The United States economy has suffered the worst recession of the post-World War II era in 2007 and 2008, and has endured an anemic recovery since. However, the economic landscape may be changing. United States unemployment has fallen for four consecutive months, down from 9% in September to 8.3% in January. Four economic factors (unemployment rate, expectation, consumer income, and interest rates) affect supply and demand in different ways as discussed in this paper. Unemployment
It has been going on five years since unemployment has been such a factor in the United States. The unemployment rate is defined as the percentage of people in the economy willing and able to work but are not working. This statistic is a little deceiving, as it does not take into account the people who have given up looking for work. Given that caveat, experts believe that the number of people out of work is significantly higher. The Bureau of Labor Statistics (BLS) reports the unemployment rate on the first Friday of each month. It is useful to compare this month’s unemployment rate to that of the same month last year.
This rules out the effects of seasonality (Amadeo, 2011). Unemployment is known as a lagging indicator. The effect of economic events, such as a recession, and so occur after the said economic event has already started. That means the unemployment rate will continue to rise even after the economy has started to recover, as employers are reluctant to lay people off when the economy turns bad. In turn, companies are even more reluctant to hire new workers until they are sure the economy is well into the expansion phase of the business cycle. For that reason, the unemployment rate is a powerful confirmation of what the other indicators are already showing. The current unemployment rate as of the end of January was 8.3% and reports indicate it is at the lowest rate since February 2009.
With the unemployment rate dropping this gives the Americans of the United States hope that this will provide an increase of jobs. The president announced a plan to bring jobs back to the United States. The government is expecting to see a continuing increase in jobs. The president is also proposing to create 20,000 jobs for veterans (CNN, 2012). When people have jobs they can buy goods that will help the economy get back to normal. The rate of unemployment affects supply and demand in that the more people looking for work, the fewer people will be buying (demand), and the retail sector will decline. If the demand goes down the less companies will produce that means the less money they make with the same overhead. To improve their position companies will look to reduce their overhead that usually means a reduction in workforce. This goes only adds to the unemployment rate and the cycle starts over again. Expectations
With respect to expectations the idea is that rational expectations of the players in an economy will partially affect what happens to the economy later. If a company believes that the price for its product will be higher in the future, it will stop or slow production until the price rises. Because the company weakens supply whereas demand stays the same, price will increase. In sum, the producer believes that the price will rise in the future, makes a rational decision to slow production and this decision partially affects what happens in the future. Consumer Income
Consumer income is also known as discretionary income. Consumer income is the amount of income remaining after taxes and living expenses have been deducted from wages. This represents the amount of money a person has to spend, save, or invest. The more discretionary income a person has the more goods or services he or she can buy. Based on information from the Bureau of Economic Analysis, consumer income rose in December 2011. Goods producing industries, manufacturing, and service producing industries are areas that had an increase in personal income in December 2011. An increase in personal income is an increase in the short run as it attempts to get the economy running by providing more spendable income for consumers. By hiring more workers companies can produce more goods, more production creates more income for the company, the workers, and more money back into the economy. Interest Rates
The interest rate is the yearly price charged by a lender to a borrower for the borrower to obtain a loan. This is known as a percentage of the total amount lent. When speaking of interest rates one has to remember that there are two types of interest rates Nominal Interest Rates and Real Interest Rates. A nominal interest rate is one where the effects of inflation are not considered. Changes in the nominal interest rate often move with changes in the inflation rate, as lenders not only have to be compensated for delaying their consumption, they also must be compensated for the fact that a dollar will not buy as much a year from now as it does today. Real interest rates are interest rates that include inflation (Moffatt, 2012).
The correlation between interest rates and supply and demand is if the interest rate rises the amount of expenditure in the economy will fall. This because as interest rates rise, the cost of borrowing credit goes up; this invokes households and firms to stop investing because they will be paying more interest. This means that there is less private investment expenditure in the economy, therefore bringing along with it less money in the economy invested into capital. This means there will be less job opportunities in the economy, hence unemployment can rise, and therefore income will fall. Therefore there will not be much spending, and this means demand for goods and services will fall, which decrease the amount of demand in the economy, and increases the amount of supply (“Demand and supply”, 2010). Assessment
The current government is focusing on the long run looking to push the growth of the United States outward by creating jobs and developing new technology. The government should focus on the short run and work within the growth medium until the economy can push the growth outward. By bringing more jobs back to the United States and putting the workforce back to work will move the economy one step closer to normal. More people working will help to decrease unemployment and eventually increase consumer spending. Keeping interest rates low will allow banks to make more loans to people in lower income brackets and businesses so they can grow their business. According to the Keynesian economic model, if the demand for the economy is to grow, businesses need to produce new products and develop technology to benefit businesses in the industry. The Keynesian model focuses on the short-run, this group also introduces the multiplier to the economy because they believed saving money would lead to a decrease in expenditures that would lead to a recession.
The Classical economic model believes that the market is self-regulating and that it can correct fluctuations in the economy without the assistance of the government. It focuses on the long-run. The Classical model thought that people would save money by putting it into investments that, in turn, would create expenditures. After the inflation in 1917 the Keynesian multiplier model was proved to be incorrect because it was based on a fixed price level that could not remain fixed during the inflation period. In January 2012, American businesses added another 257,000 jobs.
The unemployment rate came down because more people found work. Altogether, the United States have added 3.7-million jobs over the last 23 months. The President of the United States walks a fine line as he trumpets the good news while acknowledging the need for further improvement. There are still far too many Americans who need a job or need a job that pays better than the one they have now. The economy seems to be growing stronger and the recovery speeding up. As mentioned earlier the unemployment rate is a lagging indicator. This means if unemployment continues going down the recovery may be well underway.
Amadeo, K. (2011). Unemployment Rate. Retrieved from http://useconomy.about.com/od/economicindicators/p/unemploy_rate.htm Demand and supply. (2010). In WiKiAnswers. Retrieved February 6, 2012, from http://wiki.answers.com/Q/How_does_the_interest_rate_regulation_effect_the_demand_and_supply_of_credit_in_the_country Moffatt, M. (2012). What Are Interest Rates? Retrieved from http://economics.about.com/cs/studentresources/f/interest_rate.htm