Country's economy - Case Study Example

? and Section # of Essay Questions Answer The long-run rate of economic growth measures the ability of a nation to progress its living standard. It is believed that even a small change in the long-run growth rate over a period of time will lead to a big advance in the income of an average person. The Figure below shows the economic growth in eight major countries from 1870 to 1996. In 1870, Australia was the richest economy whereas Japan was the poorest economy of the sixteen major economies of that time. In the same year, Australia’s real GDP per capita was almost five times that of Japan. Over the following 126 years, Australia’s economy grew by 1.3% which allowed real GDP per capita to increase by 5 times. However, during the same time, Japan’s economy grew by 2.7% which allowed its real GDP per capita to advance by 28 times. Likewise, Figure 11 also shows the progress made by United States from 1870 to 1996. The long-run rate of economic growth of the American economy was 1.7% which allowed it to raise its living standards by 8 times in 126 years. Therefore, the long-run rate of economic growth is an important measure of the nation’s wealth. (Bernanke, 2003) Figure 1: Economic Growth in Eight Major Countries The output of the economy depends upon the quality and quantity of labor and capital and on their productivity. If the inputs are constant, there is no economic growth in the country. Therefore, one of the inputs has to change along with the productivity for a healthier growth rate. The relationship between inputs and outputs of the economy are reflected in the following equation; which also shows the important factors that affect the long-run rate of economic growth. (Bernanke, 2003) Y= AF (K, N) Where: Y = Output of the economy A = Productivity N = Labor K = Capital Requirements Labor Labor refers to the working force of the nation-be it skilled, semi skilled or unskilled. Labor is one of the most important inputs into the economy. A skilled, educated labor force makes a strong contribution to the other factors of the economy. Along with them, the economy also requires semi-skilled and unskilled labor. However, the most important thing is their constant supply to the market. Similarly, the skills acquire must match the demand of the economy. (Bernanke, 2003) Technological Progress Technological progress refers to the ability of the nation to adapt to update infrastructure and equipments. No country can expect to progress without the necessary infrastructure for specific technology. In our globalized world, the economy needs to incorporate up-to-date technology replacing the obsolete machines to match the increasing demands. The smooth flow with the technological progress allows making the necessary progress. (Bernanke, 2003) Investment Investment refers to the capital requirements of the growing economy. The country needs consistent investment to make remarkable progress and achieve long-run rate of economic growth. Therefore, the nation needs to establish an environment that allows the continuous flow of foreign direct investment into the country and a credit history that allows it to raise the debt when needed. However, there needs to be sustainable amount of debt so that it does not hamper the growth in the long run. (Bernanke, 2003) Productivity It is another important factor for consistent long-run growth rate. This component refers to increase in the efficiency and effectiveness of the same labor and capital inputs. Therefore, if the productivity of the nation increases keeping the labor and capital same, the economy will growth by a certain factor. (Bernanke, 2003) Answer 2 Gross Domestic Output (GDP) is defined as market value of all the goods and services produced by a particular nation within the domestic boundaries. (Amadea, 2011) There are four components of the GDP as shown in the following equation: Y = C + I + G + X Where Y = Total output C = Personal consumption expenditures I = Investment G = Government spending X = Net exports Personal Consumption Expenditures This component refers to the individuals’ expenditure in the economy. It comprises of all the goods-durable and non-durable- consumed as well as services rendered by a person. It is the most component of the GDP. In 2011, personal consumption expenditures account for 70% of the US GDP equivalent to $10.726 trillion. (Amadea, 2011) Investment This component refers to the purchases incurred by the companies to produces those goods and to render those services. It comprises two sub-parts- fixed investment and inventory changes. The fixed investment part includes the requisition of new equipment and technology, construction of new commercial real estate as well as new residential units. The other sub-part refers to the changes in the inventory levels of the companies which signify additional purchases. (Amadea, 2011) Government Spending This component refers to all the expenditures incurred by the government- the federal government as well as provincial government. It is important component especially during the recessionary period as the governments increase their expenditures to boost the economy. . In 2011, government expenditures account for a little more than 20% of the US GDP equivalent to $3.03 trillion. (Amadea, 2011) Net Exports Net exports are equivalent to exports less imports. These two components have opposite effect on GDP; exports increase GDP whereas imports decrease GDP. Therefore, positive net exports will have a positive impact on the out of the country. (Amadea, 2011) Figure 2 shows the growing US GDP since 1950. The total output had been steady till 1970; then it started to rise at a faster rate till 2008. In late 2008, the nation fell into recession and GDP showed a falling trend after a long time. Figure 2: US GDP In the 1950s, the US economy was growing at steady rate with the total output almost stagnant over the decade. However, the US economy showed a contraction during 1957-58 and GDP shrank by 3.8 percent. In the 1960, the US GDP was $2.8 trillion (adjusted for inflation) which grew over the decade due to consumerism. During the 60s decade, there was high increasing demand for goods and services which accounted for around 63% of the total GDP. In 1970s, the US economy slowed down. The Vietnam War had ended; but already has had a severe impact on the US economy. The US fallen into recession with energy shortages, high inflation and high unemployment. The oil embargo by the OPEC countries had pushed up the oil prices- which had given way to inflation. The US trade deficit was negative as cheaper goods from competitive states had flooded their markets. The 1970s was a bad time for the American people. This situation continued till 1982. However, beyond that, the economy turned towards its recovery phase. The American Government passed tax cuts to stimulate the economy through increasing investments and savings. Likewise, the government was responsive to the inflationary pressures and was quick to act. Therefore, this decade saw the recovery of the US economy as shown in Figure 2. However, the US economy again dipped into a recession in 1991, but was soon on its way to recovery the next year. The decade is known for its ‘long boom’, because the period GDP growing continuously for a decade- the longest in the US history. The inflation and unemployment was low, the corporate profits were surging and the stock market was on a rise. The decade starting from 2000 saw two long wars-including the longest war in the American history. The economy had been drained of all the surplus money. In late 2007, the US economy dipped into a recession following a global downfall of the financial markets. The unemployment rate surged, the inflation rose and the corporate profits fell. The Americans feared another depression of the 1930s. Nonetheless, the economy is on the way to recovery and shows signs of major improvement. (US State, 2013) (American History, 2013) Answer 3 Since World War II, the US labor conditions have dramatically changed due to globalization, industrial restructuring and federal policies. There has been a growth of service sector followed by a fall in a manufacturing sector which has changed the labor pattern over the years. Similarly, globalization has changed the diversity, demand and supply of various skills as well as wage scales over the past 60 years. (Lee, 2008) The US population doubled between 1950 and 2000-which indirectly increased the working cadre population from 62 million in 1950 to 128 million in 2005. The major changes were: benefits increased, wages improved, white collar jobs increased and diversity enhanced. In the 1960s, the main cause of increase in the labor force was increasing population. In the 1970s, it was the women entering the market and crying for equal employment rights. Over the years, a lot of foreign born people also entered the labor market increasing to 13 percent in 2000. (Lee, 2008) (Elsby, 2010) Figure 3 shows the increasing labor force from 1948 to 2013. There are only a few downward shifts during certain months. Figure 3: US Total Labor Force2 The number of people unemployed in the US market has been fluctuation due to various reasons. Figure 4 shows this fluctuating trend from 1948 to 2013. The recessionary period that hit the US economy during 1957-58 saw the unemployment rate rising to 7.5%. The economy soon recovered and the rate fell to the normal economic levels. The economy again slowed in the 1970s. The unemployed again peaked after the end of the Vietnam War in 1975 when people returned from the war and could not find employment. The economy was already in a recession due to energy crisis and stiff competition. The economy could not revive till mid 1980s. However, the 1990s saw consistent growth which lowered the unemployment rate to the lowest levels. The American policies were helping the common people to enjoy the benefits of the employment. Nonetheless, the US economy was hit by a global recession in late 2007 which doubled the unemployment rate instantaneously as seen in the graph. The situation still remains worse off. This is worst downturn since the World War II. Initially, the labor conditions resembled those that of earlier recessionary periods of 50s, 70s or 80s. The employed consisted of the male, less educated, less skilled and ethnic minorities. However, the recovery trend tends to show that the recovery to the premium labor conditions is much better compared to past periods. (Elsby, 2010) Figure 4: US Unemployment Rate3 Works Cited Abel, A. B., & Bernanke, B. (2003). Macroeconomics fourth edition update, 2002-2003. Boston, Addison Wesley. A. Lee, Marlene and Mark Mather. "U.S. Labor Force Trends." Population Bulletin, 63. 2 (2008): http://www.prb.org/pdf08/63.2uslabor.pdf Amadeo, Kimberly. "What Are the Components of GDP?." 2011. Web. 19 Apr 2013. http://useconomy.about.com/od/grossdomesticproduct/f/GDP_Components.htm American History. "The Economy in the 1980s and 1990s < A Historical Perspective on the American Economy < Economy 1991 < American History From Revolution To Reconstruction and beyond." 1991. Web. 19 Apr 2013. http://www.let.rug.nl/usa/outlines/economy-1991/a-historical-perspective-on-the-american-economy/the-economy-in-the-1980s-and-1990s.php. Bureau of Labor Statistics. "U.S. Bureau of Labor Statistics." 2013. Web. 19 Apr 2013. http://www.bls.gov/ Elsby, W. L., Michael et al. "The Labor Market in the Great Recession." 2010. Web. 19 Apr 2013. http://www.brookings.edu/~/media/Projects/BPEA/Spring%202010/2010a_bpea_elsby.PDF State, U.S.. "The 1990s and Beyond." n.d.. Web. 19 Apr 2013. http://economics.about.com/od/useconomichistory/a/economy_1990s.htm State, U.S.. "Years of Change: The 1960s and 1970s." n.d.. Web. 19 Apr 2013. http://economics.about.com/od/useconomichistory/a/change.htm State, U.S.. "The Economy in the 1980s." n.d.. Web. 19 Apr 2013. http://economics.about.com/od/useconomichistory/a/economy_1980s.htm Read More