The United States Economy - Term Paper Example

?Introduction to Microeconomics The entire concept of economics is based upon the demand and supply in the market. The demand is defined as the ability and willingness of a consumer to buy a good or a service while supply is defined as the ability and willingness of the firm or individual to provide any good or service for sale. The diagram on the right shows the demand and supply curves which combine to make up the market demand curve (Mike On Ads). The equilibrium is where the demand and supply curves intersect. This is the point where there is a balance between the demand and supply of a product. The price where the curves intersect is called the market price and this is where both the consumers and producers are willing to supply a certain quantity. The demand curve is downward sloping due to the fact that as the price reduces, the ability and willingness to purchase on the consumers’ part increases meaning that there is negative relationship between the quantity demanded and price of the product. On the other hand, the opposite can be said for the supply curve. A positive relationship exists between the quantity supplied and price. As the price increases, the producers are more capable and willing to supply the product and hence the upward sloping curve. Consumer surplus is when a consumer is getting to buy a product at a price which is lower than that which the consumer is willing to pay. Therefore all the area between the demand curve and the market price line is classified as consumer surplus. Producer surplus is the excess which the producer earns as a result of the difference in the market price and the quantity the producer is willing to supply at certain prices. Producer surplus is the area below the market price and above supply curve. Business and Labor The mergers process may be beneficial for the industry in the short run specifically for industries which involve huge costs and research and development projects. The greater financial pool available to these companies is required to undertake large research operations and improve new technologies. It also is about the efficiency of the companies that is if they have been able to increase their efficiency through this process and whether they have passed this efficiency to the buyers. The mergers process may increase the efficiency because now at a larger operations base, the company may be able to achieve economies of scale which is the reduction of average production costs as a result of the increase in production. Coming towards the minimum wage laws, the governments often introduce the policies of minimum wage which acts as a floor to the price of labor employed. When the government enforces the laws of minimum wages, then the market forces are disturbed and equilibrium ceases to exist creating a gap between the demand and supply, which is of labor in this case. The disequilibrium in theory results in a rise in the supply of labor but the demand reduces as the labor is now more costly. However, the magnitude by which this disequilibrium is caused depends upon the circumstances prevailing in each economy and varies from country to country. United States Finance The economy of United States of America was performing very well at the start of the century but then went under deep recession in the year 2008 with the credit crunch and all the financial institutions seem to crumble at the same time. People started to default, and the society and institutions started to face liquidity issues. Soon with this credit crunch, the debts started to rise and the economy started to experience its effects which included the rising unemployment rates and decreasing gross domestic product (GDP) of US economy. Since the financial crisis struck in the year 2008, the US debt has been very high. According to a recent news article, the United States debt is nearly as much as the total value of all its goods and services produced in the US during the financial year. CNBC reports that the total value of the US debt is $14.96 trillion which means that the United States external debt as a percentage of its GDP stand at 99.46% (CNBC). This is a very high figure and indeed a very dangerous one because high leverage of debt can be very risky. Due to the high debt to GDP ratio, a credit rating agency has downgraded the credit rating of the United States and has gone down from AA+ to AA. Since the credit rating is going down, the investors and savers are reluctant to inject their money into the economy (Yahoo!). This creates a problem for the United States because the US government needs to borrow the money to cover up for the budget deficits they are facing each year. The housing bubble burst in the year 2008 when the financial crisis struck the economy and the property prices dipped to very low levels. Since then, the housing sector has not been able to fulfill its expectations of years from 2005 to 2008. Currently, the housing sector is not performing well in the United States economy and the think tank specialists feel that much should not be expected from the housing industry because let alone, the housing sector lifting the budget deficit anything towards the right direction, the best that can be expected from housing is that it does not damages the economy any further. This fluctuation and a number of crashes damages the confidence of the potential investors and they do not feel comfortable in investing their money into an area which does not guarantees a good return by a fair margin (Kowalski). Macroeconomics The Gross Domestic Product also known as GDP is the total value of the goods and services produced within an economy in a given time frame which is usually in years or in quarters of a year. The goods and services produced in a country add up to form the GDP and since these products are available to the home nation residents, the total GDP can be divided by the number of population in the home country, also known as per capita GDP which can be used as an estimate of the living standard. In macroeconomics, demand and supply are replaced by aggregate demand and aggregate supply respectively. The diagram on the right shows a typical business cycle (Dinesh Bakshi). The business cycle represents a fluctuating economic activity in a particular economy. The historical trends have proven that an economy never goes in the same direction with unchanged magnitude over long periods of time. The economy will go through several stages over a period of time which are termed as expansion, peak, recession, trough (or slump), and recovery (Investopedia). Unemployment is when people who are willing and able to work cannot find a job. Currently employment conditions in United States are not very conducive although they have improved as compared to the last few years. Wage-Price spiral is a Keynesian economic theory about the relationship between rising wages and inflation. It states that as disposable incomes increase, it raises the demand for goods and causes prices to rise. Higher prices cause workers to demand higher wages which leads to higher costs of production and put pressure on prices. Inflation is when the general prices of the goods and services in an economy are increasing. Due to the rise in the prices, it has a negative effect on the purchasing power of the money in the economy. Such is because the people can buy a lesser quantity of goods and services with the same amount of money compared to the last year. Trade Trading with other countries is now essential to keep up with the other economies of the world. The term competitive advantage is when a nation is able to produce a good or service by utilizing fewer resources than other nations. Some nations may have a competitive advantage in the production of particular products and therefore it is efficient to trade with the nations for products in which they obtain the competitive advantage. This benefit of trade may however be restricted due to the enforcement of trade barriers. These are policies that are introduced to restrict the international trade generally or with a specific nation. These trade barriers may include tariffs which is imposition of taxes and duties on imports, or quotas which is setting the limit of quantity of a good or service that can be imported. To overcome these barriers, the World Trade Organization (WTO) was formed so that free trade can be promoted without any barriers. The most prominent free trade agreement that exists for the US is NAFTA which stands for North American Free Trade Agreement which is an agreement between the US, Canada and Mexico. United States Economy The graph on the right shows the GDP rates since 2009. It can be seen that the US economy has progressed and that the GDP has grown by 2% in the third quarter of 2012. This GDP growth rate is greater than what was previously expected and the economic indicators have shown signs of an economic recovery in the United States but the recovery is quite sluggish and not as great as the people had wished for. The unemployment rate currently stands at 7.7% in the United States which is high according to the standards of the US. However this unemployment rate is an improvement as compared to a couple of years back when in 2010, the unemployment rate in the country was approximately 10%. The inflation rate is also under control in this quarter of 2012 and can be stated as ideal since an inflation rate of 2.2% can be referred to as healthy inflation. However, after the financial crisis of 2008, the United States government is still facing problems in raising the finances for the development of the country. The US government budget deficit has risen to a mammoth 8.7% due to which it has to rely on foreign loans and this is not a favorable situation. Due to the large budget deficit, the Charirman of US Federal Reserve, Ben Bernanke warned that a “fiscal cliff” may be on its way which may see tax rtaes increase and government spending may decrease which in turn may slow down the US economy recovery process (Morrison). Works Cited CNBC. The World's Biggest Debtor Nations. . Dinesh Bakshi. Business Cycle. . Investopedia. Business Cycle. . Isidore, Chris. Not getting by on minimum wage. 27 September 2011. . Kowalski, Alex. U.S. Housing Starts Unexpectedly Drop to Five-Month Low. 17 April 2012. . Mike On Ads. Supply and Demand. . Morrison, Malcolm. Bernanke warns on fiscal cliff. 20 November 2012. . Yahoo! US credit rating downgraded, again. . Read More