Money and the Prices
When developing market growth plans, it is essential to consider prices
and money in the open economy. Market growth is sensitive to the two factors
that determine its functional outcomes. The market
economy is also triggered by other factors such as foreign exchange, monetary
policy, and trade deficits. The United States has
maintained a stable market economic growth that is indicated by a balanced
national budget. The paper will provide the history of changes in GDP, real
interest rates, investment, savings, and unemployment and compare to forecast
in the next five years.
The History of
Changes in Investment, Savings, GDP, Unemployment, and Real Interest Rates
while Comparing with Forecast within the Next Five Years
The annual economic growth in the
United States has been 1.2% within the last eight years (Trading Economics,
n.d.). The slow growth was further affected following the 2008 economic crisis.
The recession led to a negative GDP in the year 2008 and 2009 (Trading
Economics, n.d.). However, over the last five years, the economic growth has
been recovering but at a gradual rate. Within the five years period, the
economic growth has risen to 2.2% which
is below the government target (Trading Economics, n.d.). The federal
government had aimed at helping the economy to rise up to 3% or 3.5% (Trading
Economics, n.d.).
Reports from the Trading Economics
show that America has been enjoying the largest economy globally. However, when
the U.S. is compared to other developed
countries, its economic growth has been on a negative trend. The report went ahead showing that in the 1950s to 1960s, the country was enjoying an
economic growth of 4% (Trading Economics, n.d.). However, following the onset
of the 1970s to 1980s, the rate dropped
to 3% (Trading Economics, n.d.). This has been extended to the recent past
where within the period of the last 10 years, the average economic growth has
been 2% and below (Trading Economics, n.d.).
The America economic status has been
quite unstable in the past half decade. For instance, at the start of 2011, the
economic growth was at its lowest (Trading Economics, n.d.). The year recorded
an economic growth that was below 0%. Conversely, the following year, the rate
drastically increased to 4.5%, which extended to around the end of 2015
(Trading Economics, n.d.). As a result, the general condition of the U.S.
economy can be considered relatively favorable. This has been further indicated
by the Institute for Supply Management Index that for the last five years has
remained positive. The second quarter of 2016 indicated that the total gross
savings in America were at 3350.3 billion
dollars (U.S. Bureau of Economic Analysis, 2016).
Focusing on the issue of employment, unlike in the past two decades, there
has been an improvement in the non-profit payrolls (Mankiw, 2007). Further, in the last
five years, U.S. has been having low-interest
rates. Similar trends have been observed in mortgage lending together with
government tax regulation. The approach has led to the American economy being
classified as one of the best economies in the world.
From the year 2016, the rate of
unemployment has been reduced to 4.9% (Trading Economics, n.d.). The reduction
in the rate of unemployment has been recording an upward trend since 2016 (Trading
Economics, n.d.). The following year recorded a reduction rate of 5.1% (Trading
Economics, n.d.). On the other hand, the history of investment has been
experiencing an irregular trend. In July 2015, the U.S foreign direct
investment was at $43163 million (Trading Economics, n.d.). The value reduced
to $33199 million by January 2016 (Trading Economics, n.d.). This trend has
continued until the year 2017 where the investment rate appeared to be
stabilizing. The level increased from $44328 million in 2017 to $45701 million
in January 2018 (Trading Economics, n.d.). It is expected that the positive
trend would continue in the next five coming years.
Effect of Government
Policies to Economic Growth
The government is responsible for
setting rules and regulations that are used in businesses. Therefore, business
operations are supposed to abide by the set rules. Any change of the policies
will require a similar change in the business operations. The effect has been
found to influence business profitability and competitiveness. The laws could
either set by local, state or federal government.
The government has the mandate to
control the selling of goods and services
in the market (National Bureau of Economic Research, 2018). The body
provides specific prices for goods. This has a common
being found in the crude oil industry where the government
provides the prices for petrol and diesel. The approach is to protect the
public from exploitation by the entrepreneurs. The approach encourages
diversification since entrepreneurs have to think about many ways of making a profit instead of using one method and exploit
their customers.
The government
also introduces a customs duty on goods
and services. This leads to a rise in the
prices of commodities. Besides, taxes negatively affect the amount of profit
that entrepreneurs make from their investment (National Bureau of Economic Research,
2018). As stated earlier, the government can control the profitability
of business people. Introduction of high taxes reduces the profit. Conversely, a
reduction of taxes on goods increases the
amount of profit made. However, taxes are important in helping the country’s
economy to grow.
Further, the government helps
entrepreneurs to make more profit by introducing new technologies. The
technologies increase the level of production. Sometimes, the government has to
incur cost while implementing new technologies and systems in the market.
However, this is its mandate. Additionally, the government helps in economic
growth by creating room for foreign
investors. Settlement of the investors helps
to boost the economy through taxes paid.
Investors are also a source of employment
that also helps in the economic growth (National Bureau of Economic Research,
2018).
The Way Monetary
Policy would Affect Long-Run Behavior of Price Levels, Inflation Rates, Costs,
and Other Nominal Variables
The government is able to utilize
monetary policy to control the economic status. This is connected with the
political objectives that are found among
the government leaders. In this case, the government is able to use the
monetary authority to influence the way money flows in the economy. In most
cases, the approach is usually aimed at having a macroeconomic stability. The
impacts are low inflation, employment, and economic growth. The monetary policy
is usually implemented by the Central Bank (Mankiw, 2007). The bank is mandated
to ensure a country has a solid economic performance. At the same time, the
living standards upgrades among the citizens. When there is a high supply of money, the inflation rate also
rises. This is due to the fact that the credit policy tends to loosen. It leads
to the acquisition of credits at cheaper
prices. Similarly, as the economy expands, the level of employment increases.
Presence of monetary policy has also
been found to affect the flow of goods and services. The flow increases
employment rate as well as profitability among the public. This is unlike the
fact that firms and households take long before they adjust their behaviors (Lacker, 2016).
Similarly, economists hold that the increase in individual income is directly
affected by technological change. The technology brings about effects in
capital and labor output. In this case, the increase
in production does not result from the number of people working or machines (Lacker, 2016).
Instead, higher production occurs due to technological advancement which makes
the few available workers more productive (Lacker, 2016). Additionally, new
techniques and inventions bring about the similar
impact to economic growth. Therefore, the
government tries to support its citizen to help invent and come up with better
ways of producing goods and services.
Contrary, poor monetary policy
collectively affects a country and its people. Such a policy leads to the
citizen using the available resources which eventually goes to waste. The
effects are inflation where money continue losing value the more they are
saved. To avoid this, low and stable inflation is advocated.
Trade Deficits or
Surpluses Affect the Growth of GDP and Productivity
Flows of trade occur where payments
are exchanged. Most people hold that a country should rely on its own resources
other than borrowing from neighboring countries. However, none of the countries
has all the necessary resources that meet
all demands from the citizens. Therefore, relative borrowing is healthy and
necessary for the economic growth. As a result, borrowing for the purpose of
development or investment is healthy for
the economy. For instance, money borrowed for improving education will have a long-run payoff. Education will enable people to
earn higher wages and they will be able to pay back the loans. Hence, it means
that borrowing for the sake of development leads to economic growth. The
approach requires a country to pay back the borrowed fund while in the
long-run, the country remains better off than before.
Hence, regardless of a country
suffering from trade deficits or surplus, all that matters is the way the
handle the resources borrowed externally. Large trade deficits can be lethal
when used inappropriately. This occurs when the borrowed funds were not
allocated to the activities that they were first targeted. This lost to the
country suffering from the inability to pay back the funds (Kuepper, 2018).
Similarly, borrowed funds can be allocated in nonproductive economic assets.
This result in such countries paying
large interest payments while there is no parallel economic growth.
Trade surpluses, on the other hand,
can be considered as beneficial or limiting. Such an incidence was observed in
Japan (Kuepper,
2018). However, the surplus trade was not beneficial to their GDP. Such a
country suffers from a high rate of domestic savings more than they
can invest domestically (Kuepper, 2018). As a result, they are forced to invest
the extra funds outside the country. Similarly, the surplus trade means that
the consumption rate of both the imports and exports is relatively low (Laya, 2018).
This results in a slowly growing economy
and low GDP.
Importance of the
Market for Loanable Funds and the Market for Foreign-Currency Exchange
The market
provides an important avenue for the loanable funds. The funds are directed
toward developing programs that
eventually increases the productivity. Market helps in the coordination of loanable funds, investment, and
economy’s savings. Real exchange rate directly affects the supply and demand of
both the domestic and foreign goods. This in return affects the relative price
of the two types of goods. An increase in the exchange
rate in the United States results in
domestic goods shooting at a price. This discourages local consumers as well
as foreigners. However, a low exchange rate will facilitate the flow of foreign
currencies, which in return attract more foreigners and investors. Domestic
goods will be cheap compared to the foreign ones enhancing internal trade.
Recommendation for
the Strategic Plan
As per the above findings, there are
several issues to be addressed in the U.S. economic status. First, the low-wage
economic strategy should be replaced with an updated high-wage strategy. This
will be achieved by increasing the
employment rate. Low employment rate leads to a reduction
in wages. The country should focus on a situation where every American who is
able and willing to work to have an opportunity for employment. This is without
the fear of inflation pulling down the objective. This will work together with
other sectors such as infrastructure and education. The government should
direct funds to these areas which in return will improve the level of
employment.
Further, the government should
continue increasing more opportunities for foreign investors. Investment should
also be enhanced for the Americans. This in return will raise the rate of
employment in the country. To boost the country economy, modest taxes should be
added in all foreign and domestic goods. Capital gains, wages, and salaries should be taxed which in return
will boost the country’s economy.
The United States also should focus
on enhancing its productivity. The government should evaluate business
activities that weaken the economy. Monetary policies should be adjusted in
such a way that they benefit the Americans. This will correlate with President
Trump’s philosophy of putting American first. The approach will concentrate the
wealth of the country at the reach of the citizens.
In conclusion, the flow of money affects the stability of a
country economy. This has led to the formation
of monetary policies that regulate the flow of currency. A large supply of money into the market will
lead to a failing economy. Therefore, the government has the mandate of
controlling the amount of currency in a country. Similarly, the government directly or indirectly affects the
economy. The government sets policies and rules that investors and business
people should abide. Introduction of high taxes on goods results in the price of goods and services increasing.
Additionally, the provision of
opportunities for investors to grow directly affect the economy where there are more employment opportunities. This in
return affects the GDP of a country positively. It is the responsibility of the
government to set strategies that enhance the economic
growth of a country.
References
Kuepper, J.
(2018). Trade Deficits, Surpluses and
Their Impact on Investors. Retrieved from
Laya, A.
(2018). Here’s Why It’s Time to Ditch our
Obsession with Trade Deficits. Retrieved
Lacker, J.
(2016). Can Monetary Policy Affect
Economic Growth? Retrieved from
Mankiw, N.
G. (2007). Principles of Economics. Mason, Ohio:
Thomson/South-Western.
National
Bureau of Economic Research, (2018). Firms
in Developing Countries: Can Trade
Policy Serve as Competition Policy?
Trading
Economics, (n.d.). United States GDP
Annual Growth Rate. Retrieved from
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