History of Changes in GDP, Savings, Investments, Real Interest Rates. Forecasts for the Next Five Years
First, it is important to evaluate the historical changes in the US’s GDP that directly relates to the dynamics of the economic growth of the country. Beginning with the crash of the stock market in 1929 and following into the Great Depression, the GDP of the United States has shown some dramatic changes during the period of the country’s development. The table below shows historical changes in the GDP:
Resource of the data presented in the table: Kimberly Amadeo (2017).
As shown in the table above, the United States went through a series of historical events that shaped the way the economy developed; it is evident that the landmark events such as the 9/11 attacks or the World War II directly influenced the increase/decrease in the GDP’s growth rate and real GDP of the US, so it can be concluded that the political and social atmosphere in the country contributes to its economic stability.
The has been evidence of stable economic growth by approximately eight and more percent each year beginning from 2009, according to the US Bureau of Economic Analysis (2016). In the first three months of 2016, the United States saved $3,389.5 billion (US Bureau of Economic Analysis, 2016), which pointed to the fact that there was an open market for industries to continue investing in businesses with support from the banking and the financing sphere. In 2016, there was a reported drop in the rates of unemployment (from 5.5% to 4.7% compared to 9% in 2011) (US Bureau of Economic Analysis, 2016). When it comes to real interest rates, forecasts can be only made with limited ability. If to use the Fischer equation (Mankiw, 2015), it will allow using historical data to determine that the rate of inflation increased by eight percent from 2006 to 2015 (US Bureau of Economic Analysis, 2016). Therefore, it can be forecasted that the rate of inflation would increase by eight more percent within the next ten years. Nevertheless, it is important to note that it would fluctuate because of the instability of oil prices on which the U.S. economy largely depends.
Influence of Governmental Policies on Economic Growth
It can be asserted that policies developed and established by the US government control the economy in a variety of ways. One of the most prominent modes of influence is the development of new monetary policies. For example, by lowering interest rates, the government can encourage investments due to the decreased cost of borrowing. If the government lowers interest rates on payments for mortgages; as a result, consumers end up with an increase in their disposable income, which encourages their spending.
Fiscal policies can also become effective in influencing a country’s economic growth. These policies are usually effective in boosting demand by increasing spending and cutting taxes. If for example, the government chooses to decrease income taxes, there will be a definite rise in the public’s disposable income, which, in turn, influences consumer spending. In cases when the spending of the government is higher, it will contribute to the creation of more job positions and thus the increase in the country’s economic growth (Naidoo, 2012). Such a policy can be problematic due to its leading the government to borrow more money. Moreover, if the government chooses or needs to borrow it from the country’s private sector, it will eventually lead to the tax increase. On the other hand, if the economy of the country witnessed a downfall in the spending of the private sector and boost in savings, then fiscal policies can be regarded as beneficial for the economy (especially if they contribute to the expansion of the economy and the increase in the demand without the need for the government to spend more than it intended).
Monetary Policies and Their Impact on Price Levels, Inflation Rates, Cost, and Other Variables
Monetary policies are widely used by governments to influence the direction in which the economy is going. As a rule, the government of a country will look for a way to have an impact on the economic activity of the country with regards to the political goals and objectives through enforcing their monetary influence for controlling the supply of cash flow within the economy. The main objective of monetary policies is reaching macroeconomic stability in the country through ensuring low rates of unemployment, stable economic growth, and low inflation. As a rule, the Central Bank has the responsibility to manage and administer the monetary policies within a country. Monetary policies should be enforced successfully enough to promote stable economic operation and an increased standard of citizens living within the country’s economy. The rate of inflation (predictable, low, and stable) is usually the most useful indicator that shows how a country’s economy is functioning. Governments can use monetary policies to decrease the interest rates and thus increase consumer spending; to do this, expansionary monetary policies are the most effective. They make borrowing money less expensive, which enhances employment and demand.
About poor monetary policies, they limit economic growth because of the rise in inflation. First, high and changing inflation can become a barrier to the establishment of relative prices. If inflation managed to make all prices to move in uniformity, they would not have an impact on the trajectories of supply and demand. Nevertheless, experience with poor monetary policies suggests that the rate of inflation has a different effect on prices. For instance, if initially, inflation contributed to the increase of prices for construction plaster, such a process will be falsely interpreted as an indicator that the society has grown demand for plaster, which results in overproduction. In this situation, a high level of inflation acts as a distraction from growth with the help of allocating productive resources inefficiently.
Influence of Trade Deficits and Surpluses on GDP and the Growth of Productivity
It is important to remember that trade surpluses and deficits can have an impact on how a country’s economy deals with exports and imports. The government makes trade deficits in cases when the economy is dealing with fewer exports than imports (Makinew, 2015). With the creation of trade deficits, there is a possibility of an increased number of regulations for imports. For example, the government may choose to impose more tariffs and taxes on foreign goods that are imported from different countries. Thus, the trade agreements can be tweaked by each governmental administration that is trying to test the management of imports. On the other end of the spectrum, some surpluses are developed when fewer goods are being imported than exported (Makinew, 2015). With regards to surpluses, there will be a range of outputs the government of the United States may implement to decrease the inflation (e.g. with the aid of buying more of its treasures). This, in turn, will contribute to the creation of less money in the economy and the push for an increase in the power of purchasing (Jayaram & Kotwani, 2012) among families that are looking to invest in new businesses and thus boost the country’s GDP. Trade deficits have adverse effects on the economy that can force the government to increase the number of stimulus packages (Makinew, 2015) that contribute to the injection of more money into the American economy to compensate for the emerging deficits and thus improve the effectiveness of companies that produce domestic products. It’s worth mentioning that the deficits have been very common over the last half-decade, so there is no fear that it would become a problem for the United States in the following five years.
Importance of the Market for Loanable Funds
The loanable funds market is a type of market where suppliers and demanders can create market clearing (Hall & Lieberman, 2013). Loanable funds and foreign exchange currency rates can also contribute to the progression of a business in a foreign economy. Interest rates are determined by the supply and demand as well as the loanable funds. Put simply, any bank within the United States can use its reserves to create loans for businesses that are trying to grow and expand. Moreover, the real interest rate can also impact the growth of money and thus influence the regulation of inflation. Because more money is required for enhancing the supply, the interest rate will enhance for the increased flow of money along with the downward value in the economy (Manikew, 2015). If for example, a company is operating in a foreign country, it should focus on increasing the loanable funds from the US banks to capitalize on the foreign exchange rate due to the differences in the value of currencies.
Even though the market of foreign exchanges is linked to the overall money market, it is still a market that includes the purchasing power, the moving of finance, as well as the national (or international) credit. Also, the foreign exchange of currencies clears debts and thus minimized the risks and limitations of foreign currencies. For example, if the United States gave a loan to a foreign country for improving their development, the money should be paid back with interest that will be used by the US government for growth as well as the achievement of the strategic plan (establishing a low-interest rate and reducing unemployment). With regards to currency, the federal government of the US tried to maintain a dominant dollar, which will ensure that the foreign bargaining processes can be achieved easily.
Recommendations Regarding the Strategic Plan
Based on the findings presented in the previous sections, the success of the strategic plan can be reached in the case when the federal government implements the measures of foreign capital, tariffs, legislatures, and volume restraints. Moreover, with the continuous purchasing of US dollars by foreign investors, there is a rise in the increase of the government’s paying for exports. Furthermore, with the improvement of the economy due to the successful monetary policies and the increase in interest rates, the US dollar can become more valuable and attractive to both local and foreign investors. The usage of global financial integration and the occurrence of modern economic trends can aid in increasing the movement of the US capital and the maintenance of the stable currency.
Monetary and fiscal policies can be particularly beneficial for decreasing the unemployment rate by increasing the demand and the growth of the economy. It is recommended for the government to implement an expansionary fiscal policy through cutting rates for businesses and increasing government spending. As the decrease in taxes enlarges the disposable income for the population and thus increases consumption, thus enhancing the aggregate demand. As the aggregate demand increases, the real GDP of the country will also increase and make companies produce much more, contributing to the increased demand for jobs and thus fewer job losses. Monetary policies should include cutting rates of interest and thus minimize the cost of borrowing and make the public spend more and invest in more property. Furthermore, it is recommended to implement monetary policies since the decrease in interest rates will come to the reduction of the exchange rate that makes exports more competitive than they used to be.
Overall, the strategic plan of establishing a low-interest rate and reducing unemployment in the country is a mission that the government should undertake to improve the economic performance of the country. As historical events and the social environment of the country shape the economic performance of the country, the government should take into consideration the fluctuations of the oil prices on which the United States depends to a large extent. Despite the instability of the global economy, there is a high need in addressing the unemployment rates in the country and accommodating the public with the low-interest rates.
References
Amadeo, K. (2017). U.S. GDP by year compared to recessions and events. Web.
Hall, R., & Lieberman, M. (2013). Macroeconomics: Principles and applications. Mason, OH: Cengage Learning.
Jayaram, R., & Kotwani, R. (2012). Industrial economics and telecommunication regulations. New Delhi, India: PHI Learning Private Ltd.
Mankiw, G. (2015). Principles of Microeconomics (7th ed.). Mason, OH: Cengage Learning.
Naidoo, K. (2012). Fiscal analysis since 1994. In C. Bruggemans & E. Loots (Eds.), Economic perspectives: Ruiterbosch essays in honour of Peet Strydom (pp. 85-91). Stellenbosch, South Africa: African Sun Media.
US Bureau of Economic Analysis. (2016). National income and product accounts. Web.