Macro- and Microeconomics Analysis of the US - Essay Example

Macro & Micro economics-US Economic Analysis Question One Report the quarterly data on the growth of real GDP and its four components (using the expenditure approach) starting with the third quarter of 2008. How would you characterize the Q3 2008-Q2 2012 period? How do the GDP growth rates compare to the long-run trend for the US economy? According to the numbers what phase of the business cycle is the US economy currently in? Do you observe any important changes in the individual components of GDP? The expenditure approach entails four components which are aggregated to get the overall GDP. The four components are, Consumption, Investment, Government Purchases and Net exports. 2008 The period under consideration is the two last quarters in 2008 i.e. the third and fourth quarters. In the third quarter, the US GDP decreased by -3.7% , this decrease was informed by a ragged growth in the four areas, Consumption, Investment, Net exports, and Government expenditure. Consumption was down to -3.8%, investment went down to -16.5%, and government expenditure was the only positive component at 4.3%. In the fourth quarter GDP deteriorated further registering a contraction to -8.9%. This contraction was informed by a -5.1% contraction in consumption, -33.9% contractions in investment and a further decline of government expenditure to 1.6%. 2009 In 2009, though the GDP was still recording negative GDP, there was a slight improvement as growth went up to -5.3% compared to the -8.9% recorded in the last quarter of 2008. This slight growth in GDP was informed by a -1.6 growth in consumption, a further decline to -43% in investment, and a slight increase in government expenditure from 1.6% to 1.8%. In the second quarter the GDP continued to improve from -5.3% the previous quarter to -0.3%. This marked improvement was as a result of -1.8% decline in consumption (compared to -1.6% the previous quarter), -27.1% increase in investment, and a marked improvement of government spending to 9.6%. In the third quarter, the GDP continued to grow, for the first time in four quarters it recorded a positive figure of 1.4%. This was informed by a 2.1% growth in consumption, a -1.7% improvement in investment, and a 3.7 rise in government spending/expenditure. In the last quarter of 2009, the GDP increased further to a marked rise of 4.0%. In this quarter, consumption remained the same, investment went up by 41.4%, and government spending went up by 1.1%. 2010 In the first quarter of 2010, the GDP failed to register continued growth from the figures recorded in the last quarter of 2009. Instead, it grew by 2.3% which was a 1.7% decline in growth. This was informed by a 2.5% growth in consumption, a 19.8% growth in investment and a-3.1% growth in government expenditure. In the second quarter, GDP grew by 2.2%, this was informed by a 2.6% growth in consumption, a 14.6% growth in investment and a 2.8% growth in government expenditure. In the third quarter, the GDP grew by 2.6%. This was informed by a 2.5% growth in consumption, a 16.4% growth in investment and a -0.3% growth in government expenditure. The last quarter of 2010 saw a GDP growth of 2.4%, this was a result of a 4.1% growth in consumption, a -5.9% growth in investment and a -4.4% growth in government expenditure. 2011 In the first quarter of 2011, the GDP continued to grow dismally, this was evident through its 0.1% growth in the first quarter. This slowing growth was represented by a 3.1% growth in consumption, a -5.3% growth in investment and -7.0% growths in government expenditure. In the second quarter, the GDP grew by 2.5%. This marked growth as compared to the first quarter was informed by a 1.0% in consumption, a 12.5% growth in investment, and a -0.8% growth in government expenditure. In the third quarter, the GDP contracted further, as was represented by 1.3% growth from the previous 2.5% growth. This decline was informed by a 1.7% growth in consumption, a 5.9% growth in investment and a -2.9% growth in government expenditure. In the last quarter of 2011, the GDP improved further as was represented by a 4.1% growth. This improvement was informed by a 2.0% growth in consumption, a 33.9% growth in investment, and a -2.2% growth in government expenditure. 2012 The first quarter of 2012 saw the GDP decline as growth was 2.0% as compared to the 4.1% growth recorded in the last quarter of 2011. This was represented by a 2.4% growth in consumption, a 6.1% growth in investment and a -3.0% growth in government expenditure. The real gross domestic product went up by an annual rate of 1.3% in the second quarter of 2012. This was marked by a 1.5% increase in real personal consumption expenditures, a 3.6% increase in real nonresidential fixed investment, a net export increase of 5.3%, and a decrease of 0.2 percent in the total Federal government consumption expenditure and gross investment. From the Data, it is evident that the greatest movement in GDP is informed by the Investment component. This is also the biggest variant among the four components of GDP. However, the GDP from the last quarter in 2009, and the third and fourth quarter in 2009 registered negative growth, and though it rose to positive growth afterwards, these still varied between 0.1-4% growths. This indicates an economy that is till struggling to register significant growth or consistency, from this one sees a stagnant economy, one struggling to assume a growth path. Question Three Report the monthly (February 2012 – September 2012) and 12-months (ending in August 2012) headline inflation (all items) and the core inflation rates for the US economy. What is the difference between the two inflation indicators? How do the numbers for headline inflation compare to the long-term trend for the US economy? Is inflation currently an issue for the US economy? Month Sept 30 Oct 31st Nov 31 Dec 31 Jan 31 Feb 29 March 31 April 31 May 31 June 30 July 31 Aug 31 Core Inflation in % 1.97 2.10 2.15 2.23 2.28 2.18 2.26 2.31 2.26 2.22 2.10 1.1 Headline inflation is different from core inflation. This is because headline inflation includes more volatile price changes such as those of energy and food prices. This may explain the sharp and very sensitive changes, a phenomenon not observed in core inflation. In the period under consideration, September 2011 to August 2012 core inflation had a marked average change of +0.1% each month, the average core inflation for the period was 2.1%. This figure is also representative of the inflation rate for the period considered. This was significantly lower than the headline inflation which was an average 2.9% for the same period. This difference, of about 0.8% is informed by an increase in the CPI of volatile commodities such as foods and energy products. From the difference in figures, one can sum up that the prices of these products increased during the period under consideration. This increase must have been lower as compared to that of other products which explains the 0.8% difference. The figures of core inflation for the period denote an economy which is not yet grappling with increased commodity prices, and on which is experiencing a relative period of price stability. On the other hand, the almost level inflation rate, culminating to an average of 2.1% maybe an indicator of slowed growth as a reasonably higher economy, averaging 3-4% maybe an indicator of a thriving economy. All the same, the higher headline inflation maybe an indicator of significant economic efforts to spur growth, this is because the CPI is expected to rise with an increase in demand. This fact is best tracked by an examination on headline inflation. In the long-term, and as the economy seeks to register significant growth the rates of both headline and core inflation maybe expected to go slightly higher. At the moment, the US economy has a manageable rate of inflation, averaging at 2.1%. This is not alarming and does not present a major issue, going forward, this rate is expected to increase slightly at which point proper policies maybe required to manage the increase and hold it at a proper level. Question three Report the monthly unemployment rates for the US economy from January 2007 to September 2012. How do the numbers in different periods compare to the natural rate of unemployment for the US economy? How do the unemployment numbers relate to the GDP numbers? What types of unemployment do you think the US is currently experiencing? Unemployment Rate from Jan 2007-Sept 2012 Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2007 4.6 4.5 4.4 4.5 4.4 4.6 4.7 4.6 4.7 4.7 4.7 5 2008 5 4.9 5.1 5 5.4 5.6 5.8 6.1 6.1 6.5 6.8 7.3 2009 7.8 8.3 8.7 8.9 9.4 9.5 9.5 9.6 9.8 10 9.9 9.9 2010 9.7 9.8 9.8 9.9 9.6 9.4 9.5 9.6 9.5 9.5 9.8 9.4 2011 9.1 9 8.9 9 9 9.1 9.1 9.1 9 8.9 8.7 8.5 2012 8.3 8.3 8.2 8.1 8.2 8.2 8.3 8.1 7.8 The unemployment rates indicate a deteriorating situation from August 2008 when unemployment first hit 6%. From then, to date, or as indicated in the table to September 2012 the rates have not gone lower that 6%. In any case, these rates have soared to 9.9%, the highest recorded over the period under examination. These high rates of unemployment were recorded starting December 2008 and only seemed to go lower in the last quarter of 2011. September 2012 has recorded the lowest unemployment rate since February 2009. This represents three years of high unemployment rates. This information is comparable to other indicators of an economy’s performance such as the GDP. In the period when employment rates started to shoot up, August 2008, which represents the third and fourth quarter the GDP dipped and had negative growth, -3.7% in the third quarter and -8.9% in the fourth quarter. The high rates of unemployment may have been supported by the slow growth in the GDP whose largest growth has been 4% in only two quarters and an average growth of less than 2%. The type of unemployment affecting the US economy at the moment is cyclical unemployment. This is they type of employment attributed to economic contraction. As the economy contracts, employment chances become limited and in some cases employed people loose their job which is the case in United States. Question Four Given the data above discuss the current state of the US economy. How does the current level of output compare to the potential level of output? Explain. Is the US economy currently at, above or below full employment? What do you think the US economy will look like in the short-term (next year) and in the medium-term (five years from now)? Given the slow but seemingly stabilizing growth in GDP, low inflation and reducing unemployment rates in the past two quarters the US economy seems to be recovering. The recovery is informed by the worse conditions that have been evident in the past two years as evidenced by the GDP and unemployment rate data. However, the current output is far from the potential of the US economy. At present, the US economy is below full employment, with an employment of around 8%. There have been better times such as in January 2006 where the rate was 4.6% almost half the current rate. Going forward, the US economy needs to focus more on growth oriented policies, these will be required to spur GDP growth and stabilization and also help address the current high unemployment rate. These policies will have a significant impact on the inflation rate which needs to be kept at check so as not to harm consumers. All the same, the current situation shows a slight improvement and if sustained better results would be expected in one year’s time. Hopefully, these improvements would inform future growth and further growth and stabilization of the economy and in five years rate the country may have lower levels of unemployment, a higher GDP growth and a sustainable inflation rate. Works Cited Taylor, John B, and Akila Weerapana. Principles of Microeconomics. Mason, OH: Cengage Learning, 2009. Print. Read More