Gross Domestic Product Growth Rate in the US - Case Study Example

 Gross Domestic Product Growth Rate in the US Introduction The US economy has many challenges especially from the year 2008 when it experienced a recession, high inflation, and high unemployment rates. The recession is reported to be officially over and a new period of new economic growth is expected in 2012 and in the years to follow. The recession is officially said to have ended by the third quarter of 2009. However, household incomes kept falling for the two year period after September 2009 (Pear, 2012). The key measures of macroeconomic indicators for a product market and labor market include Gross Domestic product (GDP) which measures the real changes in growth and levels of real output and changes in average consumer prices. Changes in the labor market are measured or indicated by the rate of unemployment, total employment and total unemployment (Vroman & Brusentsev, 2005). Other indicators include the base interest rate which is determined based on inflation and inflation levels. These also in turn affect the consumer purchasing power and the level of economic activity in an economy. The United States is a free capitalistic economy where the forces of demand and supply and free enterprise dictate economic development. This paper evaluates the trends, performance and forecasts for the US economy by looking at key economic indicators and concludes at the end of the paper. Literature review The US economy is the largest in the world and its performance affects not only the USA, but also other countries which are trading partners and usually affects the whole world too. The last two years, from 2010, have seen an increase in overall GDP growth although the rate of GDP growth fell from the third quarter of 2010 (Isidore, 2011). In the first quarter of 2010 GDP grew by 3.9 percent and 3.8 percent in the second quarter. The rate fell to 2.5 percent GDP growth in the third quarter and falling further to 2.3 percent in the fourth quarter. In 2011 the GDP grew by just 0.4 percent and improved in the second quarter by growing 1.3 percent in the second quarter. The third quarter of 2011 saw the GDP grow by 2.5 percent showing a steady improvement in GDP growth in 2011, after adjustment for inflation (Isidore, 2011). The observed growth rate especially in the third quarter though good is still considered weak as a growth rate of at least 3 percent to be considered as real growth. The economy is expected to just grow by 2.2 percent in the fourth quarter of 2011 and achieve a 2.3 percent growth rate throughout 2012, though economists predict a robust 3 percent growth in the fourth quarter (Isidore, 2011). The revised upward trend for fourth quarter GDP growth is due to contributions from computer sales adding 0.12 percent. Real personal consumption rose by 2.1 percent in the fourth quarter, which is higher than the 1.7 percent experienced in the third quarter of 2011. Real exports of commodities grew by 4.3 percent in the fourth quarter; all contributing to the expected GDP growth of 3 percent in 2011/2012 (“US GDP Growth rate” 2012). The US is expected to achieve a GDP growth of 2.1 percent in 2012 while 2013 will see a GDP growth of 2.2 percent (“The economist online”, 2012). While the US GDP is expected to grow, the growth is still minute compared to what a good GDP growth should be (3 percent). The trend and forecasts are summarized in the table below; 2009 2010 2011 2012 2013 -0.48 3.13 1.63 2.10 2.20 Source: Trading economics GDP which stands for Gross Domestic Product refers to the total value of all services and goods produced within an economy (or country) in a given year. It is a measure of how much income is generated from production activities within the country’s economy. The GDP incorporates only the finished commodities (goods and services) produced within the economy but does not incorporate capital goods or raw materials used to produce another product.GDP is calculated by factoring in all goods and services produced in an economy and considering only the market prices of the finished goods and services. Two methods are used to calculate GDP one is the expenditures method which incorporates the Gross Private Consumption Expenditures (C), the gross private investment (I), government purchases (G) and net exports (X-M). With this the formula for calculating GDP is = C + I + G + (X-M). The other method is the income approach that determines national income (Sexton, 2008). It considers labor income (W), rental income (R), interest income (i) and profits (PR). The formula for determining GDP using this method is; NI (GDP) = W + R + i + PR. A GDP value that is positive shows that the economy is growing while a GDP value of zero shows that an economy is stagnant. A negative GDP value shows that the economy is shrinking or becoming smaller. The US annual unemployment rate has been improving with 2009 seeing a national unemployment rate of 9.3 percent which worsened in 2010 to a high of 9.6 percent, a rate close to the historical highs of 9.9 percent in 1941; and fell in 2011 to 8.9 percent (“Labor Force Statistics”, 2012). This indicates that the economy is improving as the GDP growth in 2011 show. The fourth quarter from 2011 experienced an unemployment rate of 8.3 percent which was same for February 2012 (“Labor Force Statistics”, 2012). 2012 forecasts of unemployment levels in the United States show promising figures with March expected to have an unemployment rate of 8.2 percent as summarized in the table below; Source: the financial forecast center The trend shows promising times for those who are unemployed as the rate of unemployment is expected to keep falling in the first half of 2012 and the same trend is expected for the rest of 2012 and in early 2013 (“US unemployment rate forecast”, 2012). Unemployment is an important indicator of economic performance as it shows the trends in the labor market. A high unemployment rate shows a shrinking economy in which production is either falling or businesses are closing. When the unemployment rates are falling it shows the economy is growing as more production requires more human capita as a factor of production. Employment rates are also improving with more people getting employed (“US unemployment rate forecast”, 2012). Conclusion The US economy has just gotten out of the 2008 recession. GDP is growing in the US especially in 2011 after slumping in the first quarter of 2011 to just 0.4 percent from a high of 2.3 percent in the third quarter of 2010. Overall, 2009 had a GDP growth of -0.48 percent showing the economy shrank, 2010 had an annual GDP growth of 3.13 with 2011 achieving 1.63 percent. 2012 and 2013 are forecasted to have a GDP growth of 2.1 and 2.2 percent, respectively. Unemployment rate was high in 2009 at 9.3 percent, rising to 9.6 in 2010 and falling to 8.3 percent in 2011. The rates are expected to fall further in 2011 with the second quarter of 2012 forecasted to have an unemployment rate of 7.8 percent. The base lending rates will also remain low below 1 percent as the Federal Reserve will not change its monetary policy. Inflation is forecasted to remain below 3 percent in 2012. The information above shows that the US economy is on the rebound although the rate of growth for instance of GDP is still weak but it is growth nonetheless. References The Economist Online (2012, March 08). GDP forecasts Retrieved from http://www.economist.com/blogs/graphicdetail/2012/03/focus-0 Inflation Data (2012, March) Historical inflation Retrieved from http://www.inflationdata.com/inflation/inflation_rate/historicalinflation.aspx Isidore, C. (2011, October 11). GDP forecast: Growing faster, but not for long. Retrieved from http://money.cnn.com/2011/10/24/news/economy/gdp_forecast/index.htm Pear, R. (2011) Recession Officially Over, U.S. Incomes Kept Falling. . The New York Times Retrieved from http://www.nytimes.com/2011/10/10/us/recession-officially-over-us-incomes-kept-falling.html?_r=1 Sexton, R. (2008). Exploring macroeconomics (5th edition ed., pp 313-316) Mason, OH: South -Western Cengage Learning. U.S. Bureau of Labor Statistics, Division of Labor Force Statistics. (2012). Labor force statistics from the current population survey. Retrieved from U.S. Bureau of Labor Statistics website: http://www.bls.gov/cps/cpsaat01.htm US inflation rate forecast. (2012, March). Retrieved from http://www.forecast-chart.com/forecast-inflation-rate.html Vroman, W Brusentsev, V (2005) Unemployment Compensation throughout the World: A Comparative Analysis. Michigan: W.E. Upjohn Institute for Employment Research. Read More