American Economy from 2005 to 2007

Word Count: 2823 |

Over the past three years American government has seen some changes in its economy that were influenced not only by the economical but as well political and environmental factors. We will study the development of economic factors such as, inflation, unemployment, growth, balance of payments and the overall well being of the population and how the wealth of the nation was distributed, on the period going from November 2004 to November 2007. The steady economy is always growing and developing at a slow pace, which allows us to see that the Starting 2004, President G.W. Bush was reelected for a second term we can notice many changes: noticeably there have been some major differences influencing economy such as devastating natural disasters as Hurricane Katrina (2005). It cost not only lives, but as well the damages of $105 billion for reconstruction and repairs including ones that have touched the oil factories, environment and the employment which had lead to the amount of more than $300 billion to be paid off by the government. Many of the charity workers and donations were helping to cope with the situation.
This might be one of the economic examples on how the natural causes might influence the economy, considering that the people became unemployed and could not pay taxes to maintain the stability in the society where they used to live.
On of the other examples that always come to attention is the War in Iraq. As some of the articles from 2006 suggest that the war budget might increase to over $1 trillion, the other article from the Herald tribune international confirms these suggestions by showing that at the beginning of 2007 the war budget went over $1.2 trillion which are founded by the government taxes. Overall the national debt has risen to the amount exceeding $9 trillion of which $3.5 trillion were attributed only to G.W. Bush administration.
Talking about the unemployment as the economic factor the rate has eventually decreased from 2004 of being 5.5% to 4.7% in 2007, but at the same time considered to be slowly rising comparing to 4.4% in 2006.

The Inflation :

One of the other factors taken into consideration is the inflation rates throughout the period of 2004-2007. The data shown below indicates the evaluation of the inflation taking into the consideration the CPI and the core inflation with the difference that the core inflation does not include basic items that might face the price variation such as food and drinks. The data below shows monthly evaluations of the inflation from November 2004 to September 2007.

Even though extracted from the data there are evident fluctuations from 4 to 1 on the CPI index, the Core inflation seems to vary between 1 and 2 which would mean that the consumer goods prices stay relatively the same comparing to the basic need products such as food. The other reason for such fluctuation in the CPI is the oil price variations in the past year due to the import-export reasons and the market influence on the prices overall throughout the world. On the other hand the stable inflation rate shows that the economy was stable and other variables such as interest rates might not have changed as much as if they would for the reason of the low inflation.

The Interest Rates:

In the recent years in the United States the interest rates have grown and stayed relatively high as one of the reasons to generate economic revenue which then supplied most of the investment into Bush administration which still tries to found more money in the war in Iraq. One of the most recent phenomena is that since September 2007 we already could see the cuts in the interest rates, as well as from the recent publication stating that on the 1st of November the Federal government has cut the interest rates to the quarter point. If the oil prices stay at the same rate the consumer spending will decrease, but at the same time as noticed the housing prices are going down. However, the recent problems have shown that even though the inflation was stable and the interest rates were high, many people couldn’t pay up their loans and mortgages and lost their houses. If now the economy stays at a current pace there might be no need to worry as much, but on the other hand the dollar value decreased comparing to some stronger currencies have shown that many foreign countries such as China have much more foreign money in their Federal reserves. This might influence and even bring down most of the American economy if the money is used widely by the foreign nations. On the diagram below we can see the fluctuations of the interest rate :

Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
2007 4.50 5.25 5.25 5.25 5.25 5.25 5.25 5.25 5.25 4.75 4.50
2006 5.25 5.25 4.50 4.50 4.75 4.75 5.00 5.25 5.25 5.25 5.25 5.25
2005 4.00 4.25 2.25 2.50 2.75 2.75 3.00 3.25 3.25 3.50 3.75 3.75
2004 2.00 2.25

If we try to interpret the data, we can notice that the interest rate increased from 2.25 in November 2004 to 5.25 November this year (2007); the Fed then lowered to 4.50 it in order to minimize the impact of the actual financial crisis trying to stimulate consumption.
One of the other data which also fluctuated a lot is the oil prices that have risen up since 2005 as shows the following graph: they went from $60/ barrel in 2005 to $77/barrel in mid 2006, suddenly fall to an enormous difference. In the beginning of 2007 the prices went from $50/barrel up to $98/barrel this Friday, November 8th 2007.
There are many factors that made the oil price that high; some of these factors are the high demand, the adjustment to the inflation, limited amounts of the resources, as well as the instability in producing countries. There have been other factors that have influenced the oil prices to grow in the United States such as Labor strikes, hurricane threats to oil platforms, fires and terrorist threats at refineries.

The Balance of Payments:
As for the balance of payments, the United States is considered to be in the deficit of the exporting goods and services to other worldwide countries and their expenses are growing higher over the time. We will talk more about the exports and imports in the second part that is focused on the macro economic policies.
The United States face a difficult period, considering that in the past years their currency was suffering in the market exchange and undervalued. At the same time the capital and financial accounts are going through the difficult time considering the dangers of terrorism within the country and other places. At the same time we have recently heard that many properties were on sale because of the incapability of the population to pay up for their loans and mortgages. Talking about official reserves, the was has taken most of them by Bush spending most he could, however at the same time the amount of American currency that belongs to other countries such as China, if released might severely damage the economy and put it out of control losing its place in the international market.

Nowadays macro economic policies used by the American government might seem controversial for some of the economists. Many of the aspects influence the macro economy such as prices and their stability, privatization, deregulation, national income and international trade as well as many others that would be considered and discussed.
‘’ Monetary policy works in the first instance by affecting financial conditions, including the levels of interest rates and asset prices’’ and as we saw before the fluctuation of interest rates and oil prices varied largely for the past three years, as well as the property prices in the United States highly increased in 2005 up to 15% which have fallen in 2006 by 3.5 % (biggest fall in years at a time) now reached the -5.0%. On the other hand average consumer prices are being stable. Talking about the monetary policies we have to touch such areas as the money supply and its measurements, as we know in the past year the US monetary supply have risen up to 14% and therefore have increased the prices of gold that measures the total welfare of the country. The privatization in the past years has increased considering the sectors such as health care, airports and some of the roads and highways. Even though it helps to enlarge the economy, a large part of the private sector influences a lot the population spending power.
Taxes have varied but slightly increased since the Bush administration have entered the office and kept rising adjusted to inflation. The majority of the population being middle class workers has found it difficult even with 1% increase that takes away their incomes; it was especially felt in the food and beverage industry which has many part time workers. At the same time talking about the deregulation, the US government has encouraged all sorts of the regulations and rules to be adjusted to ease the privatization that allows the economical growth of the businesses.
National income and output (Billions of dollars)
Period Ending 2006
Gross national product 11,059.3
Net U.S. income receipts from rest of the world
55.2
U.S. income receipts 329.1
U.S. income payments 273.9
Gross domestic product
11,004.1
Private consumption of fixed capital
1,135.9
Government consumption of fixed capital 218.1
Statistical discrepancy 25.6
National Income
9,679.7
The National Income of the United States as shown on the table data below and indicates that the stability around $9.679.9 (in billion) comparing to previous results that were increasing up to 2003 being $9707.8.

As being the part of the calculation the Gross National Product and Gross Domestic Product show the increasing numbers that account for the exports and imports as well as the investments that have risen for the past years. Many of the national imports and exports largely contribute to the economy as the country has many natural and acquired resources. Some of these resources are estimated to rise as well as increase exports and imports over the next 10 years.
One of the other factors available for the interpretation gives us the possibility to understand the importance of the International Trade of the United States and its influence on the economy.
Gross Domestic Product or Expenditure, 2004–2005
(in billions of dollars)
Item 2004 2005
Gross domestic product $11,734.3 $12,487.1
Personal consumption expenditures 8,214.3 8,745.7
Gross private domestic investment 1,928.1 2,105.0
Exports of goods and services 1,173.8 1,301.2
Imports of goods and services 1,797.8 2,027.7
Government1 2,215.9 2,362.9

The population of the United States has seen the phenomena of the delocalization of the businesses that are now located in the third world countries such as Mexico and different parts of Asia for the cost reasons. This has created not only the unemployment but also the decrease of the exports and increase of imports affecting the data of the Gross Domestic Product and the International trade. In the relation to the fiscal policy the economy sees much spending of the Bush administration which intends to stabilize the economy but at the same time create the inequalities in the revenues as well as the welfare distribution between different sectors. Even though the income per capita gradually increases, the revenue comparing to the prices and spending possibilities are still considered low among the majority of the population. The data below shows us the income per capita for 2005, comparing to the previous years (which are not included in the table) it had risen over the years which would mean that the population is getting more spending possibilities which at the same time are influenced by the interest rates and taxes.
Per Capita Personal Income
State 2005
United States 34,586

Overall we can say that the American economic stability depends largely on the upcoming election where G.W. Bush is going to be pulled out of the worldwide attention and front decision making roles. At the end of the day if we can say that American economy is still one of the strongest and highly developing and slightly getting better over time considering its low unemployment rates, high GDP growth rate, high GDP per capita. At the same time United States has many debts at this point, but it doesn’t influence the overall stability as much and therefore we can say that its economy is slowly growing each year.

References:

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