Economic Analysis of the Current Outlook of Economy of the US - Research Paper Example

?Running Heading: Applied Economic Analysis Applied Economic Analysis “Applied Economic Analysis of the Current Outlook of Overall Economy of United States of America” INTRODUCTION AND DESCRIPTION OF THE ISSUE: The impact of recent economic recession has been experienced by almost every other economy of the world. Different countries have been coming up with different policies and strategies in order to recover from one of the worst economic downturn. Economy of United States of America has been under serious issues and problems after the economic recession and is still experiencing several issues in this regard. The overall national income of United States of America is being decreased. Highest concern has been raised about the job or labor market of the country. There are number of people who are looking for suitable jobs and are not able to find one. On the other hand the average take home wages have been decreasing considerably (Pear, 2011). This all results in further increasing the issues and problems for the economists and policy makers, who are in search of different ways to come out of the after affects of the economic recession. Government of United States of America along with other policy makers are busy in devising such a policy or strategy which facilitates them in the process of recovering. Different policies and initiatives are being taken by the officials and policy makers, but despite of this there has been continuous decrease in the overall income and output level of the economy. It has been reported that the national income of United States of America decreased by almost 9.8 percent after the recession till June this year. According to different economics analysts, this is one of the largest decline in past few decades (Pear, 2011). Despite of the little improvement in overall unemployment rate, the average wage rate is reporting constant decline (Pear, 2011). This issue is not only of high importance for the job seekers, but also for job providers and the government of United States of America. As it has direct link with the overall economic condition of the country. And there is a high need of coming up with some effective strategy in order to overcome this problem. In order to solve this issue or problem, it is necessary to first identify the reasons and causes behind it. This is possible only through a proper and thorough applied economic analysis. APPLIED ECONOMIC ANALYSIS FOR IDENTIFYING MAIN REASONS BEHIND THE ISSUE AND COMING UP WITH EFFECTIVE STRATEGIES: In order to better understand the overall situation it is important to have a look at the basic elements and factors which are directly related to the issue. First step in this regard is to identify and explore the reasons and factors behind the constant decrease in the wage rates and also in the overall national income of the country (Pear, 2011). Different analysts have presented several elements which are responsible for this. One of the main factor for this declining wage rate is high unemployment rate. There are several people who are in search of job, who are also ready to work at nominal hourly rates. Along with this, employees cannot demand high salary because of the increasing unemployment. It will be easy to understand these factors by applying the concept of supply and demand. In a normal market prices and level of output are decided by the forces of supply and demand. Similarly, in labor market wage rates are decided by the supply and demand of the labor. The concept of Marginal Productivity, tried to explain the relationship between the wage rate and demand of the labor. According to this concept the wage rates are directly related to the demand of the labor. If there is more demand of labor the average wage rates will also increase. Whereas the there is an inverse relationship between the supply of labor and wage rates. If the supply of labor exceeds the demand of labor, then there is a significant decrease in the wage rates (Mankiw, 2009). This concept can be explained with the help of graph as follow: Now, the question is that why there is more supply of labors in American economy as compared to the demand of labors. The decrease in the demand of labor can be understood by exploring the different associated factors. Due to ongoing recession, organizations are undertaking different cost cutting measures in order to reduce the overall cost of operations. In this regard organizations are downsizing and are not hiring more people. The reason behind this practice of the organizations can be understood by investigating the situation of the overall economy. The total output of the economy is represented by the Gross Domestic Product (GDP). Total GDP consists of four main components which are (Leamer, 2009): 1. Private consumption 2. Government consumption 3. Investment 4. Net Exports (Exports minus Imports) GDP = C + I + X – M These are also known as the components of the aggregate demand. In order to understand the fluctuations in the total GDP or aggregate demand, it is necessary to identify the explore the trends and fluctuations in the components of GDP. (Source: Watkins, 2011) As visible in the chart above, there has been considerable decline in the overall investments. This means that the because of the lack of investments organizations are not able to generate a certain amount of output and revenue, as a result they are downsizing. This concept can also be explained with the help of marginal analysis. Any organization usually focus on hiring optimal number of employees. This number can be calculated with the help of marginal productivity analysis. As long as the additional employee is contributing in increasing the overall revenue, organizations keep on hiring. The marginal revenue curve is basically the demand curve for the labor. The marginal revenue product is the increase in the overall generation of the revenue by hiring an additional labor. MRP can be calculated with the help of two different approaches (Arnold, 2008). First Approach: MRP = Change in Total Revenue / Change in the Quantity of Labor Second Approach: MRP = Marginal Revenue * Marginal Physical Product This concept can be explained with the help of a hypothetical example. Consider an organization which charges $ 10 for its products. The marginal revenue analysis of this organization, for labor factor is presented in the table below: Quantity of Labor Quantity of Output (Q) MPP (?Output/?labor) Price of the product (MR) Total Revenue ( P * Q) MRP 1 5 - 10 50 - 2 20 15 10 200 150 3 34 14 10 340 140 4 47 13 10 470 130 5 59 12 10 590 120 6 70 11 10 700 110 7 80 10 10 800 100 8 89 9 10 890 90 9 97 8 10 970 80 10 104 7 10 1040 70 11 110 6 10 1100 60 12 115 5 10 1150 50 13 119 4 10 1190 40 14 122 3 10 1220 30 15 124 2 10 1240 20 16 125 1 10 1250 10 17 125 0 10 1250 0 18 124 -1 10 1240 -10 19 122 -2 10 1220 -20 Once the Marginal Physical Productivity and Marginal Revenue Productivity is zero, organizations stop hiring procedure at that time as further hiring reduce the overall revenue (Arnold, 2008). The organizations in United States of America are facing issues of decline in the investment level, hence the total output level is decreasing, which in turn is reducing the marginal revenue productivity of the employees. As a result there is decrease in the demand of the labor. Next step is to investigate the decrease in the private investment which in turn is resulting in declining the total output level. This concept is linked with the private consumption which in turn is dependent on the earnings of the people in the economy. Private consumption in an economy is equal to the sum of disposal income and savings. Where disposal income is defined as the income generated after paying taxes and adding any other transfers (Arnold, 2008). C = Yd + S Private consumption can further be explained with the help of consumption function, which is used to explain and explore the relationship between consumption and disposal income. Marginal propensity to consume is the slope of the consumption function and is defined as the change in the level of consumption caused by the change in the disposal income (Wessels, 2000). C = a + bYd The decrease in the income results in decreasing the disposal income, as a result people decrease their consumption. This decrease in the consumption results in reducing the demand of the goods and services in the economy and thus reducing the overall production of the economy. Which in turn is resulting in reducing the demand of the labors and generating unemployment in the economy. Hence, it can be said the current level of unemployment in the country is forcing the wage rate to decline. It is also important to consider here that these decreasing wage rates are directly affecting the overall economy of United States of America. The decrease in wage rates is not only reducing the consumption level but is also reducing the output level. On the other hand the decrease in the output level is resulting in decreasing the demand of labor and as a result the wage rates are declining. Therefore it is a cyclic process and the economy of United States is exposed to the joined implications of several economic factors. CONCLUSION: In order to overcome the existing economic condition, government of United States has to inject money supply in the economy and has to invest in various projects. This in turn will increase the output in the economy and will increase the demand of labor. As a result the wage rates will also improve, which in turn will increase the consumption level leading to the increase in the production. REFERENCES Arnold, R. (2008). Economics. Mason, OH: South-Western Cengage Learning. Leamer, E. (2009). Macroeconomic Patterns and Stories. Heidelberg: Springer – Verlag Berlin Heidelberg. Mankiw, G. (2009). Principles of Economics. Mason, OH: South-Western Cengage Learning, 2009. Pear, R. (2011) “Recession Officially Over, U.S. Incomes Kept Falling”. New York Times. Retrieved November 10, 2011, from Watkins, T. (2011). A Statistical Review of Current Economic Conditions in the U.S. USA: San Jose State University, Department of Economics. Wessels, W. (2000). Economics. New York: Barron’s Educational Series. Read More