Us Economic Status

US ECONOMIC STATUS

josphat yego

@02704665
11/25/2012.
United States of America current economic status and factors affecting its growth
Having study macroeconomics from chapter one to sixteen, it’s now time to put the knowledge learned in class to practicality. It will be a good to start with definition of economics. “Economics is a social science concerned with how individuals, institutions and society make optimal choices under conditions of scarcity” (McConnell 19th edition). With the fact that choices are to be made and costs are to be incurred when one alternative is forgone, economic efficiency must therefore be practiced in order to avoid the economic cost. It is therefore an obligation for the government to keep the economy stable to protect her citizens from economic costs. U.S economy is service based economy and government plays an important role providing enabling environment for people to exchange their services for money does contributing to national income through payment of tax. The government had also maintain the steady GDP for a long time and therefore making the economy stable and the best compared to all other nations in the world. US government had been able to accomplish this achievement in economy by practicing its democratic rights of allowing private sector to make majority of decision and to venture in any business of their choice provided they a bid by the laws. With private sector opening businesses all over the nation and paying taxes to the government, GDP increases and thus boosting the economy. This paper will discuss US economic systems, Role of government in economy, and factors that affect the economy.
There are two economic systems i.e. the command system and the market system. Command system is where the government own resources and economic decision making occurs through central economic plan. On the other hand, the market system is where private ownership of property is practice and most of the decisions are made by private investments and businesses. US economy is based on market system. Apart from private ownership, market system is also characterized self-interest, completion freedom of choice and enterprise, market prices, use of money, specialization and technology. The role of the government is to design and implement rule and regulations that safeguard buyers and sellers from exploiting each other. The regulations are called “invisible hand” of the government. US government takes a lot of responsibilities in maintaining its economy and therefor splits its responsibility to three wings; these are the three agencies that provide statistics on how economy is progressing. These agencies’ are census bureau, the bureau of economic analysis and bureau of labor and statistics. The agencies look into five economy detectors which includes; personal income, consumer price, new home sales and net retail sales. By analyzing the data from the agencies and detecting any problem, government tend to decide what to do by applying economic policies, economic laws and economic principles to attain economic efficiency. The next and the crucial part of this paper is to look at the factors that affect the economy of the country. To start with, let’s look at GDP. GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. US releases its GDP quarterly with the latest release being 3rd quarter release which showing a 2.0 percent increase compared to the 2nd quarter. The release was on October 26th 2012.The exact number for the 2nd quarter was $117.4 billion. 2.0 percent for the 3rd quarter gives an exact amount of 119.748 billion dollars (bureau of economic analysis). According to BEA, The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), federal government spending, and residential fixed investment that were partly offset by negative contributions from exports, nonresidential fixed investment, and private inventory investment. Imports, which are a subtraction in the calculation of GDP decreased. According to BEA the acceleration in real GDP in the third quarter primarily reflected an upturn in federal government spending, a downturn in imports, an acceleration in PCE, a smaller decrease in private inventory investment, an acceleration in residential fixed investment, and a smaller decrease in state and local government spending that were partly offset by downturns in exports and in nonresidential fixed investment. Unemployment is factor our second factor that determines the state of economy. It’s caused by: governmental corruption, incompetence, and red tape, accompanied by lawlessness, lack of property rights, and poor educational systems. The need to obtain many permits before opening a business discourages many people. The inability of the government to provide security and the corruption in the legal system making it impossible to prosecute thieves discourages many people. The danger of having the government seize your property at any moment discourages many people. Since United States had been fighting against terrorist for the past decade, unemployment rate had been on the increase thus contributing to the recession. According to USA bureau of labor and statistics, unemployment rate had decreased as from November. It had been at 8.1 % for the last four years but it decreased to 7.9% this year (bls). Over the year, 31 states experienced statistically significant changes in employment; only West Virginia’s employment decreased (-11,000). The largest over-the-year jobs increase occurred in California
(+295,300), followed by Texas (+277,400) and New York (+134,500). Inflation is defined by economist as "sustained rise in the general level of prices." Very high inflation adversely impacts economic performance, as evidence from cross-country studies portrays this according to Federal Reserve of Boston. Likewise, moderate levels of inflation can distort investment and consumption decisions. Recent U.S. experience with low, stable levels of inflation, in the range of 2 to 3 percent, has spurred policy makers to consider the possibility of achieving zero percent inflation. Reducing inflation however has costs in lost output and unemployment during the adjustment concern about rising prices during the early 1960s, as inflation was low. Concern rose with inflation in the late 1960s and early 1970s. When inflation twice surged to double-digit levels in the mid and late 1970s, Americans named it public enemy number one. Since the late 1980s, public anxiety has abated along with inflation itself (http://www.bos.frb.org/economic). Inflation being brought up by high prices brings about two types of prices into our discussion i.e. general price level and relative price. General price level focuses on price of all the goods in the economy while relative price compares the change of price of a certain item to the price of the other. The third factor that affects the economy is interest rate. Lower interest rates make it easier for farmers, manufacturers, and other businesses to borrow to invest in equipment, inventories, and buildings. Also, the returns that investments will produce in future years are worth more today when rates are low than when rates are high. That gives business more of an incentive to invest when rates are low. Increased business investment, in turn, makes the economy grow faster, as productivity, or output per worker, increases faster. Interest rate changes each day and as 2010 to 2012, the table below portrays the rates and late breaks it down to 2012 monthly interest change. Period | AA financial | | AA asset-backed | | 1-day | 7-day | 15-day | 30-day | 60-day | 90-day | | 1-day | 7-day | 15-day | 30-day | 60-day | 90-day | Annual average | 2010 | 0.17 | 0.18 | 0.18 | 0.20 | 0.24 | 0.29 | | 0.27 | 0.33 | 0.33 | 0.30 | 0.33 | 0.35 | 2011 | 0.08 | 0.09 | 0.10 | 0.13 | 0.17 | 0.21 | | 0.30 | 0.37 | 0.35 | 0.27 | 0.27 | 0.29 | 2012* | 0.09 | 0.09 | 0.11 | 0.12 | 0.15 | 0.21 | | 0.25 | 0.32 | 0.29 | 0.27 | 0.29 | 0.31 | Monthly average | 2012-June | 0.10 | 0.10 | 0.11 | 0.13 | 0.16 | 0.21 | | 0.25 | 0.30 | 0.30 | 0.31 | 0.29 | 0.33 | July | 0.11 | 0.09 | 0.10 | 0.13 | 0.14 | 0.24 | | 0.24 | 0.32 | 0.29 | 0.27 | 0.29 | 0.33 | Aug. | 0.11 | 0.11 | 0.12 | 0.14 | 0.16 | 0.19 | | 0.22 | 0.27 | 0.26 | 0.27 | 0.28 | 0.32 | Sept. | 0.11 | 0.11 | 0.11 | 0.11 | 0.16 | 0.17 | | 0.23 | 0.27 | 0.26 | 0.27 | 0.29 | 0.30 | Oct. | 0.11 | 0.11 | 0.12 | 0.12 | 0.16 | 0.19 | | 0.23 | 0.27 | 0.24 | 0.25 | 0.27 | 0.29 | Nov.* | 0.12 | 0.13 | 0.14 | 0.15 | 0.19 | 0.22 | | 0.23 | 0.27 | 0.25 | 0.25 | 0.28 | 0.29 | |

Source: Federal reserve ( http://www.federalreserve.gov/releases/cp/rates.htm)
Interest rates are controlled by the government through, monetary policies which are is implemented by the Fed. The Fed has three main instruments that it uses to conduct monetary policy: open market operations, changes in reserve requirements, and changes in the discount rate. Productivity is another determinant of economy. It is defined in economics measure of the relationship between output goods and services) and one or more of the (inputs (land, labor, capital, etc.) used to produce the output. According to US Bureau of Labor and Statistics, Labor productivity increased at a 1.9 percent annual rate during the third quarter of 2012, the U.S. The increase in productivity reflects increases of 3.2 percent in output and 1.3 percent in hours worked. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the third quarter of 2011 to the third quarter of 2012, productivity increased 1.5 percent as output and hours worked rose 3.3 percent and 1.8 percent, respectively. (http://www.bls.gov/news.release)
Currency Strength: The value of the U.S. dollar compared to other foreign currencies had been strong and thus enabling Consumers to have a choice to purchase goods or services originating in the United States or in other countries. If the U.S. dollar strengthens more, companies in the industry that purchase inputs from other countries are able to be more competitive in pricing. In industries that are heavily reliant on foreign raw materials and processing, such as the clothing industry, the entire sector can be lifted or depressed with a strengthening or weakening of the dollar. Dollar value changes every day and as from yestareday, the table below show the trends. * -------------------------------------------------
EUR/USD-0.13766%
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USD/JPY-0.36945%
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GBP/USD-0.16882%
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USD/CHF+0.13783%
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USD/CAD+0.05461%
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EUR/JPY-0.50660%
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AUD/USD-0.18293%
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CNY/USD+0.07812%
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Government spending is the last factor discussed in this paper. This component considers the level of government expenditures as a percentage of GDP. Government expenditures, including consumption and transfers, account for the entire score.
GDP / Spending . | |
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The table above shows that government spending had been increase which means the economy is growing. (Source: US government GDP history).
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Sources 1. World Bank website, www.worldbank.com. 2. US Treasury website, www.ustreasury.gov 3. FEDS http://www.federalreserve.gov/monetarypolicy/beigebook/default.htm 4. U.S. Department of Labor – Bureau of Labor Statistics http://www.bls.gov/cps/home.htm 5. U.S. Department of Commerce Economics Statistics
U.S Bureau of Economic Analysis http://www.bea.gov/