The US economy Essay

Custom Student Mr. Teacher ENG 1001-04 19 March 2017

The US economy

Real GDP in 2006 experienced an increase of 3.4%, a 0.2% appreciation if compared with 2005 (3.2%) . The increase was mainly build up of consumer spending, since it contributed approximately 2.2 percentage point to the increase in real GDP1. The second influential factor was exports, as it contributed a 0.93 percentage point to the increase, followed by nonresidential investment (0.7 percentage point), state and local government spending, inventory investment ($26.8 billion, 0.26 percentage point) as well as federal government spending (0.1 percentage point) 1. Nevertheless imports have produced a 1 percentage point decrease and declining residential investment created a 0.26 percentage decrease as well1.

If its GDP increases, hence a higher economic activity, less unemployment and a rising GDP per capita occurs. In fact personal income increased by 29.618% between 2005 and 2006, as in 2005 personal income increased by $507.8 billion and in 2006 it rose by $658.2 billion2. Hence people are more able to spend and thus saving rates decreased; in the first quarter of 2005 saving rate was 0.7% but in the fourth quarter of 2006 it was -1%2. Hence the government must have applied a loosening monetary policy, which discourages savings and encourages spending.

Although GDP and spending increases, inflation decreases. In 2005 inflation increased 3.5% and in 2006 it rose 3.1%2. Inflation may decrease, since prices might have increased immensely due to a higher income and thus aggregate demand; hence rising prices discourages spending and thus decreased inflation. In the second quarter of 2007 real GDP increased by 3.8%, a 4.9% increase occurred in the third quarter of 2007, while annually it experienced a 0.6% increase3. The increase was a result of personal consumption expenditures (PCE), exports, nonresidential structures, state and local government spending, and equipment and software; while imports decreased3.

Final sales of computers have influenced a 0.28 percentage point increase in real GDP in the third quarter of 2007, while in the second quarter it produced a 0.21 percentage point increase3. As well motor vehicle output in the second quarter contributed a 0.03 percentage point to the second-quarter growth, followed by a 0.36 percentage point increase to the third quarter growth3.

Moreover, real personal consumption expenditures increased by 1.4% in the second quarter and 2.8% in the third quarter4. As well real nonresidential fixed investment increased 9.3 percent in the second quarter, compared with an increase of 11.0 percent in the third quarter, nonresidential structures increased 16.4 percent in the second quarter, compared with a rise of 26.2 percent in the third quarter, equipment and software experienced an increase of 6.2 percent in the second quarter, while it produced an appreciation of 4.7% in the third quarter, real residential fixed investment decreased 20.5% in the second quarter, while in the third quarter it decreased 11.8%4.

Furthermore, the 7.5% increase in the second quarter and the 19.1% increase in the third quarter in real exports of goods and services as well contributed to the increase in real GDP4. But the 4.4% increase in real imports of goods and services reduces the growth of its real GDP4.

The government as well attempts a loosening fiscal policy, where its spending level rises. A fiscal policy is the use of Commonwealth Government’s budget in order to achieve the government economic objectives by influencing economic activity, resource allocation and income distribution.

Since real federal government consumption expenditures and gross investment increased 7.1 percent in the third quarter, compared with an increase of 6.0 percent in the second4. National defense increased 10.1 percent, compared with an increase of 8.5 percent; nondefense increased 1.1 percent, compared with an increase of 0.9 percent. Real state and local government consumption expenditures and gross  investment increased 1.9 percent, compared with an increase of 3.0 percent4.

In fact, inflation averagely increased by 2.54% in the first six months and in the next six months inflation rose about 3.17%5. This increase might be derived from the increase in GDP, as economic activity increases, unemployment decreases and thus personal income as well as aggregate demand rise; hence higher demand-push inflation occurs since consumers force up prices for the limited amount of goods and services available.

A higher inflation may lead to higher unemployment as businesses face higher production costs and thus some companied might fire some of its employees. A higher unemployment would reduce its GDP per capita, aggregate demand, economic activity as well requires the government to increase its spending for welfare and unemployment benefits; as a result its budget deficit might increase, which discourages foreign capital inflow and thus leading to less demand and value of the US$.

However in the first quarter of 2008, GDP increased at 0.6%. Personal consumption expenditures contributed 1% to the change, government consumption expenditures and gross investment demanded 2% of the increase; while decreased gross private investment contracted 4.7% of the increase6.

In January 2008 inflation rate was 4.28%, in February it reached 4.03% while in March it was 3.98%5. Decreased inflation increases people’s purchasing power and thus standard living increases. Nevertheless it will also increase aggregate demand and thus could lead to rising demand-push inflation. Currently the government seemed to apply a tightening monetary policy, in which it increases interest rates to encourage people to save rather than spend, thus inflation decreases.

It is estimated that economic growth will improve in 2009 with a projected $14.2 trillion GDP, as its housing and financial sectors will enhance7. Moreover the government as well plans to exercise a contractionary fiscal policy, as it plans to keep non-security discretionary spending growth below 1% in 20098. Nevertheless, deficit has increased from $248 billion (1.9% of GDP) in 2006 to a projected $407 billion (2.7% of GDP).

This is a result of reduction of corporate tax receipts as well as a 7.5% increase in total defense spending. a rise of 8.2% in total emergency spending, a 10.7% increase in funding for improving nuclear detection capabilities, expanding cyber security protections, securing the Nation’s borders and removing those individuals in the country illegally, and developing stronger identification and screening capabilities and a 14.9% increase for international affairs .9

Bibliography

Economic Growth Decline Predicted for 2008, with Rebound in 2009.[online], http://www.america.gov/st/econ-english/2008/January/20080124144024dmslahrellek0.8207666.html, ‘cited as 14.5.2008’

Gross Domestic Product : fourth quarter 2007.[online]. http://www.bea.gov/newsreleases/national/gdp/2008/gdp407p.htm, ‘cited as 14.5.2008’

Gross Domestic Product: Third quarter 2007 (final) Corporate profits: third quarter 2007 (revised).[online]. http://www.bea.gov/newsreleases/national/gdp/2007/gdp307f.htm, ‘cited as 14.5.2008’

National Income and Product Accounts Table.[online].
http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=1&FirstYear=2006&LastYear=2008&Freq=Qtr, ‘cited as 14.5.2008’
Personal income.[online], http://www.bea.gov/scb/pdf/2007/02%20February/0207_advance_gdp_q4.pdf, ’cited as 14.5.2008’

Real GDP for 2006.[online], http://www.bea.gov/scb/pdf/2007/02%20February/0207_advance_gdp_q4.pdf, ‘cited as 14.5.2008’

The Budget message of the president.[online].http://origin.www.gpoaccess.gov/usbudget/fy09/pdf/budget/message.pdf, ‘cited as 14.5.2008’

The nation’s fiscal outlook.[online]. http://origin.www.gpoaccess.gov/usbudget/fy09/pdf/budget/outlook.pdf, ‘cited as 14.5.2008’
The United States inflation rate.[online]. http://www.miseryindex.us/irbymonth.asp, ‘cited as 14.5.2008’

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