The US Economics of International Finance - Essay Example

Essay, Macro & Micro Economics Economics of International Finance (Choosing a Country) Paper Outline Introduction 2. Review of Literature 3. Methodology 4. Discussion 5. Conclusion 1. Introduction This study presents assessment of economic factors of the US in the year between 1994 and 2013. The purpose of the study is to evaluate the relationship between the various economic variables such as Nominal G.D.P, Real G.D.P, Economic Growth Rate, Consumer Price Index, Inflation Rate Unemployment rate, Value of Exports and Value of Imports. The report is based on the financial report generated from an analysis of cost and benefit prepared by Don Drummond, a US economic analyst. The report was about strategies of managing costs and incomes in the financial organizations as well as the entire economy of the US government. The reason for choosing the US is the ready availability of data for this study, the reliability of the data collected. The sample size of the data collected was sufficient and realistic, hence, suitable for testing the hypotheses of this study. The report will be presented in an analytical and descriptive structure containing the summaries and analysis of the economic variables. The report thus gives recommendation of actions because of economic management policies that had projected economic growth of the debts of US to approximately US$ 430 Billion in the subsequent five years (Cohen 2007, p76). The ultimate purpose of the economy is to do cost and benefit analysis of the US, showing a roadmap to cost balancing between the exports and the imports in alignment with the US economic policies. There are four study questions, which this study intends to investigate. Using the economic variables, this study investigates whether there is any effect of consumer product demands on the consumer prices or not. It is hypothesized that there is a positive relationship between the two variables. Secondly, it investigates the trend of the consumer demands and consumer price index from the year 1994 to 2013. The hypothesis is that consumer demand decreases with the increase the rate of unemployment in the US. The third research question is to investigate the relationship that exists between the import and export, the hypothesis is that the more the export, the more the import volumes. The fourth study question is to investigate the relationship that exist between the unemployment level and the GDP, as well as the relationship between unemployment and the rate of economic inflation in the US. The hypothesis is that the level of unemployment negatively affects the percentage of GDP in the US economy. 2. Review of the Literature One of the economic reports and national survey of the US economy shows the objectives of the government to implement a policy to control the national expenditure and ensure that the US citizens can acquire quality life at affordable rates. The US government for the previous 5 years emphasized on the increased quality of education, healthcare, energy among other economic resources. The Economist reveals that from 2010, the demands for basic needs in the US increased; causing the average consumer price to increase. The average cost of consumer purchase in the US appeared to overwhelm the country’s purchasing power and the revenues of the US government, which majorly had its source from the public sector (Grier 2008, p68). The economic paper advised the US government to practice a great deal of assessment to reduce the inflation rate and increase the opportunities of the economic growth. Economic analysts further observed that in the same year 2012, the US experienced high economic deficiencies that it needed a number of analytical studies to overcome. Part of the recommendation indicates that the US citizens were not ready to accommodate the actions of the government including the decision to increase the product prices and the rate of taxation to cover up the massive government deficits. The deficits of the Federal US government reflected in the increasing amount of debts that the government had acquired (Feldstein, Hines and Hubbard 2007, p73). Logically, increase in debts implies that the cost of imports had grown beyond the value of exports. Coupled with inflation rate, Drummond paper explains the relationship between the GDP and the rate of unemployment. The rate of unemployment among the citizens affected the GDP and the general percentage of the economic growth and an increase in the level of debts. The Economic paper also revealed in 2011 that the US government had to minimize the annual expenditure capacity on the regular costs including health care, cost of food, education and social facilities. It is evident from the consumer behavior that the cost cutting would not have been any easier a task for the US government as it would require doing away with certain vital factors of critical priorities. The Drummond’s economic survey showed that the annual demand and cost of health care for example increased by approximately 7 percent (Argyrous, Forstater and Mongiovi 2004, p45.). The validity of the Drummond’s survey faced many critics from other analysts who question the possibility of optimization of income and revenue (Feldstein, Hines & Hubbard 2007, p65). The Economic survey of 2011 supports the rationale and the suitability of cost reduction in certain areas of the US economy, especially in the aspect of healthcare. The second area of challenge was how the US government could carry out revenue expansion and economic growth cost without interfering with certain regular pattern of lives of the citizens. Jones (2002, p63) gives a suggestion of increasing opportunities of employment to increase the purchasing power of the citizens while generating annual revenue from employment taxation. According to his survey, the idea of cost cutting is not holistic in economic development of the US. The demands of the citizens have to be met in whichever state of the economy. In that case, there has to be equilibrium between the demands and supply. According to Barro (1997, p48), the situation of high demand, the annual economic review of the US reported that the consumer prices also rise because of limited imports. Drummond economic study advocates for a reduction in the annual average cost products and reduced annual expenditure at the rate of 11% (Cohen 2007, p65). The report continues to reasons that it is unsustainable to attain higher rates of expenditure reduction as 13% and 15% every year (Cohen 2007, p65). The Annual US Economic Survey recommended that there be a decrease in the cost of imports. A Drummond report on the economic performance suggests another aspect of economic development, the nominal GDP and the real GDP, both measured in percentages. In this, the Economic survey by Martenson (2011, p34) argues that the US government should allocate a certain amount of resources and money for mitigation of the risk of inflation (Galor 2005, p79). In an attempt to increase the capacity of revenue gathering in the next five years, the Drummond Economic report recommended logical measures to promote the income and revenue allocation for the US government (Hueting 2011, p64) and (Schumpeter and Backhaus, 2011, p51). The report is valid evidence that running an underground economy is detrimental to the economic rise of the US Government and the entire global market. 3. Methodology This research uses quantitative analysis and descriptive methods in the presentation of the analysis and results. The analysis will be conducted using statistical methods such as use of descriptive statistical summary, linear regression analysis and linear correlation analysis. These tests will be done in alignment with the study questions and the hypothesis of each study question. The hypothesis will be used to test the four models The variables will be used as follows to collect data of the specified sample size of 80 observations. The variable names are assigned identifiers using unique letters and symbols to form models for economic calculations. Nominal G.D.P (NG) Demands (D) Real G.D.P (RG) Growth Rate (GR) Consumer Price Index (CPI) Inflation Rate (IR) Unemployment Rate (UR) Value of Exports (VE) Value of Imports (VE) The variables were selected because they present the relevant data for testing the hypothesis of the study. Their data was readily available from secondary sources, in the Federal Bureau of Statistics and the US Economic Reports including the Drummond report on the US and Canadian economy (Vásquez 2008, p64). It was logical to isolate the variables because they are directly linked to the economic development and trends of consumer behavior in the US through all the years. The variables are the building blocks of the models to be used in the analysis and presentation of the statistical results for the US economy. 3.1. Economic Models The models for the hypothesis are constructed as derivatives of the hypothesis as shown below: 3.1.1. Hypothesis The hypothesis is that there is a positive relationship between the two variables, consumer price index and the demands. 3.1.2. Economic Model CP = K * D where K is a constant economic factor 3.1.3. Hypothesis The hypothesis is that Consumer demand increases the consumer price index in the US. 3.1.4. Economic Model D = K / UR, where K is a constant economic factor. 3.1.5. Hypothesis The third hypothesis is that the more the export, the more the import volumes. 3.1.6. Economic Model VE = K * VI, where K is a constant economic factor. 3.1.7. Hypothesis The fourth hypothesis is that the level of unemployment negatively affects the percentage of GDP in the US economy. 3.1.8. Economic Model RG = K / RU, where K is a constant economic factor. NG = K / RU, where K is a constant economic factor. 3.2. Data Analysis The data analysis will be presented in various forms including descriptions, graphical tools and tables. From the analysis tools, the study will be able to test the hypothesis and make relevant conclusion and recommendations. 4. Discussion The data uses is a dataset of 80 records, measuring the economic variables for the 20 years between 1994 and 2013, separating each year into quarters. In that regard, 20 years have a total of 80 quarters, forming 80 records. The data is presented as shown below: Periods Demand (000,000 Tonnes) Consumer Price ($) Norminal GDP % Real GDP % Export (000,000) Import (000,000) Growth Rate % Consumer Inflation Rate % Unemployment rate % 1994Q1 240.00 1,374.00 13.00 13.39 78.00 67.00 6.00 3.00 32.00 1994Q2 256.00 1,345.00 13.00 13.91 56.00 78.00 5.00 7.00 12.00 1994Q3 467.00 1,353.00 12.00 12.72 75.00 57.00 4.00 6.00 34.00 1994Q4 492.00 1,345.00 12.00 12.48 89.00 76.00 8.00 4.00 45.00 1995Q1 340.00 1,234.00 12.00 12.6 46.00 56.00 7.00 5.00 33.00 1995Q2 2,137.00 1,283.00 14.00 14.84 87.00 74.00 7.00 6.00 23.00 1995Q3 2,632.00 1,157.00 13.00 13.91 87.00 46.00 6.00 7.00 23.00 1995Q4 343.00 1,221.00 15.00 15.6 98.00 48.00 5.00 4.00 45.00 1996Q1 1,234.00 2,216.00 13.00 13.65 98.00 58.00 5.00 5.00 23.00 1996Q2 1,394.00 1,272.00 14.00 14.84 78.00 67.00 6.00 6.00 43.00 1996Q3 453.00 1,383.00 12.00 12.84 65.00 48.00 7.00 7.00 43.00 1996Q4 2,344.00 1,217.00 13.00 13.52 76.00 78.00 6.00 4.00 23.00 1997Q1 2,834.00 1,185.00 15.00 15.75 89.00 49.00 5.00 5.00 14.00 1997Q2 1,226.00 1,084.00 16.00 16.96 65.00 87.00 4.00 6.00 15.00 1997Q3 2,394.00 1,232.00 17.00 17.51 78.00 67.00 4.00 3.00 23.00 1997Q4 1,415.00 1,276.00 12.00 12.48 69.00 75.00 3.00 4.00 14.00 1998Q1 1,345.00 1,250.00 13.00 13.65 98.00 85.00 4.00 5.00 13.00 1998Q2 243.00 1,390.00 14.00 14.42 76.00 95.00 5.00 3.00 15.00 1998Q3 2,321.00 1,275.00 15.00 16.2 67.00 47.00 5.00 8.00 16.00 1998Q4 431.00 2,343.00 16.00 16.8 59.00 59.00 6.00 5.00 24.00 1999Q1 3,120.00 1,236.00 7.00 7.42 68.00 59.00 7.00 6.00 28.00 1999Q2 1,432.00 1,236.00 12.00 12.6 78.00 76.00 3.00 5.00 28.00 1999Q3 2,310.00 1,237.00 11.00 11.55 67.00 67.00 4.00 5.00 25.00 1999Q4 1,332.00 1,233.00 11.00 11.66 78.00 65.00 5.00 6.00 27.00 2000Q1 1,243.00 1,238.00 12.00 12.84 89.00 85.00 5.00 7.00 26.00 2000Q2 1,342.00 1,223.00 16.00 16.96 67.00 98.00 6.00 6.00 25.00 2000Q3 2,154.00 1,320.00 14.00 14.7 78.00 56.00 7.00 5.00 28.00 2000Q4 227.00 1,320.00 16.00 16.64 67.00 87.00 6.00 4.00 27.00 2001Q1 273.00 1,568.00 12.00 12.36 78.00 67.00 5.00 3.00 26.00 2001Q2 279.00 1,210.00 14.00 14.56 87.00 56.00 5.00 4.00 34.00 2001Q3 136.00 2,119.00 12.00 12.6 76.00 69.00 4.00 5.00 23.00 2001Q4 1,232.00 1,351.00 15.00 15.9 76.00 67.00 4.00 6.00 24.00 2002Q1 310.00 2,168.00 16.00 17.12 79.00 87.00 3.00 7.00 25.00 2002Q2 234.00 1,213.00 17.00 18.02 78.00 67.00 4.00 6.00 26.00 2002Q3 2,453.00 1,416.00 11.00 11.55 78.00 87.00 5.00 5.00 25.00 2002Q4 2,154.00 1,415.00 15.00 15.9 56.00 78.00 4.00 6.00 34.00 2003Q1 424.00 1,372.00 11.00 11.44 58.00 69.00 5.00 4.00 32.00 2003Q2 227.00 1,235.00 14.00 14.7 70.00 67.00 6.00 5.00 32.00 2003Q3 151.00 1,144.00 11.00 11.66 65.00 44.00 6.00 6.00 25.00 2003Q4 275.00 1,357.00 12.00 12.84 43.00 87.00 5.00 7.00 25.00 2004Q1 1,022.00 1,041.00 13.00 14.04 34.00 56.00 5.00 8.00 27.00 2004Q2 324.00 1,425.00 17.00 17.68 56.00 78.00 4.00 4.00 28.00 2004Q3 533.00 1,392.00 15.00 15.75 47.00 78.00 5.00 5.00 27.00 2004Q4 245.00 2,154.00 13.00 13.39 84.00 67.00 7.00 3.00 28.00 2005Q1 1,243.00 1,214.00 13.00 13.52 46.00 56.00 5.00 4.00 29.00 2005Q2 865.00 746.00 13.00 13.65 46.00 48.00 3.00 5.00 27.00 2005Q3 453.00 812.00 12.00 12.72 98.00 76.00 4.00 6.00 26.00 2005Q4 1,464.00 784.00 14.00 14.98 98.00 65.00 5.00 7.00 26.00 2006Q1 1,332.00 815.00 12.00 12.6 78.00 85.00 6.00 5.00 56.00 2006Q2 1,234.00 1,248.00 15.00 15.6 65.00 98.00 7.00 4.00 45.00 2006Q3 231.00 2,210.00 16.00 16.64 76.00 56.00 5.00 4.00 23.00 2006Q4 242.00 1,105.00 17.00 17.51 89.00 87.00 4.00 3.00 23.00 2007Q1 122.00 1,104.00 11.00 11.44 65.00 67.00 6.00 4.00 23.00 2007Q2 159.00 1,126.00 15.00 15.75 78.00 56.00 7.00 5.00 45.00 2007Q3 3,298.00 3,830.00 11.00 11.55 69.00 69.00 8.00 5.00 23.00 2007Q4 324.00 1,239.00 14.00 14.84 98.00 67.00 7.00 6.00 43.00 2008Q1 2,345.00 2,145.00 11.00 11.77 76.00 87.00 5.00 7.00 32.00 2008Q2 234.00 910.00 12.00 12.96 67.00 67.00 4.00 8.00 12.00 2008Q3 245.00 913.00 12.00 12.84 59.00 87.00 4.00 7.00 34.00 2008Q4 222.00 1,170.00 12.00 12.6 78.00 44.00 4.00 5.00 45.00 2009Q1 431.00 1,139.00 14.00 14.56 65.00 87.00 4.00 4.00 33.00 2009Q2 432.00 825.00 13.00 13.52 76.00 56.00 5.00 4.00 23.00 2009Q3 432.00 820.00 15.00 15.6 89.00 78.00 6.00 4.00 23.00 2009Q4 329.00 1,254.00 13.00 13.39 65.00 78.00 7.00 3.00 45.00 2010Q1 245.00 1,899.00 14.00 14.56 78.00 67.00 6.00 4.00 23.00 2010Q2 543.00 1,126.00 12.00 12.6 69.00 56.00 4.00 5.00 32.00 2010Q3 234.00 2,496.00 13.00 13.65 98.00 48.00 5.00 5.00 32.00 2010Q4 324.00 2,116.00 15.00 15.9 76.00 76.00 6.00 6.00 25.00 2011Q1 453.00 2,100.00 12.00 12.84 67.00 65.00 6.00 7.00 25.00 2011Q2 261.00 2,262.00 13.00 13.78 59.00 85.00 7.00 6.00 27.00 2011Q3 361.00 2,345.00 15.00 15.75 65.00 75.00 6.00 5.00 28.00 2011Q4 643.00 990.00 16.00 16.64 76.00 85.00 5.00 4.00 27.00 2012Q1 345.00 1,690.00 17.00 17.68 89.00 95.00 4.00 4.00 23.00 2012Q2 643.00 444.00 12.00 12.36 65.00 47.00 4.00 3.00 45.00 2012Q3 202.00 1,181.00 13.00 13.52 78.00 59.00 3.00 4.00 23.00 2012Q4 534.00 564.00 14.00 14.7 69.00 59.00 4.00 5.00 43.00 2013Q1 662.00 540.00 15.00 15.9 98.00 76.00 5.00 6.00 43.00 2013Q2 564.00 772.00 16.00 17.12 76.00 67.00 4.00 7.00 23.00 2013Q3 332.00 929.00 12.00 12.72 67.00 65.00 3.00 6.00 14.00 2013Q4 324.00 1,228.00 12.00 12.48 59.00 85.00 4.00 4.00 15.00 Table 1: Economic Performance of the US Economy from 1994 to 2013 (Walker 2014, p2-4). 4.1. Analysis 4.1. First Hypothesis and model The, test for the first model is about the relationship between the consumer price index and the demand. The test in excel uses the formula: K = CORREL (B2:B81, C2:C81) = 0. 087617 The coefficient of linear correlation gives a value of 0.087617. This indicates that in the US economy, the demand of consumers has been increases the consumer price index at the rate of 0.0876 or 8.76%. This agrees with the first hypothesis, proving that the hypothesis is true. The second aspect of the test is the analysis of the performance of the variables through the 20 years. The series is shown in appendix 1: 4.2. Second Hypothesis and model The second hypothesis is tested by conducting linear correlation analysis using the consumer demands and the rate of unemployment as the variables. The formula is as follows: K = CORREL (B2:B81, J2:J81) = -0.15645 This gives a negative linear correlation coefficient, showing that there is a negative relationship between the two variables, as projected in the second hypothesis. The performance of the variables over the 20 years is presented Appendix 2. 4.3. Third Hypothesis and Model The second hypothesis is tested by conducting linear correlation analysis using the value of export and value of import as the variables. The formula is as follows: K = CORREL (F2:F81, G2:G81) = -0.01936 This gives a negative correlation analysis indicating that the imports are negatively affected by the exports. This is contrary to the third hypothesis. The performance of the variables over the 20 years is presented by the appendix 3 page. 4.3. Fourth Hypothesis and Model The fourth hypothesis is tested by conducting linear correlation analysis using the nominal GDP, the Real GDP and the rate of unemployment as the variables. The formula is as follows: K =CORREL (D2:D81, J2:J81) -0.06866 K=CORREL (E2:E81, J2:J81) = -0.08134 Both of the tests give a negative correlation coefficient, showing that there is a negative linear correlation between the rates of unemployment in the US and the GDP. This is contrary to the hypothesis. The performance of the variables over the 20 years is presented by the series in appendix 4. 5. Conclusion and Recommendation From the four hypotheses, it is clear that only the first hypothesis passed the test. It is therefore logical to conclude that the consumer demands positively affected the consumer price index. The US economy therefore depended much on the consumer demands and the purchasing power of the citizens for the 20 years. It is therefore recommended that the US government ought to increase the purchasing power as the demand continuously grows due to population growth. The data practically supports the arguments that the Drummond presented in the two reports for the reforms of Canadian and the US economy. The US government can implement the recommendations by incorporating them in the US economic policies and the reduction of the economic expenses. References Argyrous, G., Forstater, M and Mongiovi, G. eds. 2004. Growth, Distribution, And Effective Demand: Essays in Honor of Edward J. Nell. New York: M.E. Sharpe. Barro, R J. 1997. Determinants of Economic Growth: A Cross-Country Empirical Study. MIT Press: Cambridge, MA. Cohen, S. D. 2007. Multinational Corporations And Foreign Direct Investment: Avoiding Simplicity, Embracing Complexity. New York: Oxford University Press. Feldstein, M., Hines, J. R. & Hubbard, R. G. 2007. The Effects of Taxation on Multinational Corporations. Chicago: University of Chicago Press. Galor, O. 2005. From Stagnation to Growth: Unified Growth Theory. Handbook of Economic Growth, Elsevier. Grier, K. 2008. Empirics of Economic Growth. The Concise Encyclopedia of Economics (2nd ed.). Library of Economics and Liberty. Hueting, R. 2011. The future of the Environmentally sustainable national income. Ökologisches Wirtschaften, 4/2011, 30-35 Jones, C I. 2002. Introduction to Economic Growth 2nd ed. W. W. Norton & Company: New York, N.Y. Martenson, C. 2011. The Crash Course; The Unsustainable Future of our Economy, Eneregy, and the Environment. John Wiley and Sons. p. 4. Schumpeter, J & Backhaus, U, 2003. The Theory of Economic Development. In Joseph Alois Schumpeter. pp.16. Vásquez, I 2008. "Development, Economic". In Hamowy, Ronald. The Encyclopedia of Libertarianism. Thousand Oaks, CA: SAGE; Cato Institute. pp. 20–35. Walker, D 2014, Quarterly Update: The Economic Downturn in Historical Context, Council on Foreign Relations, Geo-economics. Appendix 1: Consumer and Demands Figure 1: Presentation of consumer Price index and Demand Appendix 2: Consumer Demand and Unemployment. Figure 2: Consumer Demand and the rate of Unemployment Appendix 3: Imports and Exports Figure 3: Relationship between the US Import and Export Appendix 4: Fogure 4: Rate of unemployment and the nominal and real GDP Read More