Us Economy And Economic Indicators Essay Research

Us Economy And Economic Indicators Essay, Research Paper

Daekwon the chef and Rza Shogun, Sergio Suarez, Sylvia Lin, Anne-Sophie Young

Economics Final Report

A Treatise on the Value of Economic Indicators

The US Economy and Economic Indicators

The United States economy is the strongest and the most affluent in the world. Besides having the highest GDP (Gross Domestic Product), the United States has a complex system of regulating economic policy and controlling the money supply. The system also regulates banks and financial institutions, and even has a central bank (Federal Reserve Bank) that decides on significant issues, such as raising interest rates. There are many economic indicators that affect the economy such as the CPI, which is the measure of prices at the consumer level for a fixed basket of goods and services, and the unemployment rate. Other indicators include the GDP, which measures the dollar value of all the goods and services of a nation, retail sales, and the consumer confidence index (CCI).

The CPI is the measure of inflation, and is released every month by the Bureau of Labor Statistics. Prices are collected in 85 cities across the country on thousands of different products and services from establishments of all kinds. It reflects prices of food, clothing, shelter, fuels, transportation fares, charges for doctors. and dentists. service, drugs, and all sorts of other goods and services that people buy for day-to-day living. The CPI is used by the Federal Reserve to analyze the data and act accordingly to the interpretation of it. For example, on May 19, 1999, the Federal Reserve decided to hold interest rates for now but are debating to raise interest rates in the near future because the CPI increased seven-tenths of a percent, the highest in eight and a half years. There are two types of CPI. The CPI-U relates to the urban workers, and accounts for about 80% of the civilian population. The CPI-W relates to the wage earners, and accounts for about 40% of the population. The CPI, a reliable measure of the current state of the economy, is used as a warning for inflation, deflation, and disinflation. The CPI generally increases every year because the standard of living rises through time.

The unemployment rate is also significant in the fact that it measures the percent of the population that are currently not legally employed and are actively seeking employment. Recently, because of the strong, healthy US economy, the unemployment rate was the lowest in peacetime since 1957. Low unemployment correlates to a good economy but it can mean increasing inflation because the workers, who have been working as wages increased, can spend more and drive up prices. More jobs have become available because of economic growth including strong consumer confidence and low interest rates. Too low of an unemployment rate is bad because it will cause inflation due to the wealth effect, which means that people will get richer and richer until inflation sets in. According to the Phillips curve, it was widely believed that as unemployment decreases, inflation would increase. Recently, there has been an anomaly because this theory hasn.t been true. This relationship has not been so prominent due to the recession in foreign markets. Recession in foreign markets can cause an increase in the unemployment rate because factories that export goods to other nations will have to cut down on production because people there cannot buy the products. Inflationary pressures caused the Fed to announce an expected rise in increase rates because of high CPI, but the unemployment rate remains almost fixed at 4.3 percent, which is still low, as well as being a factor in inflation.

The GDP measures the dollar value of a nation.s spending and output in goods and services. The GDP can increase when there are inflationary pressures, which meant that the economy is growing at an unhealthy rate. The GDP, if it has risen dramatically, means that prices will skyrocket and if it falls dramatically, a recession might occur. The GDP is measured by a mathematical macroeconomic formula. The formula is GDP=C+I+G+(X-M). Prior to August 1991, the GNP was used as a nation.s economic indicator, which measured the output of goods and services by US residents anywhere in the world. However, the GDP measures a nation.s economic activity regardless of who owns the productive assets in that country. For example, the output of United States-owned companies based in Australia is considered part of Australia.s GDP rather than part of the U.S. GDP. Also, GDP is difficult to measure because every nation has its thugs that does business illegally, such as in the drug trade or people who smuggle goods in another nation. The C in the formula above is Consumption, the most important sector in the US economy. This sector represents consumer spending, and is more than 65 percent of real, or inflation adjusted, GDP. The I is Investment, which is composed of residential (single family and multi-family housing) and nonresidential (auto factories, computers, oil rigs, etc) and change in business inventories which are either added if there is a surplus or subtracted if there is a drop. Investments take about 15% of the GDP. The G in the equation is Government Spending, which is in federal, state, or local form and it takes up approximately 20% of the GDP. Federal spending is 36%