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Economics Presidents, cabinet members, congressmen, senators, TV pundits, editorial writers, leaders of business and labor, and taxpayers talk about the American economy. That is natural and good. Much of our lives center on the economy. A great deal of this talk, though, proceeds in ignorance of basic facts about the American economy or, what is worse, makes assumptions about it that are not so, or at least are highly doubtful.
By basic facts I mean those that refer to the condition of the country as a whole, that affect and interest large number of people, and that throw some light on the subjects of most widespread concern. Economics is the study of our behavior in producing, distributing, and consuming material goods and services in a world of scarce resources. Economics is concerned with the efficient use or management of limited productive resources to achieve maximum satisfaction of human material wants. Current state of American economy is characterized by astonishing levels of productivity and profit of business firms, which have helped to provide greater affluence and a higher standard of living for a larger percentage of the population in the United States than has ever been the case in any other large society. No single factor is responsible for the success of American business. The geographical size, bountiful resources and population trends have all contributed to these successes.
Religious, social and political traditions; the institutional structures of government and business, and the courage, hard work and determination of countless entrepreneurs and workers have also played a part. With the fourth largest area and population of the world, the United States benefits greatly from the size of its internal market. The Constitution of the United States bars all kinds of internal tariffs, so manufacturers do not have to worry about tariff barriers when shipping goods from one part of the country to another. A population of more than 250 million people provide both workers and consumers for American businesses.
Thanks to several waves of immigration, the United States gained population rapidly throughout the 19 th and early 20 th centuries, when business and industry were expanding. Population grew fast enough to supply a steady stream of workers, but not so fast as to overwhelm the capacity of the economy. As we grew rapidly and almost chaotically into a manufacturing nation, population increased and concentrated in cities. Today people dress better, eat better, work fewer hours, and live more comfortably, that shows an overall development and progress of our country. Economic growth occurs whenever people take resources and rearrange them in ways that are most valuable.
The example from the kitchen may be useful for production in an economy. To produce a valuable final product, we mix inexpensive ingredients together according to a recipe. The cooking is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would run out of raw materials and suffer from unacceptable levels of pollution and nuisance.
The economic growth springs from better recipes, not just from more cooking. New recipes generally produced fewer unpleasant side effects and generate more economic value per unit of raw material. Economics is described by two facts that may be called economic problems. The first one is wants of the society, that are unlimited, and the second one is that resources scarce. Unlimited wants are those goods and services that have a utility that can satisfy a consumer. And economic resources are those resources that we use in producing goods and services.
There are few types of resources: land, capital, labor, and entrepreneurship. So the main objective of economics is to find ways to best satisfy wants and needs of consumer and to spend resources effectively. Total output and output per capita are the best single measures of the performance of the economy. The total output of a country limits how much its population can consume, how much they can devote to investment to increase consumption in the future, and how much they can devote to defense of the country.
The American people today enjoy much higher levels of consumption that they did in earlier generations because per capita output is much greater than it was. GNP (the Gross National Product) is the most commonly used measure and the one that extends farthest back in history for the largest number of countries. Real GNP is the sum of the total output of goods and services valued at the price of a given year. Change in GNP is an imperfect measure of change in total output. Because national output consists of millions of different goods and services, we have no completely satisfactory way of converting them to a common unlike tons or square feet that would permit them to be added to a total.
In practice different products are added together in proportion of to their relative prices. This method has a disadvantage that relative prices change and in any case may not reflect the value of output to any group of individuals or to the nation. Moreover, with few exceptions GNP as measured includes only output that is sold or bought in markets. Thus GNP leaves out some important items, notably unpaid work performed within the household.
For example GNP in 2001 was eight times s high as in 1880, no alternative measure would deny the great increase in output over the past 120 years. The last fifteen years have been a period of general prosperity. Since 1900 the average rate of growth of the gross national product, that is goods and services, has been 3 percent a year. Output increased over the years because people wanted more income and worked, saved, educated their children, and did other things to get more income by producing more.
The big increase in output in United States signals the Americans were successful in achieving something they wanted and the increase in GNP must be valued on this account. The rise of output has greatly increased our choices about how to live. We have favorable conditions for increased well being. That is the most important contribution an economy can make. The measured total of consumption expenditures is the best indication we have of the extent to which the output of the economy is currently contributing to the satisfaction of the wants of millions of individuals and households. Many factors are responsible for the rising share of personal consumption in GNP.
Consumption depends partly on personal after-tax income, which increased relative to real GNP during the years. After big inflation of the Civil War and World War I, the United States entered prolonged periods in which the price level fluctuated along a declining trend. This trend eliminated most of the increase in the general price level that had occurred during the wars. For the whole time period, including the war, the annual rate of increase of the CPI (consumer price index) was only three-tenths of 1 percent.
Output today contains more sophisticated and complex products, whose quality is difficult to measure, than formerly. Possibly, the measurement of changes in the price level underestimates recent improvements in the quality of products and therefore overestimates the rate of inflation. We have become used to thinking of inflation rates of 4 or 5 percent a year as moderate. But the real effects of such rates are seen only when the consequence of continuing them over a relatively short period are calculated. For example, if the inflation rate is 4 percent, the average price level will double between the time a child enters the first grade and the time he graduates from the college.
If the inflation rate is 5 percent, it will have nearly doubled by the time he graduates from high school. From a marketing standpoint, if prices rise faster than consumer incomes, the number of items consumers can buy decreases. Today, a new car costs the equivalent of about 26 weeks pay for an average US wage earner, up from 18 weeks pay 20 years ago. Whereas inflation is a period of price increases, recession is a time of slow economic activity. Businesses decrease production, unemployment rises, and many consumers have less money to spend. The US economy experienced recessions in the early 1970 s, early 1980 s, and early 1990 s.
Inflation doesnt necessarily means that prices for all products and services increase, some prices may stay stabile and others can decrease. In 1970 - 1980, the level of inflation was high, but the prices for tape recorders, video players, and personal computers actually declined. One of the main problems connected with inflation is that rises and declines of the prices on different products are disproportional. Inflation is figured out with a help of price index. Another way to figure out the number of years, in which the prices will double, is so called the rule of 70. We just need to divide the number 70 by the rate of annual price level increase.
During the last years total private employment increased by about 20 percent. But during this period employment declined in industries that in 1980 had accounted for 26 percent of total private employment. (These calculations are based on a division of employment among sixty-five industries. ) Employment declined by 45 percent in railroad transportation, for example, by 43 percent in metal mining, and by 42 percent in coal mining. In contrast, employment in the provision of business services rose by 106 percent and in security and commodity brokerage by 90 percent. Still, a large proportion of all employment was in industries that had about the average increases. Three main factors explain the differences in the variations in employment among industries changes in the pattern of demand, differences in productivity growth, and differences in the impact of foreign trade.
The far above average increases in employment in service industries contrasted with below average or declining employment in manufacturing, reflecting both demand shifts and relatively rapid growth of productivity in manufacturing. The clearest sign of the impact of foreign competition is the 13 percent decline of employment in the apparel industry. Employment in agriculture in the United States was 8 percent of civilian employment in 1960 and only 3 percent in 1989, the number keeps shrinking to this day. Declining farm employment in this country was a part of the worldwide phenomenon.
The decline in agricultural share of employment was an important factor in the productivity rise in Western Europe, Canada, and Japan. In most of these countries agricultural employment is now so low that this source of productivity increase is largely spent. What is the most striking thing about this picture is the clear ability of the economy to adapt to great changes in demand, productivity, and foreign competition, affecting industries very differently, and still to maintain high employment growth and relatively little unemployment. Controlling the money supply is the responsibility of a government agency, the Federal Reserve, which has an unusual degree of independence.
The money supply consists partly of currency and checkable bank deposits. The currency is issued by the Federal Reserve and is a liability of the Fed. Most of the checkable bank deposits are liabilities of banks that are members at the Federal Reserve System. These banks are required to hold reserves equal to a certain proportion of their checkable deposits in the form of deposits at the Federal Reserve, which are also liabilities of the Fed.
These two kinds of fed liabilities, currency and deposits of member banks with the Fed, are called the monetary base. They constitute almost all of the Fed. s total liabilities. By controlling its liabilities, the Fed can control the sum of the currency and checkable deposits fairly closely, although not exactly. The Fed controls its liabilities by controlling its assets, which consists largely of government securities and loans to banks. If the Fed buys more securities or makes more loans to banks, it increases the monetary base and tends to increase the total of currency and checkable deposits; the opposite results follow if it sells more securities or makes fewer loans.
Currency and demand deposits now constitute only about one-fourth of the money supply, the type of money now commonly considered most relevant for monetary policy. The other components mainly time and savings deposits and balances in money market mutual funds and in money market deposit accounts require no reserves to be held in the Federal Reserve. If the amount of those other kinds of money increases relative to currency and checkable deposits, the total money supply can increase without any increase in monetary base. The ability of the Federal Reserve to control size of the money supply does not imply that making the money supply move along some predetermined path has been the exclusive or primary goal of monetary policy. The Fed may use its powers with some other goal in view; such as to manage interest rates or exchange rates. But in any case its policies, whatever their goal, will affect the supply of money.
Whether Federal Reserve policy should be aimed at a predetermined path of the money supply or at some other or some combination of objectives is a continuing subject of disagreement among economists. Monetary policy is majors instrument the government uses in an effort to stabilize the economy. The influence of monetary policy control of the money supplies...
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Research essay sample on Gross National Product Goods And Services
