International Macro Economics

Question: Discuss about the International Macro Economics. Answer: Introduction The economy of the United States is considered one of the most developed economy in the world. The total population of US was estimated as 321 million in 2015. The per-capita GDP in the year 2015 was $55,905 with the growth rate of 1.8%. The total Gross Domestic Product (GDP) growth rate in real terms in the year 2015 stood at 2.4%. In the year 2014, the total GDP had reached the maximum value of $17,419 billion in the United States. The inflation rate of the United States was1.7 % in 2015. However, the unemployment rate continues to be reasonably high having the value of 4.9% as on January 31, 2016 (USA.gov, 2016). There are some major industries, which directly or indirectly contribute in the GDP of the country. Food processing industry, mining industries, Electronic industries, aerospace, goods, telecommunication, automobiles, steel and ore, petroleum and natural gas are examples of those industries, which directly affect the level of the economy of the country. However, the major contribution in GDP is the service sector, which is having a high portion of 80%, manufacturing and food-processing industries is 19% and agriculture sector is 1.2% of the total GDP. The estimated labor force stood at 156 million as on March 31, 2016. About 14% of the total population of the United States was below poverty line in the year 2015 (Usa.gov, 2016). Production Output Performance The production output analysis of a country can be determined with the help of the real GDP growth rate and real GDP and GDP per capita analysis. Brief discussion about these parameters is as follows. Real Gross Domestic Product (Real GDP) It is an evaluation technique to determine the final value of a product or service in a given financial year without considering the variation in the price domain. It provides a base indication of the economic growth rate, which is not affected by inflation. (Abel et al., 2014). Real Gross Domestic Product (Real GDP) growth rate It provides the percentage change of rate in the value of real GDP from one financial year to another financial year. The purpose to find the growth rate is to forecast the per capita GDP (Mankiw, 2014). Real Gross Domestic Product (Real GDP) per capita is the evaluation method to determine the average GDP per individual, it is imperative to measure the per individual contribution in the gross domestic product of the real GDP (Argy, 2014) Performance trends - United States The trend of the real GDP of the United States during the period of 2005 2014 can be concluded in the graph shown below (Trading Economics, 2016). This graph provides the average incremental rise in the real GDP of the United States during the period of 2005-2014. The maximum value of GDP is $16,455.10 billion in the year 2015 and the minimum value of GDP is $13,800 billion in the year 2005. As per the graph, it is observed that there was a fall in the real GDP because of the global recession, which occurred in 2009. The GDP however recovered and reached a value of $16,000 billion in the year 2015. The following graph is indicating the growth rate of real GDP in the period of 2005-2014 (Trading Economics, 2016). It has been observed in the above figure that the highest value of the growth rate is 3.90 in 2005. However, the lowest value of growth rate is (-4) in 2009. It is clearly shown in the graph that there was a gradually decrease in the growth rate which ends at the minimum value of (-4) in 2009.The growth rate is rising in the next five years. The following graph is showing the per capita GDP during the period 2005-2014. (Trading Economics, 2016). The maximum value of per capita GDP reached in 2014 with a value of $50,662.4. However, the minimum value of per capita GDP observed in the year 2009 with a value of $47,575.6. As per the graph, it can be concluded that the people of the United States have improved their standards of living and expenses which caused a higher value of per capita GDP in the recent years and has reached the highest value in the year 2014. Detailed explanation of the performance indicators and direct effect on economy of the US The real GDP is the amount of the total goods product and service produced in the United States in a specified period. However, the production of goods and service is not specified for a particular year, hence the real GDP cannot be much affected by the inflation. Therefore, the real GDP is considered a well-explained measure to determine the national annual output or the overall growth of the country (Mankiw, 2012) The real growth rate cannot be mislead by the inflation, however; it is used to determine the direct economic growth of the country along with the efficiency of the annual production within the country on an annual basis. This rate is a more effective parameter to analyze the economic growth of the country, despite of the effect of deflation or inflation (Hoover, 2012). The per capita real GDP can be calculated by dividing the GDP value by the total registered national population of the country. This provides a brief indication of the living standards of the citizens of the United States (Parkin, 2012). Production output performance - Action taken by the Government The government has taken proactive actions to enhance the economic performance of the United States which are highlighted below (Dornbusch, Fischer Startz, 2014). Reduction in the cost of input variables, for example providing subsidies Adopted advanced and modern techniques for the product manufacturing units Decreased the duties on imported goods Eased loan schemes for entrepreneurs Provided financial support for the start-up enterprises To enhance the production rate of the goods, monetary department has monitored the inflation rate in such a way so that the demand will gradually increase Reasonable drop in the interest rate so that the small and medium class people could avail loan Encouraged the investments in the industry for more efficient production Labor Market Analysis Unemployment trends and unemployment rates in US The relevant graph for the unemployement rate in the US for the relevant period is indicated below (TradingEconomics, 2016). As per the observation, the unemployment rate reached its maximum value of 10% in the year 2009. Although, after 2009 the unemployment rate has gradually decreased in the upcoming years which has lead to lower unemployment rate in 2014. It can also be concluded from the graph that an exponential upward growth in the unemployment rates is seen in the year 2008-2009 because of the global recession. In this period, the economy of United States was affected by recession and caused unemployment in the country. Types of Unemployment in United States Unemployment can be described with the example of a situation in which an individual is willingly to work, but he/ she is not getting job due to a plethora of reasons ranging from lack of skills, recession or market structure. There are three basic types of unemployment. Cyclical Frictional Structural Brief discussion about the unemployment is as follows- Cyclical Unemployment - This type of unemployment occurs at the time of recession when the demand is less in the market due to a continuous fluctuation in the business cycle (Argy, 2013). At such time, the production is gradually decreased and rate of unemployment increases. However, at the time of market boom the rate of unemployment decreases and the overall production rate increase (Mankiw, 2012). Frictional unemployment - As the name suggests, it is a temporary time frame in which the unemployment occurs when one individual changes his/her job to any other job. Hence, the unemployment in between this time lag of switching for a suitable job is termed as frictional unemployment (Parkin, 2012). Structural Unemployment This unemployment occurs when the existing workforce is unable to handle the process in regards to change in the technology, industry or work structure due to lack of skill. When the economic structure changes, differential skills may be required (Popescu, 2013). As per the research, all the three types of unemployment exist in the United States. United States is a developed economy and experiences a cyclical transformation of the recovery, boom and recession. Cyclical unemployment is common in the US as when there is a reduction in the labor demand , the unemployment enhances (Dornbusch, Fischer Startz, 2014). On the other hand, United States is having lots of job availability due to market structure and therefore, the individual is more flexible to switch any job i.e. frictional unemployment increases. United States always pays a key attention to the technology enhancement which directly or indirectly affects the employment because new processes or advances in technology require well trained skilled labor to work. This leads to occurrence of structural employment( Parkin, 2012). Full employment in the United States - Action taken by the government United States has taken enormous steps to maintain an equilibrium employment level in the country. US government has taken following key measures to achieve full employment (Dornbusch, Fischer Startz, 2014). Reduction of the interest rate to increase the production by Federal Reserve board Organized non profit and public employment functions Huge investments in the infrastructure For less literate labor, US government has invested in providing shelter and transportation For more skilled workforce. government invested in research and development sector, educational programs for the up gradation of the employee These factors play a vital role and reduce unemployment rate in the country. Price Level Analysis The inflation rate and inflation trend for the period of 2005-2014 for US is shown below. (Trading Economics, 2016). This graph indicates the maximum variation in the inflation of United States in the time of 2008 2010 with the highest value of inflation 5.9% to the minimum value of (-1.9%). Although, in 2014 the inflation rate is near about 0%. Inflation - Type and definition Any change in the price level of the goods and service in a specified time is termed as inflation. This directly affects the purchasing power for a particular product. Type of inflation depends on various demand supply factors which cause the price to increase (Hoover, 2012). Deficit induced inflation - When the government has high deficit in the budget due to less financing, the price would become high and this is termed as deficit-induced inflation. Demand-pull inflation Extreme rise in the demand in comparison to supply causes high price. Costpush inflation If the rise in the price of goods is due to the shortage of the supply and high input cost , then it results in cost-pull inflation. Causes of inflation in United States United States has been seen both costpush and demand pull inflation in the past years. The major cause of cost-push inflation is huge dependence on imported goods and services. Government levies high tax on goods and reduces the input subsidies and hence the cost-push inflation comes into picture. In addition to that, due to different growth programs by the government, there has been an incremental rise in the aggregate income , which has fuelled the demand-pull inflation (Koutsoyiannis, 2013). Another more imperative cause for inflation is that the government has decreased the interest rate, which results in lesser saving and increases the expenses that finally enhances the demand. This sudden change in the price of the goods causes the demand -pull inflation (Mankiw, 2012). Actions taken by US government to combat inflation United States government has prudently used fiscal and monetary policies to reduce the rate of inflation so that the price would become stable (Dornbusch, Fischer Startz, 2014). Cost-push inflation Reduction in the per unit cost of the produced goods through higher efficiency and automation. With regards to fiscal policy, government has provided input subsidies Reduction of the interest rate by the Federal Reserve Bank leading to reduced finance costs. Demand -pull inflation Increment in the tax rate of the income of the citizen of the United States which directly causes fall in the disposable income, hence it results in significant drop of the demand Reduction in the aggregate demand by decreasing the employment beneficial schemes (Popescu, 2013) Conclusion As per the above discussion, it can be summarized that the overall economic status of United States in the last ten years from 2005-2014 has been wavering primarily due to the global financial crisis which adversely impacted the macroeconomics. However, the economy seems to have emerged well from the crisis and now poising for growth. The inflation rate and unemployment rate have stabalised and the economy seems poised for long term growth. This has been enabled primarily on account of prudent measures by the government so as to provide stimulus to the economy while ensuring that inflation does not go out of hand. References Abel, A., Bernanke, B., Croushore, D. (2014). Macroeconomics. Boston: Pearson. Argy, V. (2013). International Macroeconomics. Hoboken: Taylor and Francis. Dornbusch, R., Fischer, S., Startz, R. (2014). Macroeconomics. New York, NY: McGraw-Hill Education. Hoover, K. (2012). Applied intermediate macroeconomics, Cambridge: Cambridge University Press. Koutsoyiannis, A. (2013), Modern Macroeconomics, London: Palgrave McMillan Mankiw, N. (2012). Principles of macroeconomics. Mason, OH: South-Western Cengage Learning. Parkin, M. (2012). Macroeconomics. Harlow: Pearson Education. Popescu, G. (2013). Macroeconomics. New York: Addleton Academic Publishers. Trading Economics (2016), 300,000 Indicators from 196 countries, Retrieved 5th August 2016, from https://www.tradingeconomics.com/ U.S. Government's Official Web Portal | USA.gov. (2016). Usa.gov. Retrieved 5th August 2016, from https://www.usa.gov/