This paper evaluates the performance of the USA economy from 2008 to 2018, analyzing real GDP, real GDP growth rate, per capita real GDP, unemployment rate, and inflation rate. It also discusses government measures to achieve full employment and stable prices.
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1ECONOMICS Introduction The economy of USA is known as one of the most developed mixed economy.In terms of nominal GDP the country ranks first while in terms of purchasing power parity the nation stands second. The natural resources and associated sectors developed based on these resource has made USA one of the largest economy of the world (Imf.org. 2018). USA is blessed with the abundance of six primary natural resources. The nation possesses a large area of land mass controlled by single political system. Two large coastlines bordered the nation that earlier provided food and later ports to help in commerce. The country has large acres of fertile land that help in the development of fertile land. USA has abundant fresh water. The industrial sector of USA is second largest in the world constituting a real output valued US$2 trillion in the first quarter of 2018. The industrial sector is further subdivide into different sectors.Real estate along with Renting and Leasingaccount the largest share of GDP. The sector plays an integrated role in US economy.The next important sector is Finance and Insurancesector contributing 8 percent in GDP. The sector particularly helps the economy to facilitate export. TheHealth and Social Careindustry makes up a significant portion of USA’s GDP (Sawe 2019). Besides these, other important industries of USA includeDurableManufacturing,RetailTrade,WholesaleTrade,Non-Durable ManufacturingandInformation industry. Production output performance analysis The first primary determinant of economic performance of a nation is the aggregate output. One composite indicator of aggregate output of a nation is Gross Domestic Product. In the essay, output performance of USA has been analyzed in terms of real GDP, real GDP growth rate and per capita real GDP.
2ECONOMICS Real GDP Gross Domestic Product is considered as a measure of aggregate output of nation. It gives an estimation of produced goods and services in a nation in monetary terms. It is a quantitative measure that estimate aggregate value of total output using market price and produced output. Estimation can be based on either market price of current accounting year or market price of a previously fixed based year. GDP estimated at current year prices is termed as nominal GDP while GDP computed at a fixed base year prices is termed as real GDP (Gottheil 2013).Real GDP thus provides an inflation adjusted measure for aggregate output. Figure 1: Real GDP in USA (Source: Tradingeconomics.com 2019) The above figure indicates trend of real GDP from 2008 to 2018. Real GDP in USA recorded a decline in between 2008 and 2009. The fall in real GDP was due to the hit of global financial crisis. The crisis first originated in the housing market and then spread all over the economy. Housing price in USA reached to the peak in 2006 and then suddenly
3ECONOMICS started to decline since last half of 2007. Housing market crashed in 2008 resulting in an economy wide crisis (Chen et al. 2016). USA economy recovered at a relatively slower pace from the recession. Since then USA recorded a steady rise in the real GDP. Real GDP growth rate The real GDP growth rate is used as a measure of tracing trend economic growth of a nation. Growth in real GDP is expressed as a change in real GDP in a year as a percentage of real GDP in the previous year. As real GDP is adjusted for any change in the price level, growth in real GDP provides an accurate measure of economic growth. Figure 2: Real GDP growth rate in USA (Source: Tradingeconomics.com 2019) As revealed from the above the figure, USA economy recorded a downfall due to recessionary pressure in 2008. Real GDP growth rate began to contract since the third quarter of 2008. By the beginning of 2009, growth became negative; the slowest grow ever since 1950. With active government measure, the economy began to recover since latter half of 2009 and recorded an average growth rate of 2.3 percent since then. Economic growth though fluctuated but remained around an average rate of 2 percent.
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4ECONOMICS Real GDP per capita Per capita real GDP estimates average output of a nation. A country’s per capita GDP is estimated by dividing GDP of a particular period by the average population. Figure 3: Real GDP per capita in USA (Source: Tradingeconomics.com 2019) USA is known for accounting seventh largest per capita GDP in world. As obtained from the above figure, per capita GDP in USA has increased steadily except in the year 2009. Per capita GDP decline from 49364.6 USD to 47575.6 USD from 2008 to 2009. Government’s measure to achieve production output performance The government of USA tends to increase its spending on needed areas of the economy in times of economic downturn. From late 2007 to early 2008, USA economy entered a severe recession arising mainly from credit crisis in the housing market. In order to rescue the economy from the crisis government introduced series of bailout or stimulatory packages. The “Troubled Asset Relief Program” introduced in October 2008. Under this
5ECONOMICS program government, the federal government spent USD $700 billion to stabilize the financial system. The American Recovery and Reinvestment Act introduced during this time contained a series of tax relief and spending measure totaling $787 billion. The government enhanced energy security in terms of promoting an integrated, transparent and diversifying energy market and encourage appropriate investment in energy sector in order to increase access to the energy sector and encourage economic growth. Government strengthens the private sector by helping business to grow profits and invest in US market. Government reduces regulation to assist allow companies to grow (state.gov 2019). Recently, government hasintroducedalargeprogramforinfrastructuralinvestment.Theproposedfederal government funding for the program is $200 billion. Labor market analysis Unemployment and its type Unemployment defines a condition of labor market where some members of labor force are not able to find a job are willing to get a full-time employment. In an economy, peopleremainunemployedfordifferentreasons.Basedonthedifferentscenariosof unemployment, there are three major form of unemployment (Mankiw 2014). These are Structural unemployment, Frictional unemployment and cyclical unemployment. Structural unemployment Structuralunemploymentinaneconomyoccursduetostructuralshiftinthe economy-creating mismatch between skills of workers and available jobs. An example of structural unemployment is unemployment created due to replacement of machine workers with the robots. Frictional unemployment
6ECONOMICS Frictional unemployment is the unemployment suffered by people in moving between jobs. This is the time when labors leave their old jobs have not yet found a new job. People mostly leave their jobs voluntarily to get some better jobs. Frictional unemployment is also observed among students newly entered the labor force. Cyclical unemployment Cyclicalunemploymentistheunemploymentoccurredduetobusinesscycle contraction. During business cycle, contraction there is rapid decline in demand for goods and services in the economy. This forces firms to lay off workers resulting in cyclical unemployment. Types of unemployment in USA The economy of USA experiences three major types of unemployment in some forms. Structural unemployment in US exits because of two main reasons. First is technological advances in the existing industry and the second is trade agreement. Frictional unemployment is observed among students just graduating from college, mothers who have rejoined the labor force after raising their children or a construction worker shifting to Arizona in winter (Summers, 2014).USA economy experienced several recession in past years and faced the associated problem of cyclical unemployment. Examples of cyclical unemployment include unemployment created during great depression of 1929, tech crash in 2000 and financial crisis of 2008.
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7ECONOMICS Trend unemployment rate in USA Figure 4: Unemployment rate in USA (Source: Tradingeconomics.com 2019) Unemployment rate in United State fluctuated rapidly especially during economic recession. Rate of unemployment increased from a low level of 4.7 percent in 2008 to a high level of 10.1 percent during 2009 (Cunningham 2017). Unemployment rate rose significantly due to the effect of housing bubble burst and collapse of Wall Street. Different employment support program and expenditures on social security scheme contributed to labor market recovery. Since then unemployment in the economy fell sharply and reached close to the rate beforethecrisis.Duringeconomicrecovery,jobswerecreatedinareassuchas professionals, management and related areas and service occupation contributing to lower unemployment rate in the economy (whitehouse.gov 2018). Government measures to achieve full employment USA’s government has made continuous effort to attain full employment or at least close to full employment in the economy. In times of recession, the economy suffers from the problem of cyclical unemployment. In order to combat unemployment and restore full
8ECONOMICS employment government takes either expansionary monetary policy or expansionary fiscal policy. Expansionary monetary policy is introduced in the economy through reduction of federal fund rate. Under expansionary fiscal policy, government directly increases spending on government employment programs. Examples includes New deal and Economic Stimulus Program in 2009 (Hall 2015). The federal government plays an important role for training displacedanddisadvantagedworkers.MajorprogramsarefundedbyDepartmentof Education and Department of Labor. Government also funds valuable and complementary tasks for providing reemployment services. Price level analysis Inflation and causes of inflation Inflation in an economy refers to a situation of sustained increase in general price level. The two main causes of inflation are discussed below Demand-pull inflation When the economy is close to or at the full employment, then an increase in aggregate demand causes price level to increase. As firms during this time are operating with full capacity, they respond to the increased demand by increasing price. Inflation caused due to a higher demand is called demand-pull inflation.
9ECONOMICS Figure 5: Demand-pull inflation Cost-push inflation When there is an increase in cost of production of firms, then businesses pass on the higher cost to consumers by lowering supply and increasing price (Burda and Wyplosz 2013). Inflation caused due to an increase in production cost is known as cost-push inflation. Figure 6: Cost-push inflation Causes of inflation in USA In USA price level increases both for demand and supply side forces. On the demand side,expansionindemandhasbeenoccurredduetoexpansionaryfiscalpolicyof
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10ECONOMICS government. This include a cut in personal income tax, decline in corporate income tax and other. This results in an increase in aggregate demand causing demand-pull inflation in the economy. Cost-push inflation in the economy is mainly resulted from higher growth in wages. The increased cost of wage increases production cost reducing aggregate supply. This cause cost-push inflation. Trend inflation rate in USA Figure 7: Inflation rate in USA (Source: Tradingeconomics.com 2019) The movement of price level is associated with the movement of aggregate output and level of unemployment. During economic recession of 2008, aggregate output contracted and unemployment increased significantly (Reinhart and Rogoff 2014). Consequently, inflation rate fell to a considerably low level. Inflation rate in 2009 was around -2%. With recovery of economic growth and inflation, targeting policy of Federal Reserve price level gradually stabilized. Inflation rate though remain more or less volatile it stayed close to fed’s inflation target of 2 percent.
11ECONOMICS Government’s measure to achieve stable price In USA, Federal Reserve controls the inflation rate. The Federal Open Market Committee(FOMC)iscommittedtomaintainaninflationrateof2percent (federalreserve.gov 2019). Government uses monetary policy tool to attain the objective of price stability. If growth in gross domestic product exceeds the standard rate of 2-3 percent then the excess demand condition creates inflationary pressure in the economy. Fed then takes a tight monetary policy. Federal Reserve has several tools to implement monetary policy contraction. The first is open market operations. Under this, Fed sells or buys governmentsecuritiesfromthememberbanks. Intimesof excessdemandcondition government sells securities lowering money supply and hence, reduces inflation (Summers 2014). A second way to lower inflationary pressure is to increase reserve requirement of commercial banks. The third way is to increase the federal fund rate or discount rate. Fed does the reverse in times of deflationary pressure. Conclusion The paper evaluates performance of USA economy from 2008 to 2018. The economy recorded a considerable slowdown in between 2008 and 2009. This was due to bursting of housing bubble in the year 2008. The sudden fall in housing price put the economy into severe crisis. The economic slowdown during this time is evident from a decline in real GDP and negative growth rate. Unemployment rose significantly and inflation became negative. The economy however recovered the recessionary shocks and again recorded a stable performances. In the economic recovery of USA, government played an important role. To rescue the economy from financial crisis in 2008 and ensure a stable growth, government introduced several resilience or bailout packages. Government takes significant measures to support the private sector, support business growth and associated strategy to support
12ECONOMICS economic growth. The USA government designs several employment measures to ensure full employment in the economy. Government funds training and development program for displaced and disadvantaged workers to lower unemployment among them. In order to maintain stability in the price level Federal Reserve conducts monetary policy depending on state of the economy. Monetary policy tools used to control inflation include open market operations, reserve ratios and discount rate.
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13ECONOMICS References Burda, M. and Wyplosz, C., 2013.Macroeconomics: a European text. Oxford university press. Chen, Q., Filardo, A., He, D. and Zhu, F., 2016. Financial crisis, US unconventional monetarypolicyandinternationalspillovers.JournalofInternationalMoneyand Finance,67, pp.62-81. Cunningham, E. 2017.Great Recession, great recovery? Trends from the Current Population Survey : Monthly Labor Review: U.S. Bureau of Labor Statistics. [online] Bls.gov. Available at: https://www.bls.gov/opub/mlr/2018/article/great-recession-great-recovery.htm [Accessed 4 Apr. 2019]. federalreserve.gov 2019.The Fed - What are the Federal Reserve's objectives in conducting monetary policy?. [online] Board of Governors of the Federal Reserve System. Available at: https://www.federalreserve.gov/faqs/money_12848.htm [Accessed 4 Apr. 2019]. Gottheil, F., 2013.Principles of macroeconomics. Nelson Education. Hall, R.E., 2015. Quantifying the lasting harm to the US economy from the financial crisis.NBER Macroeconomics Annual,29(1), pp.71-128. Imf.org.2018.ReportforSelectedCountriesandSubjects.[online]Availableat: https://www.imf.org/external/pubs/ft/weo/2018/02/weodata/weorept.aspx? pr.x=57&pr.y=14&sy=2018&ey=2019&scsm=1&ssd=1&sort=country&ds=.&br=1&c=111 &s=NGDPD%2CPPPGDP%2CNGDPDPC%2CPPPPC&grp=0&a= [Accessed 4 Apr. 2019]. Mankiw, N.G., 2014.Principles of economics. Cengage Learning. Reinhart, C.M. and Rogoff, K.S., 2014. Recovery from financial crises: Evidence from 100 episodes.American Economic Review,104(5), pp.50-55.
14ECONOMICS Sawe, B. 2019.The Biggest Industries In The United States. [online] WorldAtlas. Available at:https://www.worldatlas.com/articles/which-are-the-biggest-industries-in-the-united- states.html [Accessed 4 Apr. 2019]. state.gov 2019.Strategic Goal 4: Promoting Economic Growth and Prosperity. [online] U.S. DepartmentofState.Availableat: https://www.state.gov/s/d/rm/rls/perfrpt/2009/html/135583.htm [Accessed 4 Apr. 2019]. Summers, L.H., 2014. US economic prospects: Secular stagnation, hysteresis, and the zero lower bound.Business Economics,49(2), pp.65-73. Tradingeconomics.com 2019.United States GDP Constant Prices | 2019 | Data | Chart | Calendar.[online]Tradingeconomics.com.Availableat: https://tradingeconomics.com/united-states/gdp-constant-prices [Accessed 4 Apr. 2019]. Tradingeconomics.com 2019.United States Inflation Rate | 2019 | Data | Chart | Calendar | Forecast.[online]Tradingeconomics.com.Availableat: https://tradingeconomics.com/united-states/inflation-cpi [Accessed 4 Apr. 2019]. Tradingeconomics.com 2019.United States Unemployment Rate | 2019 | Data | Chart | Calendar|Forecast.[online]Tradingeconomics.com.Availableat: https://tradingeconomics.com/united-states/unemployment-rate [Accessed 4 Apr. 2019]. Tradingeconomics.com. 2019.United States GDP Annual Growth Rate | 2019 | Data | Chart | Calendar. [online] Available at: https://tradingeconomics.com/united-states/gdp-growth- annual [Accessed 4 Apr. 2019]. Tradingeconomics.com. 2019.United States GDP per capita | 2019 | Data | Chart | Calendar | Forecast. [online] Available at: https://tradingeconomics.com/united-states/gdp- per-capita [Accessed 4 Apr. 2019].
15ECONOMICS whitehouse.gov 2018.America's Unemployment Rate Falls to Its Lowest Level in Almost 50 Years.[online]TheWhiteHouse.Availableat: https://www.whitehouse.gov/articles/americas-unemployment-rate-falls-lowest-level-almost- 50-years/ [Accessed 4 Apr. 2019].