, as there is a possibility of the government incurring a budget deficit in the next years to recover the huge amount spent on infrastructure. The economy has taken a long time to recover due to reduced consumer and business spending and more particularly loss of investor confidence in the financial markets. However, real estates and undervalued stock during that period could offer the best investment opportunity as many investors have shifted focus from investing these industries. On the other hand, decrease in consumer spending as result of bankruptcies of consumers may exert economic strain on discretionary spending sectors and retailers. This calls for socio economic approach to solve the vicious circle of economic decline of the American economy. The government introduced economic policies alongside Obama’s fiscal stimulus package to stop the economic decline and restore its stability and development. However, the economic disruptions of 2009 and 2010 had varying effects on different sectors of the economy with the recession affecting specific industries. The financial, real estate and tourism industries were adversely affected while technological, export and alternative energy industries were not affected. Aggregate Demand Aggregate demand is the measure of collective spending on goods and services in a particular country. Outputs, employment levels, and general prices of goods and services are affected by variations in the county’s aggregate demand. Aggregate demand consists collectively of consumers’ expenditure, capital investment, government spending, exports and imports of goods and services. Expenditure on consumer goods and services include durable and non-durable goods consumed and repurchased by the specific consumers. In aggregate demand, expenditure on consumer goods and services is the biggest component. Capital Investment comprises of the total spending on capital goods that are used and applied for production of more goods and services such as plant, equipment and buildings, which will allow us to produce more consumer goods in the future. Capital investment also comprises of expenditure on working capital, which includes both work in progress and stocks of finished goods. Capital investments have bigger percentage being spent by the private sector and a smaller percentage being spent by the government in undertaking such as construction of new schools and road networks. Capital investments, particularly in the private sector of the American economy declined in the fiscal year of 2009 and 2010 due to the world recession that had affected all economies. The supply of goods and services both in the domestic and foreign markets are affected by the aggregate demand of that particular country. Government Spending is the expenditure of the government on public and merit goods with respect to political and economic plans and decision of the government of a particular country. The spending patterns and behavior of the government is more or less political as administrative agencies and political groups evoke efforts to influence spending in a particular way (Maxwell, Crain, and Santos, 2009, pg 338). Although the government’s capital investments are relatively low compared to the public sector, it spends a significant amount in welfare payments and public goods. Money transfer from one group to another is not included in government spending though. Exports of goods and services to foreign countries are an injection to aggregate demand while imports of goods and services are withdrawal from the aggregate demand. Exports injection less imports withdrawal is what adds up to the aggregate demand as net exports of the country. According to Peters (2010:18), exports in the United States were lower than imports during economic crisis where their exports were relatively priced higher than those from foreign markets were. When import withdrawals are more than the export injection, the net exports are negative as it is the case with the United States as shown below Expenditure rates vary with consumer expenditure constituting the highest as depicted below. Source: Albert Einstein, https://sites.google.com/site/sociologysystemsresearch/home/economic-crisis/over-accumulation Economic Growth Rates in United States The American economy in the fiscal year of 2009 and 2010 is characterized by increased output of goods and services produced. In the fourth quarter of 2010, real gross domestic product increased by an annual rate of 3.1 percent from the third quarter, which had consequently increased by 2.6 percent. The quarterly increases in 2009 and 2010 are attributed to consumer expenditure, which recorded the highest with contribution of real estate investment and exports of goods and services to foreign country. However, after the recession, the manufacturing industry supported by strong infrastructure recorded significant economic growth and stability as the pump prices and supply stabilized back to normal (Reidy, 2006, pg 39) Aggregate demand in the fiscal years lagged behind with respect to imports and capital investment expenditure through government spending and private investment. Although there were quarterly increases in real gross domestic products, the general economic growth rates in 2009 declined with regards to the world economic crisis. Reductions in construction, manufacturing, scientific, and technological service industries in the United States are the main contributors to economic decline during the 2009 recession. However, there are many widespread industries in the United States that contributed to decline in economic growth rates and particularly growth of the countries’ gross domestic products. After consecutive contractions in the gross domestic product due to recession, the United States economy recorded a 2 percent annual increase of the general economy of United States in the late 2009 quarters and early 2010 as economic recovery slowed (Organization for Economic Co-operation and Development, pg 74) In 2009, annual gross domestic product growth rate recorded the highest growth rate of 5.7 percent for the last six years in the United States. The annual gross domestic product increase in the fourth quarter of 2009 has been proved to be as a result of the economic stimulus package that was launched to help in recovery of the United States Economy. The expansion of gross domestic product after recession was as a result of significant increase in private sector capital investment and consumption expenditure. The graph below shows the consecutive economic growth rates over years with the economic decline of the year 2009. Source: Andrew Couno, Governor Robert Megna, Budget Director, http://www.budget.state.ny.us/pubs/archive/fy0910archive/eBudget0910/financialPlan/0910_FinPlanSummary3.html Unemployment and Interest Rates in the US The situation where the citizens of a country are said to be unemployed involves people not having jobs in the time when they are actively searching for them within a specified period, which may be long-term or short-term unemployment (Mankiw, 2008, pg 317). In the United Sates, the situation of unemployment is currently approximated to be 8.8 percent nationally up from 9 percent a long period. However, this rates that show unemployment prevalence does not include the non-visible unemployment and part time employees. The unemployment prevalence is also not inclusive of semi-employed citizens who have been for a long time conveying complains that they not only seek for semi-employment but fulltime permanent jobs in whole industries. Prevalence of unemployment varies with respect to the regions in which those who are unemployed reside in. Unemployment rates may be altered with respect to movement and dislocation of both job seekers and industries that create and provide opportunities for employment by regions. Examples of regions that severe rates of unemployment are the West Coast, and the Midwest with the exception of specific cities such as Washington in the West Coast. On there other hands, regions that are doing well with unemployment rates that are lower than national average are the Central United States, the South, and the East Coast. Unemployment prevalence has had a significant effect on the economic recovery as this factor directly affects consumption expenditures and output maximization in the economy (International Monetary Fund, 2010, pg 4). The interest rates are mathematical descriptions of timely maturities of debts and securities to a borrower in a given United States dollar currency. The interest rates are usually depicted in upward sloping yield curve where interest rates are directly proportional to the time to maturity. The interest rates increase proportionally with the increasing term to maturity with diminishing marginal growth. Projection of investors to the risks free rates have a direct influence to on allocated time to maturity and thus consecutively interest rates. Investor may forego investing the money now for the possibility of investing when interest rates have gone up in the future. There are preferences that interest rates remain high for the purpose of economic development through investor confidence in financial and stock markets. The United Sates central bank therefore seeks to hold interest rates slightly higher than inflation rates so as to stimulate economic growth. In fiscal period between 2009 and 2010 after the world economic recession, the interest rates are increasing slowly and real estate rates are on the increase. Interest rates were projected to rise between 2009 all the way to the year 2012. Long-term interest rates were expected to increase while short-term interest rate remained constant (Office of Management and Budget, 2009, pg 177). Macro-economic Policies Used In the US During the economic situations of 2009-2010 in the United States, the US government and the United States Federal Reserve adopted the use of microeconomic policies to recover its economic strength after the recession. The Unite States federal government seeks to facilitate and put in place conditions that are necessary for a steady economic growth and reduced levels of unemployment. The condition favorable to economic improvement and stability are particularly focused on stability of general prices of goods and services, and tax burdens that are tolerable by players in the economy. The United States Federal Reserve the central bank uses the monetary policy while the government uses fiscal policy (OECD, OECD - Organisation for Economic Co-operation and Development, 2010). The monetary policy manipulates the supply of money and use of credit, which is essential to control escalation of general prices of goods and services during inflation (Timberlake, 1993). The supply of money is an essential tool in controlling interest rates and general prices of goods. Likewise, interest rates can be increased to speed up and expand the economy it is slowing down at an increasing rate by increasing the money supply in the economy. The government commonly applied the open market operation characterized by the purchase and sell of government securities and bonds by the United States Federal Reserve dealing with major banks and dealers, Stagflation is also an instrument used by the United Sates Federal Reserve when inflation rates are increasing at alarming rates and the economic growth is falling (Timberlake, 1993). On the other hand, the government uses the fiscal policy, which comprises adjustments of government spending and tax burdens issued. However, the fiscal policy application always faces intense criticism and opposition from the academicians. The opposition attribute to variation in government spending as disproportionate to big United States economy. Expert emphasis though are based on low rates of taxes which have a positive effect on growth and expansion of the economy while government spending variations through borrowing is attributed to have a negative effect on the development and expansion of the economy (Frenkel, 1988, pg 7). The government applies fiscal policy through alteration in the levels and compositions of taxes in the economy. Governments spending alterations influences aggregate demand levels to affect the gross domestic product thus affecting the general performance of the economy. Reductions in government spending, tax levels and compositions are particularly applied to achieve price stability, full employment, and economic growth by stimulating aggregate demand (American Assembly, 1971, pg 15) Reduction in government spending and tax charges come in handy in times of recession and slow rates of economic performance to boost economic growth. Government budget deficits as a result of borrowing can be covered by the growth of the economy after application of the fiscal policy. In case of resulting budget, government surplus in fiscal policy application, slow economic growth rates, and price stabilization can be achieved. Reference List International Monetary Fund. 2010. Regional economic outlook: Western hemisphere. NY: International Monetary Fund American Assembly. 1971. United States monetary policy. NY: Ayer Publishing Maxwell, W., Crain, E. and Santos, A., 2009. Texas politics today 2009-2010. OH: Cengage Learning Office of Management and Budget. 2009. Analytical perspective; Budget of the US government; Fiscal year 2010. Washington DC: Government Printing Office Peters, M., 2010. What the 2009/2010 world economic crisis means for global Agricultural trade. NY: DIANE Publishing. OECD, OECD - Organisation for Economic Co-operation and Development. 2010. OECD Economic outlook: Volume 2010. Paris: OECD Publishing. Reidy, R., 2006. Profile of the International Industry: Market Prospects to 2010. NY: Elsevier. Mankiw, G., 2008. Principles of Macroeconomics. OH: Cengage Learning. Frenkel, J. A., 1988. International aspects of fiscal policies. CA: University of Chicago Press. Timberlake, R. H., 1993. Monetary Policy in the United States: an intellectual and institutional history. CA: University of Chicago Press. Read More