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Economic Performance Of United States

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Question:

Discuss about the Economic Performance of United States.
 
 

Answer:

Introduction

United States (US) economy ranked the world –largest nation in nominal way as it represents 20% of the total worldwide output. The service sector of US economy account for 80% of total output. Moreover, US manufacturing base represents about 15% of the global output. US economy is considered as the second largest in terms of purchasing power parity (PPP) that represents 22% of global GDP. This economy has profuse natural resources and developed infrastructure. Presently, it is the major trading economy around the globe as it amounts to $4.92 trillion in the year 2016 (Van den Berg, 2016). Furthermore, the GDP per capita is the ninth highest in the globe and has a low unemployment rate. This assignment highlights on the economic performance of the United States over the past ten years.  This paper also discusses about the performance of production output in this state by using macroeconomic indicators including real GDP, real GDP per capita, rate of unemployment and inflation rate. Labor market of United States is also analyzed in this study. The price level analysis of United States based on its inflation trend is also reflected in this assignment.

Production output performance analysis

Real GDP, Real GDP growth rate, Real GDP per capita analysis

The performance of production output is analyzed by using macroeconomic indicators such as real GDP and real GDP per capita (Morrison, 2012). GDP of an economy refers to the final goods and services that are produced within the geographical broader of the country within a specified time phase. GDP growth rate helps in measuring the economic performance and productivity of the country. GDP is mainly of two types namely real GDP and nominal GDP.

Measuring economic performance with these indicator

Real GDP is defined as a macroeconomic measurement of economic output that is adjusted without the change in price. It is mainly adjusted for inflation rate that highlights on the product value produced by a country in particular year.  However, real GDP growth rate refers to the change in GDP growth rate of the country over a certain period.  Per capita real GDP refers to the measurement of country’s economic output divided by its total number of individuals. This macroeconomic indicator is mainly used for comparing the living standard between two nations.

 

Performance trends of US economy

Real GDP is considered as one of the most important indicator of measuring the economic performance and production output. The reason behind this fact is that it considers varying value of products when articulated in monetary conditions. Moreover, the country’s productivity output is calculated with less distortion owing to certain economic factors that includes inflation rate and fluctuating currency rate. Real GDP growth rate helps the government of an economy in controlling fiscal policy and inflation. However, this indicator also aid in improving the growth of the economy (Rots and Maduko, 2014). Similarly, per capita real GDP also facilitate in measuring relative performance between two economies. In addition, the productivity output per individual of the workforce is also determined by using real per capita GDP. Furthermore, advancement of technology over production output does not influence per capita GDP.

Both real GDP growth rate and per capita real GDP of United States has grown from 2009 to 2017. The economy has shown downward trend in real GDP and per capita GDP in the year 2008 due to recession. This nation annualized to 2.6% of real GDP growth rate in 2017 due to boost in investment, consumption and government spending. Consumption expenditure accounted to 1.93%, investment expenditure and government spending contributed to 0.12 % to the overall growth in the economy. The real GDP per capita increased to 51,950.35 in 2017, which is the highest over the last ten years.

Figure 1: Real GDP growth rate of US

Source: (As created by author)

Figure2: Real GDP per capita of US

Source: (As created by author)

Measures adopted by US government to achieve production output performance

Government of US has adopted various measures in order to improve the production output performance of the country.  US government has created new job opportunities that have improved this nation productivity capacity (Gordon, 2014). However, improvement in output aids huge disposable earnings to consumers and promotes rise in consumption expenditure. In addition, the government has adopted new regulation on import for accelerating restrictions on import of low value products. The government has commenced low tax for producers of high-value goods and this resulted to increase in revenue.

Labor market analysis

Unemployment trend

Unemployment rate refers to percentage of jobless labor force with respect to total number of persons in labor force. Unemployment trend is defined as the trends in long term of an economy over the past few years. US economy shows high levels of unemployment rate in long term during the recession period of 2007-2009 (Basu and Foley, 2013). The unemployment rate in this economy averaged to 5.80% from the year 1948 to 2017. Recent data reflects that US unemployment rate shows downward trend after the recession period.

Figure 3: Rate of unemployment in US

Source: (As created by author)

 Various factors influence the US unemployment rate:

  • Economic conditions- Subprime mortgage catastrophe and great recession increased the US unemployment rate to 10% in 2009. Further improvement in economic conditions after the recession period declines the unemployment rate to 5%.
  • Advancement of technology- Few employees could not adopt with the advancement of new technology and this replaced workers in various firms.
  • Immigration policy- US immigration policy also affected the workers entering this economy.
  • Demographic trends- Aging population in US economy has resulted to downward trend of unemployment rate in long term that rises during the retirement of Baby Boomer generation.
  • Globalization- US economy created new jobs in foreign markets and this resulted to reduction in labor cost.

Types of Unemployment

Unemployment refers to the fact that arises when an individual searches for work but is unable to get any job (Levine, 2012). Rate of unemployment facilitates the country in measuring economic health. There are mainly two types of unemployment namely voluntary unemployment and involuntary unemployment.

Unemployment is broadly classified into three types that include- structural unemployment, frictional unemployment and cyclical unemployment.

 


Frictional unemployment- This refers to the period when the workers are searching for jobs or moving to another job. This type of unemployment always exists within the economy as mismatch always occurs between employees and jobs. This mismatch relates with workers skills, attitude, work hours and job location.  Lack of information increases the time of workers for finding jobs (Mankiw, 2014).

Structural unemployment-This type of unemployment focuses on economy’s structural problems and labor market inefficiency. It occurs in the situation when the present labor market becomes unable to offer any job to the job seeker. However, mismatch happens between the skills that are required for jobs and unemployed employee’s skill. For example, automobile invention increases the demand for its mechanics.

Cyclical unemployment- This kind of unemployment takes place when the fall in country’s aggregate demand is unable to give any job to the people who are in search for it. However, decline in demand for good leads to less production and requirement of fewer workers. As a result, total number of jobless workers becomes greater than the job vacancies.

Type of Unemployment in US

Frictional unemployment generally exists in the US economy as the unemployed people and new entrants’ searches for job or changes to another job. Recent statistics reflects that great recession (2008-2009) caused structural unemployment in US economy that also declines during expansion period (Goodwin et al., 2013). The reason behind this is that skills of the workers deteriorated for a long time after recession. As 5% is the level of unemployment, US economy adopts various measures for reducing the rate of unemployment below this level.

Government measures adopted to achieve full employment

The measures adopted by US government for achieving full employment includes-

  • The government introduced employment programs in the economy. They undertake many policies that help in directing jobs to regions of high unemployment.
  • US government adopted public investment program that facilitates in creating many jobs and raises overall economic growth. The government introduces this program because investment shortfall in education, R&D and other sectors creates unemployment. However, this program generates more jobs that results to increase in productivity and full employment (Hall, 2017).

Price level analysis

Inflation Trend

Inflation refers to the rate for which the price level of products rises with the fall in currency’s purchasing power.  Central bank implements monetary policy for keeping the inflation rate lower in order to avoid deflation and improve the economic growth (Argy, 2013). Inflation rate of an economy is mainly based on consumer price index that tracks goods prices over time. During the financial crisis in 2008, Federal Reserve of US economy has kept the level of interest rate to zero. Inflation rate in US shows a downward trend over the years. The lowest level of inflation rate occurred in 2015 that was 0.1%. The inflation trend of the US economy showed both upward and downward trend over the years.

Figure 4: US Inflation rate

Source: (As created by author)

Inflation rate refers to the measurement of increase in goods price level by using consumer price index. Inflation and inflation rate has an inverse relation. Increase in interest rate leads to increase in consumer’s savings (Galí, 2015). This leads to decrease in inflation rate of the economy.

Causes of Inflation

            Various factors contribute to rise in inflation are:

  • Exchange rate fluctuations also effects inflation.
  • Increase in VAT rate also leads to increase in domestic inflation.
  • Rise in aggregate demand also impacts on economy’s inflation rat

There are mainly two types of inflation- cost-push and demand-pull inflation.

Cost -push inflation-Cost-push inflation occurs due to:

  • Increase in labor cost occurs due to low unemployment rate because scarcity of skilled workers increases the pay levels.
  • Increase in components cost including raw materials results in cost-push inflation (Ulrich, 2013).

Demand-pull Inflation- Demand-pull inflation is caused due to certain factors-

  • Exchange rate depreciation increases the imports prices and decreases the exports price of an economy. Thus, aggregate demand of an economy rises if the consumers purchase few imports.
  • Decreases in interest rate also stimulates aggregate demand.
  • It occurs when the resources are fully employed and GDP is rising faster.

Cause of Inflation in US economy

Rate of inflation is measured by the varying price index. US analyses consumer price index for determining its inflation rate. The CPI of US in 2017 has been 0.1% and hence accumulated inflation is 1.5%. In addition, expansionary fiscal policy causes demands pull inflation in the economy (Hall, 2015). US government lowers the taxes in order to increase discretionary income for consumers. However, government increases it spending for stimulating economic growth. Currency devaluation also leads to increase in exports and this result to rise in aggregate demand of goods. This increases the product price and thus results in demand-pull inflation.  Expansionary monetary policy affects the inflation rate in the economy. Expansion in money supply leads to rise in purchasing power of the US consumers. This in term leads to rise in aggregate demand, which pushes the price level upwards.

 

US government measures to achieve stable price

Monetary policy helps to keep the prices of goods stable. The Federal Reserve of US sets the monetary policy in order to reach monetary equilibrium. The Federal Reserve tries to maintain inflation by doing open-market operation. They purchases government securities for changing growth rate in money supply. However, increase in money supply increases the demand and this induces sellers to increase production. Eventually, demand and supply becomes equal and this stabilizes price level in the economy. The government tries to lower the inflation rate because it affects the economic health of the country (Gandolfo, 2014). Rapid increase in prices erodes the purchasing power of the consumers. As a result, consumers start to demand higher wages. The companies then strategize to raise the product price for attaining higher profit and meeting the demand of workers. As the goods become more expensive, the business depends on the economic decisions. For this reason, it is necessary for each government in the economy to keep their price level stable. Hence, this price stability adds to sustainable growth in the economy. Moreover, the government always maintains to keep the interest rate high as this pushes the price level down. Increases in interest rate reduce the consumption spending of the people and this lowers the inflation rate in the economy.

 

Conclusion

It can be concluded from the above assignment that the performance of the economy depends on various macroeconomic indicators including, real GDP, Real GDP per capita, unemployment rate and inflation rate. The health of the US economy improved after the period of Great Recession (2008-2009). During this period, the GDP growth rate of the US economy declined. In addition, both the inflation rate and unemployment rate increased during this period. Due to the financial crisis, the US economy slowed down but recovered after this period. The US government implemented various policies and adopted measures in order to improve the economy’s health. Moreover, financial support from neighboring countries aids the economy to recover from this huge recession. In addition, proper introduction of monetary policy by Federal Reserve helped the country to maintain stable price level of goods. Thus, it is necessary for each economy to analyze their economic performance by applying macroeconomic indicators.

 

References

Argy, V. (2013). International macroeconomics: theory and policy. Routledge.

Basu, D., & Foley, D. K. (2013). Dynamics of output and employment in the US economy. Cambridge Journal of Economics, 37(5), 1077-1106.

Caggiano, G., Castelnuovo, E., & Groshenny, N. (2014). Uncertainty shocks and unemployment dynamics in US recessions. Journal of Monetary Economics, 67, 78-92.

Farber, H. S., & Valletta, R. G. (2015). Do extended unemployment benefits lengthen unemployment spells? Evidence from recent cycles in the US labor market. Journal of Human Resources, 50(4), 873-909.

Galí, J. (2015). Monetary policy, inflation, and the business cycle: an introduction to the new Keynesian framework and its applications. Princeton University Press.

Gandolfo, G. (2013). International Economics II: International Monetary Theory and Open-Economy Macroeconomics. Springer Science & Business Media.

Goodwin, N., Nelson, J., Harris, J., Torras, M., & Roach, B. (2013). Macroeconomics in context. ME Sharpe.

Gordon, R. J. (2014). The demise of US economic growth: restatement, rebuttal, and reflections (No. w19895). National Bureau of Economic Research.

Hall, R. E. (2015). Quantifying the lasting harm to the us economy from the financial crisis. NBER Macroeconomics Annual, 29(1), 71-128.

Hall, R. E. (2017). High discounts and high unemployment. The American Economic Review, 107(2), 305-330.

Levine, L. (2012). Economic growth and the unemployment rate.

Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.

Morrison, C. J. (2012). A microeconomic approach to the measurement of economic performance: Productivity growth, capacity utilization, and related performance indicators. Springer Science & Business Media.

Rots, E., & Maduko, F. (2014). MACROECONOMIC THEORY I.

Ulrich, M. (2013). Inflation ambiguity and the term structure of US Government bonds. Journal of Monetary Economics, 60(2), 295-309.

Van den Berg, H. (2016). International finance and open-economy macroeconomics: Theory, history, and policy. World Scientific Publishing Co Inc.

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