This paper seeks to analyze the US economy for the last three years on what has affected changes in macroeconomic variables. The paper would relate GDP changes with inflation rate, unemployment rate and other relevant factors.
Geographic and political perspective
This section relates to geographical location, major cities, population and type of government pertaining to the United States of America (or USA or US). The US consists of at least 50 states and major cities are almost found in each state. Among the highly populated cities include New York, Los Angeles and Chicago. Each of the state is independent under a democratic framework of government but these are combined under a federal form of government. The country, as of this writing, is considered as still the biggest economy and hence its rise and fall has significant effects on the rest of the world.
This part would discuss the US economy by focusing on GDP and economic growth during the past three years. The relevant questions to be answered include the following: How has the financial crisis affected the economy? What has been and the driving force behind the GDP growth?
GDP growth for the last three years appears to have gone down because of the recession that started sometime at the end of 2007. See Figure 1 below. The financial crisis has indeed affected the economy since the crisis has resulted to company’s laying off employees, lower demand for goods and services and therefore lower production. The graphs below clearly indicate a decline starting in 2004 but the greatest fall in growth rate happened in the last quarter of 2008, when zero growth rates was recorded compared to 1.6% growth in the preceding quarter. The zero-growth rate was followed by three consecutive negative growth rates per quarter. From the technical definition of recession requiring two consecutive growth rates, it appears that recession was formally correct in the second quarter of 2009. This appears to contradict what have been experienced by many of the Americans and other part of world which got affected by the decline of the American economy. Reports of loss of employment in some quarters may have happened already in the last quarter of 2009. See Figure 1.
The zero growth rate of the last quarter of 2008 was understandable since it was about by second half of 2008 when several banks and/or financial institutions have shown problems in their finances with some of them even getting bankrupt is a very short period of time including that of Lehman Brothers.
Admittedly, the United States economy is still considered as the largest in the world today so that its collapse would definitely felt my many economies in the world. As the largest economy, it necessarily becomes the most important market in the world. Despite the low population in relation to land of the United States of America compared to other parts of the world, it capitalistic economy which is driven by consumerism must have its effects in creating big amount of demand for many products that would have to keep the world economy moving and functioning.
Its 2007 GDP is believed to have reached $13.84 trillion, making it three times the size of the next largest economy, Japan which registered a GDP of $ 4.4 trillion during the same year (Economy Watch, 2009). In 2008, US GDP has reached $14.24 trillion (Trading Economics, 2009a) reflecting an increase on annual basis despite the zero growth rate in the last quarter of 2008.
The size of the US economy in terms of GDP appeared to be however almost overtaken by the European Union with about $13 trillion in 2007 and even the fast growing economies of Brazil, Russia, India and China. China in particular is believed to be able to overtake the US in size within the period of 30 years (Economy Watch, 2009). Since the US economy is consumption driven it was not surprising to for it to feel the effect of the recent failure in the US housing and credit markets.
The driving force to the growth in GDP may be asserted to be the continued government spending on defence and anti-terrorism activities. The continued military spending in Iraq and Afghanistan should necessarily be included as part of the GDP since they also involve government spent in equipments as well the salaries and benefits of soldiers. Since these are needed to be produced, it necessarily includes a multiplier effect from the producers of these equipments since labour and capital resources must be used in production. With reduced consumption however as a result of the financial crisis, GDP suffered decline for about eight consecutive quarters starting in mid-2008. The US is said is indeed facing one of its greatest crises since the Great Depression (Early, 2009).
The Labour force
This part would focus on the labour force, unemployment and participation rate, and would attempt to find whether most workers employed in the primary or secondary industry. The decline in GDP as strongly felt in the last quarter of 2008 with the zero growth rates was necessarily felt in the increase of unemployment rate. Figure 2 below dramatizes the increasing unemployment rate starting in the first quarter of 2008. This would confirm some reports that recession may have happened already as of last quarter of 2007 when firms started to lay off employees because of slower demand for goods and services.
The issue of unemployment is a serious concern for many countries since its increase could mean lower production that would also produce lower consumption. When unemployment is individuals are without job and are seeking a job and implications cannot only be limited to economic consequences but also social ones since lack of employment is believe to reduce self-esteem of people and could increase crime rate. The macroeconomic implications may include reduction in output. This is premise on the simple situation that when people are not doing, there is the opportunity cost of the economy losing its intended output.
This would also reduce tax revenue since the income tax comes from individual and corporate income from engaging into business activities. As it is an important part of the revenue for the government, failure to collect tax could mean collapse of the government itself. At the present rate of 9.8% as of October 2009, the US governments must prevent it from going to double digit rate as the problem could be harder to solve. See Figure 2.
This part would comment on the inflation rate over the past few years. To start with there is a need to have a working definition of the word “inflation” connotes a unrelenting increase in the prices intensities of goods and services, that would result to reducing what the currency could. The issue of inflation has undergone changes over the years. Countries may have to view it across geographical limits since viewing it as to be purely a domestic issue would no longer be relevant as investors are now global in the computation of cost of capital where they factor in the real cost of money. Globalization of business has changes the rules of economic interpretation of inflation.
It is generally believed that the responsible cause of slight inflation rate increase in 2008 was loose monetary policy. See Figure 3 below. However, fast increasing prices of food, oil and steel pushed higher intensities of of inflation in the world economy as triggered by what happened in the US were expected to contribute to increasing inflation.
As seen in Figure 3 however, there was decline in inflation rate from 2008 to 2009 as result of recession felt in the US. This could therefore be explained as result of the reverse of demand-pull inflation where prices are expected to rise in case of increasing aggregate demand.
Monetary and Fiscal Policy
This part will answer the following questions: What is the current monetary and fiscal policy of the country? Have there been changes over the past few years? How has the financial crisis that started just over a year ago when (Lehman Brothers, one of the biggest banks went bankrupt) affected by both policies?
The current monetary policy of the US economy through the Federal Reserve Bank (Fed) is to make interest rate low by making sure that it is easy for business entities to borrow from banks in order to keep the economy going. By keeping interest rate low, the Fed may necessarily increase inflation rate because of the increase in money supply or as a result of such policy. However, it appears that inflation rate was made lower in 2009 from 2008 when a zero GDP growth rate was registered. In fact as of first quarter of 2009, it appears from Figure 3 that inflation rate has reached below zero level which may indicate a deflation since central bankers would normally want mild inflation, in the range of 1 to 2 percent as they consider the same as the most harmless for a country’s economy. As the Fed aims to prevent high inflation, it also must watch stagflation or deflation since the latter could produce serious economic consequences.
Some of causes of economic inflation include loose or expansionary monetary policy. This would therefore implying producing larger amount of money than needed that would make supply in excess of demand as against what could be bought in the market. Other causes of inflation include increase in production cost, increase in taxes based on new, wars or events that cause volatility in prices and cost and even decrease in the accessibility of inadequate resources such as food or oil. These things are largely determined the law of supply and demand when prices will rise as result. Thus the deflation seen in figure 3 is a sign of declining prices because of low economic activity and high unemployment.
On the other hand, the current fiscal policy of the US is still to sustain a certain level of spending that help the US economy to recover from recession. This include the continued spending for defence, research and development programs, monetary aid, infrastructure construction and the usual budgetary expenditure (Economy Watch, 2009). Recently, the policy could be seen in making the bail-out to the automotive, banking and insurance industry. The expected effect in increase government spending include producing economic activities so employment level would be increased and when these employees would receive their wages from government projects, the same would be expected to increase demand for goods and services that will restore again the confidence of the entrepreneurs which got dampened by the financial crisis.
Changes both monetary and fiscal policies were notable over the past few years in respond to the crisis. The Fed had been continuously decreasing interest rate to almost equal to zero to restore business confidence by making fund to be easily accessible to borrowers for business and consumption purposes. The fact the government has extended billions of dollars for bail-out plans the increased government spending than usual would indeed dramatized the changes what are happening in the US for the past few years. The financial crisis as seen in the bankruptcy of Lehman Brothers forced the US government to rescue the banks since greater damage would have been cause to the economy. Ideally the economic is run based on supply and demand but the bail-out plan was an extraordinary government fiscal policy to address a pressing problem in the economy. The monetary policy must change as well with continued, almost unstoppable decline in interest rate by making discouraging people not to invest in government securities as US economy needs the private investment to increase.
The US must do its task well or face a necessary decline in power and influence around the world. No economic power may mean no military power or no cultural power.
Early, Bryan R. (2009). To lift the US economy, lift sanctions on America’s foes. Christian Science Monitor, 2009, Vol. 101, Issue 82.
Economy watch (2009). The US Economy.
Trading Economics (2009a) United States Gross Domestic Product (GDP).
Trading Economics (2009b). Unemployment Rate.
Trading Economics (2009c) United States Inflation rate.