Assessment of Historical Growth in the US Economy - Essay Example

Assignment Business Environment: Assessment of Historical Growth in the US Economy One of the statistics used to measure the growth of the economy is the Gross National Product (GDP) GDP includes the value of all goods and services produced in the country over the period expressed in absolute terms. According to Investopedia "this includes consumption, government purchases, investments, and the trade balance (exports minus imports)" GDP is the best indicator to express the economic health of a country' GDP is usually measured on an annual basis for easy comparisons. But quarterly figures are also being computed and recorded for the major industrially advanced countries. GDP can be measured as 'Current Dollars' values or 'Constant Dollars' Values. The Constant dollar GDP is also known as the 'Real GDP represents the quantity of economic output. Real GDP is always used in measuring the overall rate at which an economy is grown. The current dollar GDP represents the market value of goods and services produced in a period in a country. "The best way to understand the U.S. economy is by looking at Gross Domestic Product (GDP), which is the statistic used to measure the economy". (Kimberly Amadeo) There are three essential uses of the GDP. They are: GDP is used to determine whether an economy is growing more quickly or more slowly than the quarter or during the same period a year before GDP is being used to compare the size of the economies of different countries in the world GDP is the best measure to compare the relative growth rate of different economies of the countries worldwide. In order to solve our question of whether the USA is enjoying the longest continuous expansion of its economy since modern records began the best solution is to retrieve the GDP figures of the US economy over a period up to which the records are available. And compare them to check for the trend of the growth in the US economy expressed through the GDP figures. Usually such kinds of economic data can be obtained from the website of Bureau of Economic Analysis. (BEA) An analysis of the US GDP is expressed in chained dollars in the BEA Website for the period from 1929 to 2006 last quarter. An analysis of the historical GDP figures indicate that the US economy has been continuously showing an increasing trend only except for some years where it shows a negative trend. Especially in the years where there were recessions of the economy the GDP has been continuously growing. From the following Chart it can be observed that the growth of the US economy suffered slightly during the years 1974, 1982 and 1991. These are the known periods of recession where the US economy was recoding a negative growth of -0.51 percent, -1.97percetn, and -0.17percent respectively which are very negligible. Apart from these small deviations in the near past the US economy has been continuously doing well. The observed data is also produced below to show that in the real values also the GDP of the US economy is growing continuously except for intermittent reversals to negative figures. These negative figures are not significant except for certain years like 1932 and 1946 where the negative growth is showing high figures -14.94 percent in 1932 and -12.39 in the year 1946. Chart Showing the Growth in the US Economy From the chart it may also be observed that there has been continuous positive growth in the US GDP figures during the longest spell of year 1992 to year 2006. Thus by examining the growth of the GDP of United States over a period, the statement that "The USA is enjoying today the longest continuous expansion of its economy since modern records began" can be proved. Table Showing the US GDP figures over the years Year GDP Chained Year GDP Chained Year GDP Chained Billion dollars Billion dollars Billion dollars 1971 3,898.6 1983 5,423.8 1995 8,031.7 1972 4,105.0 1984 5,813.6 1996 8,328.9 1973 4,341.5 1985 6,053.7 1997 8,703.5 1974 4,319.6 1986 6,263.6 1998 9,066.9 1975 4,311.2 1987 6,475.1 1999 9,470.3 1976 4,540.9 1988 6,742.7 2000 9,817.0 1977 4,750.5 1989 6,981.4 2001 9,890.7 1978 5,015.0 1990 7,112.5 2002 10,048.8 1979 5,173.4 1991 7,100.5 2003 10,301.0 1980 5,161.7 1992 7,336.6 2004 10,703.5 1981 5,291.7 1993 7,532.7 2005 11,048.6 1982 5,189.3 1994 7,835.5 2006 11,415.3 Source: Bureau of Economic Analysis Income and Expenditure Model: The Income and expenditure model in the macroeconomic theory was originally established by John Maynard Keynes in the year 1930. Later on this theory was developed and refined my many other economists. The main idea behind this model is that higher expenditures are necessary to generate higher levels of employment and income in the economy. Basically the income and expenditure model is used to understand the short term economic fluctuations when the prices do not tend to change to a large extent. The Income and expenditure model is built around an equilibrium condition which is explained below: Under Macro Economic the relationship between Consumption C, Investment I Government Expenditure G is represented by C + I + G = Y where 'Y' is the total output. Similarly the aggregate demand AD is expressed as AD = C + I + G + (X-M) where 'AD' is the Aggregate Demand, 'X' represents the Export and 'M' signifies the Import. It can be further proved that AD = C + I + G + (X-M) = Y "This means that total demand for national output equals national output. But national absorption (C + Id + G) does not have to equal national output, even in equilibrium, if the economy is open. Equilibrium still means what it did with a closed economy, which is to say that there is no change in inventories. Equilibrium in no way implies trade balance." (Colin Danby2000) Application of Income and Expenditure Model to analyse effect of fall in the US Dollar value on the Euro Economy: Since the income and expenditure is based on the equality between total income generated from gross domestic product and total expenditures on gross domestic products, this is best measure to analyse the effect of any change in the currency value as such changes are reflected only in the domestic income and expenditure reflected by the GDP. "The cornerstone of the income-expenditure model is the consumption function, which relates household consumption expenditures to income and gives rise to the aggregate expenditure line with the addition of investment, government purchases, and net exports. The intersection between the aggregate expenditure line at the 45-degree identifies equilibrium" (AmosWEB) This situation is represented by the following graph: Impact of the fall in the US $ Value over the Euro Economy: "Changes in any of the components of aggregate demand will have an effect on the equilibrium level of national income" (Joseph Nellis and David Parker) The changes in the levels of aggregate demand are brought about by the interaction of the fluctuations in the exchange rates. With the fall in the US dollar value against Euro market, the effect is that the national income level in the US gets decreased. This is due to the fact that the imports become dearer in the country as people will be forced to shell out more US dollars to get the imports into the country. In order to adjust the national income to the desired level the US government has to take some action in any of the following ways: Change in the interest rates Changes in the government expenditure Changes in the personal taxation Introducing export incentives Introducing restrictions on the imports These changes will have their own impact on the exports and imports of the country which is best described as the 'multiplier' effect. Depending on the level of the inflation or deflation the government will use any of these fiscal mechanisms to correct the situation. By using any or all of these mechanisms the government corrects the national income level to be represented by the apt employment levels with correct prices. This is so because any changes in the components of aggregate demand will have a compensating effect on the equilibrium level of national income. In this way any change in the government expenditure, public investment or increased in export income revenue will tend to boost up the national income. On the other hand any changes in personal taxation, changes in savings or changes in expenditure on imports will go to reduce the national income level. In order to maintain the equilibrium position, it is necessary that the imports and exports of the country are at the same level. But there are always exchange rate changes that do not allow the imports and exports of a country to be at the same level. Either the imports or the exports are more depending upon the value of the currency of a country. When the US dollar value falls against the Euro Economy, the tendency is that the imports in to US will be decreasing. In order to and the prices of domestic products will tend to increase on the renewed pressure from the exports. The government with a view to take advantage of the multiplier effect will adopt such monetary policies as to reduce the government expenditure, changes in taxation policies and changes in interest rates to bring back the equilibrium in the national income and output at normal costs. Such a policy change will result in reduction in the consumption and spending by the people which again is dependent on the output which will now start showing an upward trend. Because of this the government cannot expect any change in its spending. But it will have its effect surly on the investment level and which is bound to decline. When this happens the aggregate demand for the product increases resulting in an increased output and get the business cycle completed. References: 1. AmosWeb Income and Expenditure Model http://www.amosweb.com/cgi-bin/awb_nav.pls=gls&c=dsp&k=income-expenditure+model 2. Bureau of Economic Analysis Current-Dollar and Real GDP http://www.bea.gov/national/index.htm#gdp 3. Colin Danby (2000) Macro Economic Flows: Income and Expenditure Model University of Washington http://faculty.uwb.edu/danby/bls324/macro/closopen.html 4. Investopedia Economic Indicators: Gross Domestic Product - GDP. http://www.investopedia.com/university/releases/gdp.asp 5. Joseph Nellis and David Parker (1996) The Essence of Economy Edition II Prentice Hall Essence of Management Series 6. Kimberly Amadeo What Exactly is the US Economy About: US Economy. http://useconomy.about.com/od/grossdomesticproduct/p/GDP.htm Read More