Economic indicators measure and characterize the current state of economy. Unemployment rate, inflation rate, real GDP, and oil price per barrel form the general economic picture and show further directions of economic policies and tactics. “Real GDP is gross domestic product in constant dollars. In other words, real GDP is a nation’s total output of goods and services, adjusted for price changes” (Picker, 2007). Real GDP is often compared to nominal GDP which is always expressed in current dollars. In the third quarter of 2007, real GDP equaled to 11658.
9 billion of constant dollars, having increased 4. 9 percent as compared to the second quarter of 2007. Gross private domestic investment is one of the basic components of real GDP. In 2007, gross private domestic investment also increased to reach 1859. 9 billion dollars (GPO Access, 2008). The graph shows the historical fluctuations of real GDP in the United States: the beginning of 2007 was marked by the greatest real GDP decrease since 2005. The decrease of real GDP in the second half of 2006 indicates the start of economic recession in the United States.
The unemployment rate is “the number of unemployed as a percent of the labor force” (Picker, 2007). In March, the U. S. economy was characterized by 5. 1% unemployment rate (Bureau of Labor Statistics, 2008). Normally, unemployment rates should not exceed 6 percent. Thus, unemployment rates in the U. S. are kept within the reasonable limits. However, the chart shows the slight but continuous unemployment rate increase since the beginning of 2007. These trends create a picture of recession in the American economy.
Inflation rate shows the increase of prices for consumer goods and services, and is counted on a yearly basis (Picker, 2007). Inflation rates are basically measured with the help of Consumer Price Index (CPI); CPI calculates the value of consumer goods and services basket which households purchase (Picker, 2007). The chart shows the constantly increasing inflation rates in the U. S. economy. In March, the average cost of goods and services basket advanced 0. 3 percent (MERIC, 2008). These trends indicate the inability of the Federal Reserve to cope with the inflation problem.
Growing inflation requires that the Fed pushes up interest rates and slows down the economy, but as the Fed decreases interest rates to regulate particular markets, it puts the economy into a deeper recession. Oil price per barrel is usually counted on the basis of the OPEC or NMEX oil basket prices. At the beginning of 2008, the barrel of oil cost $90. 7; by the end of April, the price has already crossed the mark of $116 per barrel (WTRG Economics, 2008). The chart shows significant continuous increase of oil prices. During 2007, the price of oil per barrel has nearly tripled.
Inflation rates, unemployment rates, oil prices per barrel, and real GDP are the four interrelated economic indicators, which determine, at what stage of business cycle the U. S. economy stands. Business cycles impact all areas of economic development; the airline industry is not an exception. In many instances, airlines develop and act according to the basic economic laws. The state of real GDP and Consumer Price Index determine consumer capability to purchase tickets and choose convenient flights. The price of oil per barrel seriously increases airline industry costs, which the industry compensates for the account of more expensive tickets.
The growing energy prices contribute into the CPI growth. The growing price of oil per barrel impacts unemployment: “on average, every time oil prices go up 10 percent, 150,000 Americans lose their jobs” (Eldad, 2007). It is stated that “the cycles of the airline market are often considered to be a response to fluctuations in the evolution of the GDP and to lie beyond the sphere of the industry’s influence” (Eldad, 2007). Unemployment does not significantly impact the airline industry. The United States has been able to keep unemployment rates at reasonable levels.
Inflation rates directly impact the way the airline industry performs on the market. In general, inflation indicates the growth of all costs and expenditures within airline industry. Inflation means that energy prices grow, too. Traditionally, fuel and oil costs constituted 15 percent of the airline industry expenditures, but inflation and growing prices of oil per barrel have raised this index to 30 percent (Eldad, 2007). Due to continuous inflation growth and oil price increase, airlines annually lose up to $200 million (Eldad, 2007). These are the indicators of the economic recession.
Economic recession is one of the five stages of business cycle. Since 2005, the airline industry has been experiencing serious economic losses and numerous business closures. The slight increase of real GDP in the last quarter of 2007 reveals promising trends which will hopefully help airlines cope with energy prices. The recession stage of the business cycle suggests that the U. S. economy has not yet reached the trough at the very bottom of its economic decline. This is why the airline industry should be prepared to facing even more serious economic difficulties.
The current economic situation is more consistent with the classical economic conditions. The state is not involved into regulating inflation rates or oil prices per barrel. In the oil market, the state acts according to laissez-fair principles of classical economic theory, which promote free business choice and minimal state involvement into economic processes. Although the state regulates interest rates and seems to make everything possible to minimize the economic consequences of recession, its strategies are aimed at regulating particular markets and not the U. S.
economy in general. The airline industry is given sufficient freedom for taking economic decisions according to the changeable economic conditions in the U. S. Conclusion The current state of real GDP, inflation rates, oil price per barrel, and unemployment rates form the picture of economic recession in the United States. The airline industry experiences significant economic losses. As the U. S. economy faces the recession stage of the business cycle, airlines should be prepared to even greater economic losses before the economy reaches the trough at the bottom of its economic decline.
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