Economic Related Challenge and Unemployment Rate - Essay Example

due: Economic related challenge The economic related challenge that I have chosen to address is slow growth/ unemployment. The current rate of unemployment is 7% which is higher than what is considered as the natural rate of 3 to 4%.The policies to address this economic challenge can either be monetary or fiscal. The monetary policy can be lowering of interest rates to allow business to borrow money for less which gives them capital to hire new employees to meet demand. The fiscal policy includes increase of government spending or that it cuts taxes. This will enable the government to stimulate the economy and gives people the confidence to spend. This cuts costs for businesses which would enable them to reinvest the spare cans and hire more workers. There are also other ways that should be considered to address the problem of unemployment. These include training programs that are better than those in the past. This will ensure that the skills of employees are better matched to the jobs that are newly available. The government should also consider hiring people. It should also consider giving programs of short-run jobs to help in the normal functioning of the government. The full-time employment policies should also push for full-time employment a bit faster. This is because when labor markets grow tight, companies go ahead and hire any individual even those who have been unemployed for a time greater than one year. The above policies require time to be implemented but would help reduce the high unemployment rate. The following is data gathered on four economic indicators and plotted on graphs and charts; Real GDP in tonnes MAR 11 JUNE 11 SEP 11 DEC 11 MAR 12 JUNE 12 SEP 12 DEC 12 MAR 13 JUNE 13 SEP 13 14.89T 15.01T 15.06T 15.24T 15.38T 15.43T 15.53T 15.54T 15.58T 15.68T 15.82T (BEA) The gross domestic product is defined as the output of the final goods and services that are produced by a country. The GDP is calculated as Personal Consumption Expenditure plus Investment plus Government Expenditure plus (Exports minus Imports) The advantage of using real GDP is that it is dynamic because it changes with the constantly new figures. It is the best indicator of the overall economic health of a nation. The past figures show that GDP has increased since the last quarter and has been showing an increasing trend for the past two years. GDP is used as a coincident indicator as it changes at the same time the economy does. A negative economic growth for two quarters that are consecutive is considered a recession and the Federal Reserve usually lower the interest rates in this period in order to increase the rate at which the economy is growing and to stimulate the economy. Real GDP takes into account inflation as we multiply the nominal GDP with a deflator. GDP tells us if the economy is growing more quickly or slower than past years. The US sustainable rate as believed by economists is between 2.5% and 3 % as that has been the average rate in the past. The five components of GDP as cited above are private consumption, government consumption, investment and net exports. The GDP of 3.6 % is greatly above this rate but cannot be sustained in the long run since this can lead to inflation cause the Federal Reserve to hike up interest rates in order for monetary policies to be tighter and to make slower the rate of growth. The growth rate of GDP has increased from a slow growth as evidenced by the graph and has increased in 2013 as compared to 2012. This may indicate a recovery and lower unemployment rate but in order to establish this, the trend has to be observed for more quarters. (BEA, 2012) The recent GDP rate increased by 3.6 % in the last quarter is higher than the sustainable rate. This shows that the US economy is growing faster than that the sustainable rate. However the last increase was 2.5% which is an average rate. The current increase of 3.6% does not necessarily show a trend and the Fed should wait for the next couple of quarters before increasing the interest rates. Unemployment rate MAR 11 JUNE 11 SEP 11 DEC 11 MAR 12 JUNE 12 SEP 12 DEC 12 MAR 13 JUNE 13 SEP 13 8.90% 9.10% 9.00% 8.50% 8.20% 8.20% 7.80% 7.80% 7.60% 7.40% 7.20% (BEA) The unemployment rate defines as the percentage of the people who are employable in the workforce of a country who are past 16 who have sought jobs unsuccessfully in the past month or who are looking for jobs. It also includes those who have lost their jobs. The formula for the unemployment rate is Number of Unemployed / Total Labor Force. It is normally is a lagging indicator as it does not change until a few quarters after the economy does. It gives the health of a given business center or the state of an economy. The unemployment rate is widely used because it is a great verification of what the other indicators show. In order to come up with figures for the unemployment rate, the bureau conducts a household and an establishment survey. It is deemed important to consider the unemployed people and those who are unemployed and the ones who have simply chosen not to work. There are a number who may be attending school full-time and some who have retired. There are also those who work from home and those who are disabled. They are not considered part of the labour force and are consequently not included while calculating the unemployment rate. The rate only considers those who are either actively looking for employment or are awaiting to return to their job. The current indices show that the current unemployment rate in the US is 7.00% and it fell from 7.4% in June and 7.8% in the previous year. This is however higher than the long-run average of 5.83%. The high unemployment rate means that there is underutilization of current resources and that the economic output is extremely below expected in order to achieve full utilization of resources. The overall conclusion is that the US had been undergoing a recession in the past but is likely coming to an end. Housing starts (in ‘000) DEC 11 JAN 12 MAR 12 APR 12 JUNE 12 JUL 12 SEP 12 OCT 12 DEC 12 MAR 13 JUNE 13 AUG 13 694 723 707 754 757 741 854 864 983 1050 835 883 The housing start is defined as the quantity of new residential construction projects that have become that have started during any given month. It is considered as the indicator of economic strength. (Investopedia) It is measured as the number of houses which have started during a particular period. The housing start is considered a leading indicator as it changes before the economy does change. It is therefore forward-looking which is considered an advantage. It is also used to identify pivot points in a business cycle. The recent indices have shown that housing starts has remained constant in the last quarter. Higher interest rates result in an increase in housing costs which decreases the number of qualified borrowers and consequently starts drop off and home sales decrease. The converse is true. If the monetary policy increased the interest rates, housing-related consumer spending would reduce drastically. Conclusion The conclusion on the indicators mentioned above indicates that the economy in the US has to improve in order to reduce unemployment rates and increase GDP and housing starts. The government and Federal Reserve should consider lowering interest rates and cutting taxes in order to boost the economy. Works cited "Federal Reserve Bank of San Francisco."Federal Reserve Bank of San Francisco. N.p., n.d. Web. 12 Dec. 2013. . "Thursday Dec 12." Investopedia. N.p., n.d. Web. 12 Dec. 2013. . "U.S. Economic Accounts." U.S. Bureau of Economic Analysis (BEA). N.p., n.d. Web. 13 Dec. 2013. . Read More