American Economy
Many may wonder “How exactly does the American economy work?”
At the time of recession, one might think,” Maybe not too well”
The U.S. is the third-largest economy in the world, behind China and the European Union. The U.S. has a mixed economy.
This means that it operates as a free market economy in consumer goods and business services. And in defense, retirement programs, some aspects of medical care, and other areas it operates as a command economy.
Created by the U.S. Constitution, the mixed economy system is protected by the constitution only.
Measuring the American Economy
Estimating the size of the U.S. economy can be done best with Gross Domestic Product or GDP.
GDP is a measuring tool for everything made in the United States, whether it was produced by U.S. nationals and companies or by an outsider.
GDP
Every product of the U.S. economy is calculated in GDP and when the GDP growth rate is negative, the economy goes into recession.
Components of GDP
GDP has got three components— consumer spending is the most important part of the economy.
The other components comprise business expenditures and government spending, and the 4th one is net exports.
China has outdone current U.S. GDP statistics. The U.S. economy is no longer the world’s largest. The U.S. is the world’s second-largest economy now.
Supply and Demand
The driving force of the U.S. economy is supply and demand. Supply indicates labor in form of employment and natural resources such as land, oil, and water.
Personal consumption or Demand steer 70% of the economy. The demand increases during the time of the holiday season starting on Black Friday.
Inflation and Deflation
The prices go up when demand is more than supply. This marks inflation. Inflation is hard to put an end to. When it happens, people start to manipulate prices going up forever.
They start accumulating things anticipating higher prices in the future. Thus the demand increases more. The money supply is another reason for inflation.
The Consumer Price Index is used by the U.S. government to measure the current inflation rate, but it sometimes gives misleading information. The prices of the commodities market can escalate and plunge within months.
The inflation in assets, such as housing or stocks, is called an asset bubble.
The opposite is termed deflation when prices come down. It also engulfs assets, such as housing prices and stock portfolios, creating stock crashes and economic crises.
For any economy, deflation is more dangerous than inflation.
Fiscal Policy
The fiscal policy incorporates a $ 4 trillion budget. All the revenue is generated from the taxes on the income. The fiscal policy can be held responsible for stimulating, guiding, or depressing the economy.
The budgetary process each year is started by the president, but only congress has the right to approve it.
The Bush tax rebates are one of the biggest contributors to the deficit and debt. These tax rebates follow the theory of supply-side economics which says that lower taxes will ultimately propel the economy to restore the tax loss. These tax rebates are very famous as people don’t like paying taxes.
Monetary Policy
The Federal Reserve controls the monetary policy. The fed funds rate, the money supply, and the use of credit are the tools of the Federal Reserve. These tools help control interest rates affecting the economy.
Controlling inflation is the main objective of monetary policy, and its other objective is to motivate the economy. It also must look after the effortless operation of the banking system.
Trade Policy
Trade policy influences the cost of imports and exports. It is done by regulating trade accords with other countries.
Trade accords as the North American Free Trade Agreement, go for reducing trade costs and inflate each country’s GDP.
An aspiring worldwide trade accord in the Doha round of trade talks was supposed to be finalized by The world trade organization.
But that did not finalize as the European Union and the U.S. didn’t want to end subsidies on agriculture.
Exchange rates influence trade by affecting the value of the U.S. dollar. The dollar is the world’s global currency which influences most international trade contracts.
If the dollar is strong, it permits the price of oil and other commodities to fall creating deflation.
Financial Markets
A collapse in the financial markets hurled the economy into the worst slump since the Great Depression.
Stocks and stock investing are building blocks but they are riskier than bonds. The safest are Treasury bonds. Junk bonds are the riskiest. Mutual funds are a viable option for investing in either.
Many wealthy investors let hedge funds do the investments for them. Some others want higher benefits by trading in the more risky asset, credit default swaps, and future contracts. This raised the issue of more regulations on Wall Street by many.
