Economics

Economic indicators such as the inflation rate, the real gdp growth rate, personal incomes and average hourly earnings rate are used to determine the state of an economy. The gross domestic product (gdp) refers to the measure of the total market value of all final goods and services that are produced in the economy in a given year. (McConnell & Brue, 2005). Real gross domestic product (real gdp) refers to the gdp that has been deflated or inflated so as to reflect the changes in the price level. It is also referred to as the adjusted gdp. The unemployed people are those with the ability and willingness to work and thus seeking work. The unemployment rate refers to the percentage of the labor force that is unemployed. A government budgetary deficit is an excess of its expenditure while a government budget surplus is excess taxes or higher revenues than its expenditure. (McConnell & Brue, 2005).

Currently, the US is recovering from a deep recession which emerged in the late 2007 and which was thought to have emanated from the housing as well as the financial sector. There had been an increased demand for houses emanating from the reduced interest rates, increased income growth from the past history of economic prosperity as well as increased house prices. The financial sector which triggered the financial crisis considered to be the worse to hit the US since the great economic recession of the 1930’s played a significant role in driving the US economy and later the world economy into an economic recession. (www.federalreserve.gov). The financial institutions increasingly offered non prime loans with unconventional terms which further increased the demand for the houses. In response to the increased demand for houses the housing industry registered a tremendous growth as more houses were constructed leading to increased employment opportunities. Industries related to the housing sector also thrived and the increased returns from this sector translated to increased growth in the real as well as the per capita gdp. After some time the house prices begun to drop leading to massive losses for both the individuals as well as the financial institutions who had led a lot of money without proper security. Other sectors were also affected as the houses had been used as securities in other sectors. Soon, most financial as well as insurance companies such as Lehman brothers, the Fannie and Freddie as well as the AIG were either filling for bankruptcy or risking closing down. Tight measures had to be adopted by the operating financial institutions that made the interest rates very high deterring individuals and businesses from accessing credit. Without the finances, economic growth was negatively affected as investment was highly compromised. On anticipating reduced demand, firms reduced their production leading to increased layoffs or unemployment. Increased unemployment led to reduced incomes which lowered the domestic demand. Since the US is a super power, the world economy was greatly affected and the foreign demand also declined. The countries that relied on the US financial institutions for funding were adversely affected. In response to this, fiscal as well as monetary policies were embraced. The economic stimulus act of 2008 which involved tax incentives and tax rebates was introduced with the aim of increasing the money supply in the economy and consequently boosting the economy. Little progress was recorded from the $150 billion tax rebate program introduced by the US president George Bush leading to the introduction of the government bailout programs which aimed at ensuring that the financial institutions were empowered to remain operational. Another intervention by the government includes the recent Obama $787 billion dollar stimulus program.

The monetary policies introduced by the Federal Reserve included a reduction of the federal funds which refer to the amount of money that financial institutions keep with Fed against the set deposits liabilities. Lowering these funds meant that the financial institutions had more money at their disposal and they could easily lend households as well as business thus

boosting the economic growth. Fed also introduced facilities such as the Term Auction Facility, Asset Backed Security Loan Facility (TALF) as well as the Treasury’s Troubled Asset Relief Program (TARP) which all aimed at increasing the money supply in the economy. The adopted policies yielded positive results as the economy has improved gradually and although the flourishing economic growth is still a distant dream there are many improvements. (www.federalreserve.gov).

According to the Bureau of Economic Analysis (BEA), the US real gross domestic product from labor and property increased by an annual rate of 2.8% although it had decreased by 0.7% in the previous quarter. The increment in the real gdp growth rate was attributed to the increased consumption expenditures, exports, government spending as well as increased government as well as private investment. In the third quarter there was a 1.2% increment in the real gdp sales without including the private inventories from what had been recorded in the second quarter. The current dollar gdp also increased by 0.8% to $115.1billion. (Bureau of Economic Analysis, 2009).

According to the Congressional Budget Office (CBO) the federal budget was estimated to be $1.6trillion which is equivalent to 11.2% of the country’s GDP, a rate similar to the one registered in the Second World War. This deficit can be attributed to the increased government expenditure to boost or rather revive the economy through the economic stimulus programs as well as the weak revenues from tax rebates and incentives. (Congressional budget Office, 2009). Various factors will ensure that the US records moderate economic growth. These include the weak economic conditions in the global economy, the financial markets that have not fully recovered as well as the people’s desire to increase their savings for sometime before investing. BEA estimates that the US current account deficit which measures the extent of trade of goods
and services, the receipts as well as payment of incomes and the net current transfers to have decreased from $104.5 to $98.8 billion. (Congressional budget Office, 2009).