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The Economy of the United States of America Essay Sample

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Introduction of TOPIC

Gross Domestic Product

The real gross domestic product (GDP), which is the output of goods and services produced by labour and property, increased at an annual rate of 0.6% in the first quarter of 20081. In fact, in the fourth quarter of 2007 real GDP increased by 0.6%1, making it the world’s largest national economy2. The increase in real GDP was a result of consumption for services, private inventory investment, exports of goods and services, and federal government spending1. While an increase in inventory investment that was balanced by an increase in imports and a decrease in nonresidential structures has created an increase in real GDP in the fourth quarter of 20071. Additionally sales in computers as well affected USA’s real GDP; final sales of computer made up 0.12% of the growth of GDP in the fourth quarter of 2007 and 0.16% o the growth of GDP in the first quarter of 20081.

 U.S. Real GDP Growth Rate

Past Trend Present Value & Future Projection
Year over Year Change. Percent per year.

But if compared to the previous years, growth in real GDP has decreased. Between June and September 2007 growth in GDP was 2.9%, but then decreased to 0.9% between December 2007 and March 2008. In fact it is forecasted to decrease to 0.5% growth between April and June 2008 but then increase again to 0.6% growth in July 2008.Additionally, GDP per capita is seen as moderate high ($46,000 in 2007).

Inflation

Inflation is a sustained increase in the general level of prices in an economy4. If GDP and hence output increases, hence income as well rises; thus consumers are able to spend more money (especially on goods they could not afford, i.e. luxury goods). Higher spending results in higher aggregate demand (total spending in an economy) increases and thus leading to a demand-pull inflation, since consumers force prices up by bidding against each other for limited goods and services available. Its inflation rate from March 2007 to March 2008 reached 4%2, which is considered as high. High inflation forces the Reserve Bank to increase interest rate in order to encourage saving and discourage spending and thus reduci

ng aggregate demand and inflation. But a lower aggregate demand would mean a lower economic activity

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and thus higher unemployment and a lower GDP per capita occurs.

Unemployment

Unemployment is a situation where labour resources in an economy are not utilized. Hence due to high inflation, employees might request for higher wages and of wages rise faster than productivity, cost of labour for each unit of output increases and thus increasing the cost of production for the business. Therefore companies may pass wage increase on to consumers by charging higher prices, producing cost-push inflation.  As well inflationary expectations may as well occur, since employees may expect rising inflation hence they will increase prices, leading to higher inflation. Moreover customers would then also purchase products before inflation rises and hence creating an increase in inflation. Both types of inflation create a continuous cycle. Thus, employers may reduce their workforce and hence higher unemployment rate occurs. Its unemployment rate in 2007 was 4.6%, which is also considered as high2.

External balance

Its exports reached $1.19 trillion in 2007 while its imports only reached $1.987 trillion2, creating a current account deficit of $797 million. As the diagram shows, the proportion of US imports to exports decreased, creating a higher current account deficit.

This may be a result of a depreciation of the US$. If the US$ depreciates, hence price of imports increases; leading to rising imported inflation. As well, servicing costs and repayment of debts would then be more expensive. As a case study shows, in the 1980s Australia had higher interest rates than other countries, especially if compared to Japan and the USA. Hence people were encouraged to borrow from overseas and thus in 1980d most Australians borrowed from Swiss, but later the AS$ depreciate against the Swiss Francs and thus a rapid increase in repayment occurred and has also produced an immense CAD crisis6. In fact its gross external debt was $12.25 trillion in 20072 and thus demanding 88.512% of its real GDP (as GDP was $13.84 trillion in 20072).

Overall

Summarized the economic performance of the United States has worsened in the recent years. Although GDP increased in 2007-2008, its percentage growth has worsened compared to previous years. The GDP as well has produced high inflation and thus a high unemployment. Additionally the decrease of its export to import proportion has also contributed to a worsening economic performance as its current account deficit increases.

Bibliography

Economy of the United States. [online], http://en.wikipedia.org/wiki/United_States_economy, ‘cited as 9.5.2008’ 

 Gross Domestic Product: First quarter 2008 (Advance).[online], http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm, ‘cited as 9.5.2008’ 

http://www.ita.doc.gov/td/industry/OTEA/usfth/aggregate/H04t01.html, ‘cited as 8.5.2008’  Stephen Chapman, Cassy Norris, Natalie Devenish, Llian Merritt.

Business Studies in Action, chapter 21 

Tim Dixon, John O’Mahony, (2006) Australia in the global economy, chapter 9 

US real GDP growth forecast.[online]. http://www.forecasts.org/gdprealgrowth.htm, ‘cited as 9.5.2008’

1 Gross Domestic Product: First quarter 2008 (Advance).[online], http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm, ‘cited as 9.5.2008’ 

2 Economy of the United States. [online], http://en.wikipedia.org/wiki/United_States_economy, ‘cited as 9.5.2008’   

3 US real GDP growth forecast.[online]. http://www.forecasts.org/gdprealgrowth.htm, ‘cited as 9.5.2008’

4 Tim Dixon, John O’Mahony, (2006) Australia in the global economy, chapter 9

2 Economy of the United States. [online], http://en.wikipedia.org/wiki/United_States_economy, ‘cited as 9.5.2008’

2 Economy of the United States. [online], http://en.wikipedia.org/wiki/United_States_economy, ‘cited as 9.5.2008’

5 http://www.ita.doc.gov/td/industry/OTEA/usfth/aggregate/H04t01.html, ‘cited as 8.5.2008’

6 2005. Stephen Chapman, Cassy Norris, Natalie Devenish, Llian Merritt.

Business Studies in Action, chapter 21

2 Economy of the United States. [online], http://en.wikipedia.org/wiki/United_States_economy, ‘cited as 9.5.2008’

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