The Economic Growth of a Country - Term Paper Example

Assessment and Comparison of the Current Macroeconomic Environment in US Table of Contents I. Introduction …………………………………………………………… 3 II. Assessmentof GDP in U.S. …………………...……………………… 3 a. Asian Financial Crisis in 1997 ……………..……………….. 4 b. The Mexican Economic Recession in 2000 ………..……….. 6 b.1 Assessing the Importance of NAFTA in U.S. GDP ……………………………………………….……. 7 c. The September 11 Tragedy in 2001 ………….……………… 7 III. U.S. Temporary Solutions to Economic Problems during the Past Ten Years ……………………………………….…………… 8 IV. Difference between the Past and Current U.S. Solution to Economic Problems …………………………………………………. 9 VII. Conclusion ……………………...…………………………………… 10 References …………………………………………………………………… 15 - 16 Introduction In the past few years, globalization gradually causes a shift from domestic trading to global trading. Changes in the business and economic activities will eventually affect the employment opportunity of the local citizens to the extent that it could also result to imbalances in the supply and demand of products and services being rendered domestically and internationally. The economic growth of a country highly depends on the size of the market (domestic and foreign) the country is serving. It is essential for businessmen, bankers, the government officials, and economists to carefully assess the present macroeconomic environment. Macroeconomic study will provide us a better picture of the economic activities globally by simply looking at the Gross Domestic Product (GDP) of each country. Normally, when the GDP is higher than the previous year’s GDP, it is said that the economy of is improving. However, as a good economist, we still need to take note of other effects of the increased GDP particularly the value of import vs. export, the unemployment rate, inflation rate, the supply of money and others as it will also create economic failure in the long run. Assessment of GDP in U.S. Based on the economic report that was released by the U.S. Department of Commerce: Bureau of Economic Analysis, the GDP of US back in January 2005 and 2006 is 12,455.8 and 13,246.6 respectively. (Bureau of Economic Analysis, 2007) (See Graph I - A Ten-year US GDP Linear Graph on page 11; Table I – A Five-Year Domestic GDP in U.S. on page 4) Analyzing the graph below shows an upward trend. It means that during the past five years since the September 11 terrorist attack, the country managed to slowly recover from the economic disaster that has resulted from the attack. However, the ten-year linear graph does not give us a better picture of the U.S. economy. There are a lot of components that could affect the GDP of a country. Therefore, it is important for us to look at other macroeconomic tools that could give us a better understanding of the major factors that could affect the economy of a country as a whole. Table I - A Five-Year Gross Domestic Product in U.S. (Billions of US$)   2006 2005 2004 2003 2002 Gross Domestic Product 13,246.60 12,455.80 11,712.50 10,960.80 10,469.60 Source: U.S. Department of Commerce: Bureau of Economic Analysis, 2007 There were three major economic events that directly affect the GDP of U.S. between the years 1996 - 2006. A percent change in GDP graph can give us a more detailed historical economic outlook. It clearly shows how the U.S. economy was badly affected during the 1997 Asian Financial Crisis, the Mexican economic recession in 2000, and the September 11 tragedy in 2001. (Noland, Robinson, and Wang, 2007; CDO, 2003; and Blake and Sinclair, 2002) (See Graph II – A Percent Change in US GDP graph on page 11) Asian Financial Crisis in 1997 The Asian financial crisis in 1997 causes a lot of Asian economy to experience a great depreciation in the purchasing value of their currency. This is the main factor why most Asian countries were forced to cut down on their importation of commercial goods from the U.S. and other countries. The Asian countries at those times had to cut down on major importation of goods as their way of balancing their domestic financial needs. Since the purchasing power of their currency depreciates a lot, export opportunities for them arises along the way. (Noland, Robinson, and Wang, 2007) The sudden decline of the value of importation of goods in many Asian countries directly affects the size and value of exportation in U.S. This event causes the total production output (GDP) of U.S. to decline. Part of the economic rule states that a decrease in the demand for exported products would eventually result to a decrease in the supply of exported items. On the other hand, a decrease in production would also mean a decrease in the demand for manpower. At this point, cutting down on the number of employees would keep the local businesses capable of coping with the economic crisis. Therefore, unemployment rate increases. (See Figure I – Decrease in Export Decreases Employment Opportunity below; Table II – Unemployment Rate on page 6; and Graph IV – A Percent Change in Exports of Goods and Services (U.S.) on page 12) Basically, the U.S. government could control the fiscal and monetary policy in order to control the unemployment rate and inflation. A high unemployment rate and inflation can create a negative performance in the U.S. economy. Therefore it has to be prevented. Despite the effect of the 1997 Asian crisis on the declined exportation of goods, the country managed to maintain a low unemployment rate. (See Table II – Unemployment Rate in U.S. on page 6) This is possible by increasing the total annual government spending to create more job opportunities for the local citizens. Increasing the government spending will create a higher demand for goods and services. (Mitchell, 1993) Therefore, more manpower is required to increase the supply of these items. Notice on Graph VI, the U.S. government expenditures have been constantly increasing since 1997. (See Graph VI – Government Expenditures in U.S. on page 13) The Mexican Economic Recession in 2000 Since January 1994, the United States, Canada and Mexico follow a free trade for more than 10 years. Under NAFTA, the barriers between Mexico and the U.S. and Canada have been removed. For some time, the trading relationship between Mexico and U.S. has been very good until the Mexican economic recession that started in 1994 and 2000. NAFTA was initially developed in order to allow ‘free-trade’ between two developed countries. After many years, NAFTA’s effects on the U.S. balance of trade with Mexico dropped right after NAFTA took effect. Congressional Budget Office (CBO) noted that the decline in the U.S. trade balance with Mexico was due to the crash of the peso during the last quarter of 1994 and another Mexican recession during the late 2000 and 2001. (Congressional Budget Office, 2000) The effects of the second Mexican recession between the years 2000 to 2001 together with the September 11 crisis and the effects of the tight competition in the global market are all reflected in the U.S. GDP. (See Graph II – A Percent Change in US GDP graph on page 11) Since the effect of the decline in the U.S. exportation of goods and services in Mexico is only a portion of the country’s whole international trading, the bulk in the huge decrease is caused by the September 11 crisis and globalization. Assessing the Importance of NAFTA in U.S. GDP Assessing the effects of NAFTA in the overall levels of trade in goods between the U.S. and Mexico on U.S. Gross Domestic Product (GDP) is important because of its relevance with other proposed U.S. free-trade areas with other developing countries. When analyzing the trade of balance as a whole, trading between U.S. and Mexico is just a small portion of the whole picture. This is because differences between U.S. exports and imports are composed of many other economic activities between other countries worldwide. It means that even if the U.S. trade balance declines, there will still be a little net effect on the country’s total GDP and employment because the negative outcome is being offset by the effects of an increased net capital inflows coming from other countries. (Congressional Budget Office, 2000) Another issue that has to be considered when assessing the effect of NAFTA is to separate the uncontrollable political and economic events that are not entirely related to the NAFTA agreement between the two countries. Other than the Mexican recession, the rest of the trading experiences between Mexico and U.S. have been positive. The September 11 Tragedy in 2001 The September 11 attack resulted to a temporary drop in the demand for goods and services. This is because many businesses were badly affected by the incident. In fact, many businesses had to declare bankruptcy. Since a lot of investors lost their confidence in the U.S. economy, bulk of the domestic and foreign investments were temporarily pulled out. This resulted to mass lay-offs. In fact, “the 9/11 tragedy has led to the loss of one million jobs and investment equivalent to almost 3% of GDP over the next four months.” (Bernanke, 1983) The unemployment rate in 2001 immediately increases in 2002; from 4.20% to 5.70% respectively. (See Table II – Unemployment Rate in U.S. on page 6) Each time the unemployment rate is high, the public consumption decreases. This is because many people choose to hold on to their cash instead of purchasing goods on impulse. When the public consumption is low, domestic businesses are also affected. Many companies could either cut down on the number of employees. In worst cases, firms would close down and declare bankruptcy. On the other hand, investors chose to be in a neutral position. Most of them had a ‘wait-and-see’ attitude with regards to new investment expenditures. The September event resulted to an economic recession in the country. Based on the graphs, the gray portion between the years 2001 – 2002 represents ‘economic recession.’ It is the stage when the weak companies in US are left no choice but to give up their businesses. In fact, it was the lowest U.S. investment value since 1982. (See Graph VII – US Quarterly Investment on page 14) U.S. Temporary Solutions to Economic Problems during the Past Ten Years Since 1998, the U.S. government has been totally relying on borrowing money in order to maintain a lower unemployment rate and avoid deflation. Each time the US government spending increases, temporary employment opportunity also arises. This also creates more business opportunities for the local businessmen. At this point, the U.S. government had no choice but to use monetary instruments in order to boost the U.S. economy. As soon as the foreign investors would see that the U.S. economy has reached a recovery stage, foreign investments would once again be available to help boost, develop, and sustain the economic growth of the country. During the fiscal year 2006, the U.S. federal deficit has reached US$296 billion. This amount is way below the previous year’s estimate of US$423 billion. The total amount of U.S. government indebtedness was roughly US$593 billion as of FY2006 while the public debt has a total of US$8.4 trillion in total. (Pakko, 2006) (See Graph VIII – The Federal Deficit vs. the Change in Public Debt on page 14) Difference between the Past and Current U.S. Solution to Economic Problems The unexpectedly high government deficit that has accumulated in the past few years has to be avoided. A serious currency crisis and high budget crisis has a long-term negative effect towards the U.S. economic growth. When the currency crisis is left unresolved, the long-term effect will be the decline in the standards of living of a lot of U.S. citizens belonging to the major segments of the population. It could even result to further deterioration on the investment environment in the country. (Pakko, 2006) On the other hand, in case the U.S. budget deficit remains high, it could make the U.S. government’s future loan more complicated. Usually, a country that has a high government deficit could only loan some money from overseas lender at a much higher interest rate. The high interest rate that is being offered by the lender would eventually add up to the economic burden of the country. Basically, government loans should only be used in case of emergency. It should never be treated as an economic booster because of its adverse effects. According to IRS, the ‘gross tax gap’ in U.S. as of year 2001 has reached US$245 billion. (U.S. Department of Treasury, 2006) Today, the U.S. government is trying to lessen the amount of national loans. For this reason, the U.S. Department of the Treasury would implement a multi-year strategy aiming to reduce the tax gap. Reducing the opportunities for tax evasion is one of the best solutions for the government to reduce the amount of the U.S. national debts. The Treasury Department’s Office of Tax Policy is now working with the IRS to create a solution and develop additional legislative proposals with regards to this matter. (U.S. Department of Treasury, 2006) The use of a strict regulatory process will be designed to improve the compliance on tax payment. Aside from the initial step of the U.S. Department of Treasury, government agencies will continue to invest on the improvements in information technology and a multi-year commitment to research. This is a vital step in identifying the sources of non-compliance with regards to tax payment. Such research information will be useful for IRS to properly target tax evaders. Also, by improving document matching, examination, and collection activities, the IRS will be in a better position to prevent, detect, and act according what is necessary. Conclusion Fiscal and monetary policy can be used in ensuring the macroeconomic performance of the U.S. Whenever a fiscal crisis or a tragedy occurs, the government should immediately act on maintaining a low unemployment rate as well as avoid inflation and deflation. The current economic condition of the U.S. today involves the concern on the high national debts. Unlike in the past years, the main concern of the government is the high unemployment rate and low investment level caused by the September 11 tragedy. Economic issues will continue to rise in the future. Depending on the economic concern of the country, it is important to keep the public consumption, investments, the government spending, as well as the import and export balance all the time. Failure to do so would result to another economic issue to solve. Graph I - A Ten-year US GDP Linear Graph Graph II – A Percent Change in US GDP Graph Graph III – Exports of Goods and Services in U.S. Graph IV – A Percent Change in Exports of Goods and Services (U.S.) Graph V – Civilian Unemployment Rate in U.S. Source: U.S. Department of Labor: Bureau of Labor Statistics, 2007 Graph VI – Government Expenditures in U.S. Graph VII – US Quarterly Investment Graph VIII – The Federal Deficit vs. the Change in Public Debt Source: Federal Reserve Bank of St. Louis References: 1 Bernanke, B. (1983) ‘Irreversibility, Uncertainty, and Cyclical Investment’ Quarterly Journal of Economics. 98; 85-106. 2 Blake A. and Sinclair MT. (2002) ‘Tourism Crisis Management: Responding to September 11’ Christel DeHaan Tourism and Travel Research Institute & Nottingham University Business School Retrieved: April 20, 2007 < http://www.nottingham.ac.uk/ > 3 Bureau of Economic Analysis (2007) ‘GDPA’ Retrieved: April 20, 2007 < http://research.stlouisfed.org/ > 4 CDO (2003) ‘The Effects of NAFTA on U.S. – Mexican Trade and GDP’ May 2003. Section 2 of 9. Retrieved: April 20, 2007 < http://www.cbo.gov/ > 5 Congressional Budget Office (2000) ‘Causes and Consequences of the Trade Deficit: An Overview’ March 2000 6 Mitchell, D.J. (1993) ‘Increased Government Spending: A Recipe for Economic Stagnation, Not Stimulus’ Executive Memorandum #351. The Heritage Foundation. February 9, 1993 Retrieved: April 20, 2007 < http://www.heritage.org/ > 7 Noland, M.; Robinson, S.; and Wang, Z. (2007) ‘The Continuing Asian Financial Crisis: Global Adjustment and Trade’ Peter G. Peterson Institute for International Economics. Retrieved: April 20, 2007 < http://www.iie.com/ > 8 Pakko, M. (2006) ‘National Economic Trends: Deficits, Debt, and Trust Funds’ Federal Reserve Bank of St. Louis. August 2006 Retrieved: April 20, 2007 < http://research.stlouisfed.org/ > 9 U.S. Department of Treasury (2006)’A Comprehensive Strategy for Reducing the Tax Gap’ U.S. Department of the Treasury – Office of Tax Policy Retrieved: April 20, 2007 < http://www.ustreas.gov/ > Read More