Current GDP, Inflation and Unemployment Rate - Essay Example

? Macroeconomics Macroeconomic factors such as unemployment rate and inflation play a pivotal role in the national economy of the country. Rapid inflation takes away the benefit of rising GDP or in other words brings down the real GDP growth rate and thereby real income of the people. Similarly, high unemployment rate does not augur well for the economy as it tends to raise the income disparity among the people. The paper attempts to explore how unemployment and inflation can be tamed through policy matters. The US has experienced high unemployment and high inflation rates in the past. Both are equally bad for the national economy. Current GDP, Inflation and Unemployment Rate The US GDP in year 2012 is estimated at 15.68 trillion. Real GDP in the US increased by 3.6 percent annually in the third quarter of 2013 over second quarter and the inflation rate is estimated at 1 percent in the month of October, 2013 that is lowest since October 2009. Similarly, unemployment rate is estimated at 7 percent in November 2013 down from 7.3 registered in the previous month (US Inflation Rate). Unemployment Rate in Past 10 years The following graph taken from the Bureau of Labor Statistics provides unemployment rates for last 10 years period in the US (Source: http://data.bls.gov/timeseries/LNS14000000). It is interesting to note that during boom period of economy between 2003 and 2007, unemployment rate continued to slide. Post financial crisis it began rising rapidly and went up to almost 10% during 2009 and 2010. As of now it is hovering around 7 percent. Inflation Scenario in Past 10 years The US Federal Reserve states, "Inflation is a general increase in the overall price levels of the goods and services in the economy" (Federal Reserve). The Fed takes into account several price indexes while calculating inflation. The monetary policy is governed by the Federal Reserve and it aims at achieving maximum employment, low inflation and moderate long-term interest rates. The following graph shows inflation rates for last 10 years in the US. Source: http://www.tradingeconomics.com/united-states/inflation-cpi It is amply clear that inflation rates vary significantly in last 10 years. During financial crisis, it touched to as low as -2 % in 2009 and prior to that it was at its peak at 6 percent in 2008. For last several quarters, the inflation rates are hovering between 1% and 2%. The Federal Reserve employs tools of monetary policy to control inflation and bring down unemployment rates as its major objectives. Monetary Policy Influences Inflation and Unemployment Usually, the Federal Reserve influences the federal funds rate that banks charge each other for short-term loans. These changes in short-term rates are eventually passed on to the businesses and households for their borrowing needs. Short-term rates also influence long-term rates such as residential mortgage rates, car loans etc. When the federal fund rate is reduced it triggers demand for goods and services. More demand for goods and services tend to generate more employment reducing unemployment rate that exist. Higher demand of the goods and services will also push the wage increase. Post 2007 financial crisis, the Federal Reserve took drastic steps to stabilize financial system and thereby the US economy. In this process, short-term interest rates were brought to near zero. Low interest rates aim at supporting businesses and households to finance new spending and thereby boost the economy and reduce the unemployment rate. However, in this process, there is possibility that inflation rate would also start going up. As far as inflation rate is within the targeted rate, the Fed rate will keep using the tool of lowering the interest rate to boost the economy and generate the employment. The moment inflation starts exceeding the target rate, the fund rate will move in the reverse direction to cool down the economy and thereby control the inflation rate (Monetary Policy). Post 2007 financial crisis, when the economy was shattered the Fed resorted to the nontraditional means to manage the economy that included buying long-term securities and long-term treasury bonds and notes issued by the government to pump in more money into the economy. This is to influence the long-term interest rates and thereby prompt businesses to increase their investment and provide employment to the people. Thus, the Fed continues to influence not only unemployment rate but also the inflation rate bringing it around the targeted rate (Monetary Policy). Fiscal Measures for Controlling Unemployment Rate The US government is putting concerted efforts to reduce the unemployment rate through fiscal measures by attracting foreign investment and encouraging American companies to expand on the American soil. Increasing exports is another growth strategy to creating jobs for American citizens. The Obama Administration has taken initiatives to promoting entrepreneurship and spearheading the patent reforms in the US. Various trade agreements with several other countries aim at creating thousands of jobs at the American soil. The President's council has been formulated to advice the President for improving the competitiveness of the US businesses and for creating job opportunities for the US people (The White House). The Trade-off between Unemployment Rate and Inflation Baumol and Blinder argue "There is a bothersome trade-off between inflation and unemployment: High-growth policies that reduce unemployment tend to raise inflation, and slow-growth policies that reduce inflation tend to raise unemployment" (719). It is pertinent to note that the US was suffering from inflation and high unemployment rate in the '70s. As such both are undesirable for the nation; however, many economists prefer slightly higher inflation in lieu of lower unemployment rate in the economy. Yian Mui in the Washington Post states that unemployment makes people more miserable. Because unemployment affects not only those who are out of jobs but their family members too. Now most Central Banks view that it is better to allow some higher inflation to bring down unemployment rate in the economy. Accordingly, the Fed will continue with low interest rate policies to further reduce unemployment rate or at least until inflation crosses 2.5 percent mark even though targeted inflation rate is 2.0 percent. That means the Central bank is ready to compromise inflation by one-half percent to reduce unemployment rate to a reasonable level of around 5% to 5.5% (Mui). This implies that both inflation and unemployment rates are important measures in any economy and the central bank needs to find a trade-off between them while managing the national economy so that people get enough employment opportunities and at the same time, price rise do not affect their spending capacities in meeting their essential needs. References Bureau of Labor Statistics. US Department of Labor. Accessed December 12, 2013. http://data.bls.gov/timeseries/LNS14000000 Baumol, William, and Alan Blinder. 2011. Economics Principles and Policy. 12th ed. Cengage Learning. Federal Reserve. 2013. “What is inflation and how does the Federal Reserve evaluate changes in the rate of inflation?” Accessed December 12, 2013. http://www.federalreserve.gov/faqs/economy_14419.htm Monetary Policy. 2013. "How does monetary policy influence inflation and employment"? Accessed December 12, 2013. http://www.federalreserve.gov/faqs/money_12856.htm Mui, Ylan. 2013. “Which makes us more miserable: inflation or unemployment?” Washingtonpost.com. Accessed December 12, 2013 http://www.washingtonpost.com/blogs/wonkblog/wp/2013/04/12/which-makes-usmore-miserable-inflation-or-unemployment/ US Inflation Rate. 2013. Trading economics. Accessed December 12, 2013. http://www.tradingeconomics.com/united-states/inflation-cpi The White House. 2013. “Jobs & the Economy: Putting America Back to Work”. Accessed December 12, 2013. http://www.whitehouse.gov/economy/business Read More