United States Economy - Research Paper Example

?UNITED S ECONOMY OF THE 29TH NOVEMBER Table of contents Introduction -------------------------------------------------------------------------------------------1 1.1. History of US Economy -------------------------------------------------------------------3 1.2. Recent events in the country --------------------------------------------------------------3 2. Macroeconomics study -----------------------------------------------------------------------------3 2.1. Real GDP and Real GDP growth rate ---------------------------------------------------4 2.2. Unemployment Rate------------------------------------------------------------------------6 2.3. Current account balance (in the balance of payment) ---------------------------------7 3. Fiscal indicators --------------------------------------------------------------------------------------8 3.1. Ratio of gross fiscal deficit to nominal GDP -------------------------------------------8 3.2. Levels of Government expenditure and their ratio to nominal GDP ----------------9 3.3. Levels of revenue and their ratio to nominal GDP -------------------------------------9 4. Monetary Indicators--------------------------------------------------------------------------------10 4.1. Rate of growth of money supply --------------------------------------------------------10 4.2. Rate of inflation ---------------------------------------------------------------------------10 5. International indicators: openness index (defined as imports plus exports as a ratio of GDP -------------------------------------------------------------------------------------------------11 5.1. Levels of exports and rate of growth of exports --------------------------------------12 5.2. Levels of imports and rate of growth of imports --------------------------------------12 5.3 Level of foreign exchange reserves --------------------------------------------------------------13 6. Critical Problems in US Economy ---------------------------------------------------------------14 7. Future Prospects of businesses in US -----------------------------------------------------------15 8. Summary --------------------------------------------------------------------------------------------16 9. References -------------------------------------------------------------------------------------------17 UNITED STATES ECONOMY 1. Introduction: History of the economy of United States We are going to go aboard on a journey to look at the economy of United States. This inquisitiveness will lead us to scrutinize the economy’s operations, structures, and performance at a given time and its changes over time. We are going to look at the industries that have become additionally important in the United State economy and how the government is taking over the share of the nation’s output. The growth of people’s income, the distribution of people’s income among many more will be addressed. For a long time, the key to United States economy had been southern agriculture. But the civil war which began in April 1861 nearly destroyed everything. However, the country came out of the war with economic tools to put up the strongest economy in the world. Within 30 years, the United States led the whole world in manufacturing. After 80 years, it contained half of the world’s industry. From 1871 to 1890, United States experienced the second industrial revolution. These are social and economic changes that result from wide use of machines in production. Inventions made work easier and safer and this created the whole industry. Factories started operating using mass production and all this led to growth of the economy. Between 1861 and 1941, the economy of United States had risen from boom to bust. This was a period between the civil war and II world war. In the foremost or subsequent decade, the United States economic market growth took place in an environment where policies set by regulators were dramatically changing and conditions in the market were unstable (Garcia, 2011). This resulted to disappointing and volatile profitability of financial sector. Financial sector recorded 1.5 percent of Gross Domestic Product from 1960 to 1970s but after wards reduced to 1 percent in 1980s. In 1990s, the Gross Domestic Product began to rise and within ten years, it was up to 3 percent. This means that, from 1990, United States has experienced economic growth beyond the growth of the real sector. The financial firm’s Gross Value Added increased from 6 percent to 16 percent by year 2000. The current conventional insight is that, fiscal markets should be the mechanism that shows how to assign actual resources to their efficient uses. They should be the master and once again the brain of the bona fide sector. United States started exporting the new replicas to the rest of world. Until now, financial asset prices instability has raised making financial investments of ordinary citizens riskier when the reduction of earlier pension plans makes them depend on financial possessions to provide funds for their retirement. In general, financial innovations e.g. derivatives have increased the intricacy and non- transparency of fiscal markets even as they have extra powerful and gone over effective control of the government. For long periods of time, the growth rate of potential and actual gross domestic product tie up very well in US. But just like human beings, economies do not do to the maximum of their potentials. Gross Domestic Product in the United States normally deviates from potential gross domestic product due to macro economic fluctuations. Sometimes it is lower and other times higher, that is, times of recessions, gross domestic product shrinks (long periods). According to conventional analysis, the recession could not be shared with other countries in the world (Musgrave, 1973: Peggy, 1973: Musgrave, 1973). It would reduce the United States export demand from other countries in the world. However, rising of the dollar would concurrently make foreign commodities additionally competitive over American goods. A country like Canada is linked to United States economy and fears the impact of inflation if its dollar goes down at a higher rate. This simply means that, United States produces a global recession in cases of tight money. Induced responses of the policies from foreign governments will give the United States a policy of macro-economic more influences over the economy of the world. The degree to which United States policies are received abroad depends on the blend of policies that it selects. In other words, the United States policy determines the domestic macro economic policies of other developed countries. 2. Macro- economics: Real GDP and real GDP Growth rate Economic growth has speeded up since 1995 in United States due to inventions in information technology. Historically, since 1947, the average gross domestic product growth was 3.28 % and it extended to 17.2 % in 1950. It recorded a percentage of negative 10.4 in 1958 March. The table below shows the United States annual actual gross domestic product from 1990 to 2009 In the third quarter of year 2011, the gross domestic product of the United States has expanded over the previous quarter. The United States economy is the recorded as the largest. In United States, business firms and private individuals make most of the decisions making the country to be considered a market oriented state. The government buys goods and services from individual or private sectors. The table below shows the gross domestic growth rate for the last three years. GDP in percentages 2009 -6.8 -4.9 -0.7 1.6 2010 5 3.7 1.7 2.6 2011 3.1 0.4 1.3 2 The actual GDP increased at the rate of 2.0 percent annually in the third quarter of year 2011. This is from the 2rd to the 3rd quarter according to the 2rd estimations done by bureau of economic analysis (BEA). The GDP increased to 1.3 percent. The increase in the third quarter is brought by constructive contributions of expenditure of personal consumption, exports, spending of federal government, and fixed investment from non- residential. The local government spending, state, and private inventory investments also contributed. The imports are subtracted from the GDP increased. The expenditures from actual personal consumption increased to 2.3 percent at the third quarter of the graph as compared to an increased of 0.7 percent in the second quarter. Durable goods increased to 5.5 percent as compared to a decline of 5.3 percent. The services also increased to 2.9 percent from 1.9 percent as recorded previously. The actual exports of services and goods had risen to 4.3 percent in the 3rd quarter in comparison to an increase of 3.6 percent in the 2nd quarter. The actual imports of services and goods increased with 0.5 % when compared to 1.4 percent from the previous quarter (BEA, 2011). The actual federal government spending on consumption and gross investment recorded an increase of 1.9 % in the last quarter and similar increase still in the second quarter. 4.7 % increase of national defense was realized compared to an increase of 7.6 %. The local government and the real state consumption spending as well as gross investment declined in percentage to 1.4 as compared with a decrease of 2.8 %. 1.55 % was subtracted the 3rd quarter due to change in inventories of actual private sectors. 2.8 % was also subtracted from the second quarter. The private businesses declined inventories of $ 8.5 billion in the 3rd quarter from $ 39.1 billion in 2nd quarter and $49.1 billion in the 1st quarter (BEA, 2011). The actual or the real gross domestic product per capita of the United States economy is used to indicate the standard of living of the citizens as well as the economic growth in a given period of time. When the government of the United States studies public policies for the purposes of growing the economy, it uses the gross domestic product. 2.1 Unemployment rate Months Unemployment 2010 September 14,140,000 October 13,903,000 November 14,282,000 December 13,997,000 2011 January 14,937,000 February 14,542,000 March 14,060,000 April 13,237,000 May 13,421,000 June 14,409,000 July 14,428,000 August 14,008,000 September 13,520,000 2.2 Unemployment rate According to Milton Friedman, a Nobel price winner economist, low rates of unemployment leads to acceleration of unemployment. In 1997, the rate of unemployment in the United States fell to 4.7 %. This made the US official in charge of the employment to come to an agreement of keeping the unemployment rate over 6 % so as to keep the economy stable. However, last year was the worst year for over 32 years. The inflation rate was up to 2.3 %. In 1997, the actual wage for non supervisory workers was 14 % under its climax in 1973 although the productivity of the workers roes by 34 %. If the standard wage rate for non- supervisory workers had risen at the same rate up to date, their average wages would be between $ 19.07 and $ 12.24 (Robert and Stephanie, 1998). 2.3 Current Account balance Balance of payment is where a country records the economic transaction with other countries in the world. United States recorded $ 111.9 billion in the first quarter and $ 11.8 billion in the second quarter of the current account deficit (BEA, 2011). This decrease was more than the decline accounted by increases in extra on revenue and excess on services. Deficit on services and goods increased from $ 140 billion in the 1st quarter to 145 billion in the 2nd quarter. The services payments recorded an increase of $ 105.2 billion from $ 1.3.8 billion. The payment income from foreign owned assets increased to $ 128.2 billion compared with the previous $ 124.0 billion (BEA, 2011). In general, the United States current account deficit reads to – 7 % of the US Treasury. This is determined by subtracting the domestic investment expenditure from savings. 3. Fiscal Indicators, Monetary Indicators, Monetary Indicators. SOURCE: BEA, 2011 3.1 RATIO OF GROSS FISCAL DEFICIT TO NOMINAL GDP GDP IN % DFD IN % 2006 5.3 2.4 2007 4.9 2.2 2008 -1.2 -3.3 2009 -3.9 -5 2010 -5.4 -6.4 3.2 US expenditure and GDP US EXPENDITURE in $ US GDP in $ 2006 1373.49 13310.9 2007 1484.52 13969.3 2008 1576.85 14270.5 2009 1625.99 14014.8 2010 1622.41 14551.8 3.3 REVENUE AND GDP GDP-US IN $ BILLION REVENUE-TOTAL pct GDP 2006 13310.9 35.28 2007 13969.3 37.01 2008 14270.5 32.94 2009 14014.8 25.94 2010 14551.8 29.64 4.1 MONEY SUPPLY 5.0 Trade index and GDP trade index GDP 2006 343 13310.9 2007 386.7 13969.3 2008 409.3 14270.5 2009 346 14014.8 2010 456.8 14551.8 imports rate of growth 2006 287.8 44.3 2007 321.5 34.7 2008 337.8 16.3 2009 296.4 -41.4 2010 364.9 68.5 5.3 level of foreign exchange reserve billion US $ 2006 1068.5 2007 1528.2 2008 1946 2009 2399.2 2010 2847.3 The above data has been retrieved from (Current Population Survey) and usgovernmentspending.co Average annual gross percentage 1990 5.2 1991 4.2 1992 3.6 1993 2 1994 4.5 1995 -6.2 1996 5.1 1997 6.8 1998 4.9 1999 3.9 2000 6.6 2001 -0.2 2002 0.8 2003 0.8 2004 4 2005 3.2 2006 5.1 2007 3.3 2008 1.5 2009 -6.6 The global economic and financial crisis has changed the viewpoint for the economic position of United States internationally in many ways. It has reduced the current account deficit sharply in the short run. According to Cline (2009), the external imbalance dropped to 3.1 percent of the gross domestic product in 2009. This is $ 430 billion. This was its lowest level since eleven years ago. The crisis has also increased the budget deficit. The united state internal imbalance has increased to 10 percent of the gross domestic product, that is, $ 1.4 trillion. This has been brought by increased spending and lower tax revenues. Thirdly, the crisis has brought an unparalleled demand for secure dollar possession especially in United States treasury securities. The dollar has grown strong with 13 percent on standard and 20 percent over Euro from 2008 when the crisis entered its sensitive phase. 6.0 Critical problems of US economy The united state is experiencing an economic problem that a few countries have ever experienced. Trade deficit has hit the country. United state is consuming more its producing. Simply, the imports have become more than the exports. The country is also selling its assets to take enormous debts to sustain the living standard that they no longer afford (Cline, 2005). There is great danger of losing its super power status that it has held for long. Their international competitor‘s game plan is to render them complete independence on foreign production, financing and innovation. This means that, in losing domestic sufficiency, leverage and national security, their foreign affairs will suffer to a great extent. The tax systems and the regulatory systems have raised domestic business costs and the disaster has caused extremely unfavorable trade and globalization in the unite states (Cline, 2005). Saving crisis is another problem that has greatly affected the economy of the United States. The families in US have adopted a habit of complete consumption of all the income. The government cannot get enough to invest and this has brought financial catastrophe. The downturn of sharp housing and the associated turmoil in the markets have brought very high risk premiums, tight credit standards and low equity wealth. This has made the households to pay heavy tribute by eroding real incomes, decrease in wealth, and loss of jobs and foreclosure of homes. The financial mediators have really suffered from serious write downs (Cline, 2005). 7.0 Future Prospects of businesses in United States According to the strategies that the United State has adapted, the businesses in the country have brighter future. The authorities have decided to provide support in macroeconomic policy implementation. This will keep inflation prospects in check and also avert the continued decrease of output. When this issue are addressed and handled, the shocks will be absorbed returning the economy to its robust trail of potential expansion. This will be very beneficial to businessmen because they will not be overtaxed by the local authorities or the government at large. Environmental, fiscal, and social problems need to be addressed also. In this way, the businesses will be safe and hence the economy of the United States will boost in a robust way again. The government of the United States is planning to deals with three very crucial policies ( Sewell, 2010: Feinberg, 2010: Kallab, 2010). One is macro economic policy to maneuver through incompatible forces. Growth rate has been pulled down by adverse shocks which have resulted to negative feedback between the real economy and the financial sector. Another one is; to safeguard and regulate the financial systems. The fall down of mortgage markets with private securities has caused a wide displacement of the financial systems not only in United States but also to other nations. The government will be to improve prudential mistake as well as to prepare for more interventions. Lastly, the government is creating universal access to health care. United States spends a lot of money in health sector and yet it he health status of the citizens cannot be compared with other countries. Americans do not have good access to non- vital medical care because of the rising government spending. It will ensure that, the insurance coverage reaches to all without increased budgetary imbalances (OECD, 2010). 8.0 Summary Promoting open markets growth of the economy abroad will not create a rebalance alone to industrial collapse and trade account in the United Nation. There is need for new direction to be followed. Local industries need to be mantled and armed in order to have capacity, knowledge, and investment capital to ensure that, the production is self- sustaining. There is need for initiating and maintaining precautionary policies that will reduce or finish external imbalances in United States to a modest share of gross domestic product of say 3 percent. To achieve this, the economy can be run at subpar growth rates continually (Marris, 1985). United States can also run a cautious alternative of running a responsible fiscal policy. During the periods of above normal growth, the government can include modest surpluses. To prevent substantial and prolonged currency under valuations, additionally effective international rules and many-sided arrangements are needed. The united state and the rest of the world should join hands and increase their responses towards the rising crisis as well as their long term strategic plans. Induced responses of the policies from foreign governments will give the United States a policy of macro-economic more influences over the economy of the world. 9.0 References Bureau of Economic Analysis (2011). US Department of Commerce. National Income and Product Accounts. Page 251 Bureau of Economic Analysis (2011). US Department of Commerce. Page 5. Christian Garcia (2011). The U.S. Economy. Benchmark Education Company, pp 6. Cline William R. (2005). The united states as a debtor nation. Institute for international economics and center for global development. Washington . pp 7-25. John Williamson Sewell, Richard E. Feinberg, Valeriana Kallab, (2010). U.S. foreign policy and the Third World. Issue 3 of U.S.-Third World policy perspectives. Transaction Publishers, 1985 pp 8-16. Marris Stephen (1985). Deficits and the dollar: The world economy at risk. Institute for International Economics. Washington pp 60-75. Ozgur Orhangazi (2010). Financialization and the US Economy (New Directions in Modern Economics). Pp 5-12. Richard A., Musgrave, and Peggy B. Musgrave, (1973). Public Finance in Theory and Practice. The Living Wage: New York, pp.? Page 190. Robert Pollin (1997). Review of Radical Political Economics, Fall. 'Natural Rate of Unemployment. Pp2-15. Robert Pollin and Stephanie Luce (1998). Generating Affluence: Productivity Gains Require Worker Support. Building A Fair Economy, 15th Edition pp 3-20. Read More