Economic Analysis the United States Term Paper

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08% 2.42% 2.78% 2.57% 2.69% 2.69% 2.54% 2006 3.99% 3.60% 3.36% 3.55% 4.17% 4.32% 4.15% 3.82% 2.06% 1.31% 1.97% 2.54% 3.24% 2005 2.97% 3.01% 3.15% 3.51% 2.80% 2.53% 3.17% 3.64% 4.69% 4.35% 3.46% 3.42% 3.39%

Trade deficit

The United States trade balance has been showing deficit since the 1970s, but the rapid growth of trade deficit started in 1997. The highest record of trade deficit was marked last year, as deficit of 2006 was equal to 763.6 billion dollars, which is 6.5% higher than in 2005. Yet, general observations show that negative trade balance has no negative impacts on GDP growth, in fact it had been observed that trade deficit was higher during years with higher GDP growth:

In those years since 1980 in which the current account deficit actually shrank as a share of GDP, real GDP growth averaged 1.9%.

In those years in which the deficit grew modestly, between 0.0 and 0.5%, GDP growth averaged 3.0%.

And in those years in which the current account deficit expanded by more than 0.5% of GDP, real GDP growth grew by an average of 4.1%. (Griswold, 2007)

Though a record trade deficit had been expected, the acceleration in December caught economists by surprise, leading to the revision of growth forecasts. A bigger trade deficit means more U.S. demand for goods and services was satisfied by imports rather than by domestic firms."(Goodman, 2007)

But to the opinion of specialists, trade deficit witnesses that country's currency is strong and that its citizens have possibility to pay for more imported goods at lower prices. That's why during recession year's trade deficit is lower, as citizens didn't consume much of the exported goods due to their high price.

Graph 3.Trade deficit since 1991.

The as-AD model of current U.S. economy

In order to build new classical as-AD model of current U.S. economy we should analyze behavior of prices, GDP and inflation.

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According to the recent data price indices (Po and P1) and GDP (Qo and Q1) have demonstrated growth. Such as-AD model clearly demonstrates that growth of price indices and growth of GDP leads to the growth of inflation.

Consumer price indices for the U.S. (Source: International Financial Statistics, International Monetary Fund)

3,38 2,83 1,59 2,27 2,68 3,38 3,60 2,70

Graph 2. as-AD model of current U.S. economy

Fiscal policies of G. Bush

Current administration of President Bush promotes contractionary monetary and fiscal policies. Bush's administration promoted tax cuts and tried to shorten budget spending in most of areas except military and state security. Tax cuts raised tax revenues and shortened government spending created macroeconomic conditions for deficit decrease. But from the other side, tax cuts which have a positive effect on national economy at a current uneasy situation (war on terrorism spending), such practices had a negative influence on financial situation of people with relatively low income as they received nothing from the tax cuts. Tax cuts widened social gap, making poor people poorer, as currently wage growth can be neglected by high inflation.

Currently it's planed that decrease of deficit will be around 0.1% of GDP (from 1.9% of GDP in 2006 to 1.8% in 2007). Federal Funds rate has been experiencing continuous growth due to a number of political reasons. It experienced growth of 0.25% since May, 2006 and is now 5.25%. Such practices are explained by increase of spending on national security, war on terrorism and growing prices on hydrocarbon energy resources. Also introduction of Euro as EU official currency had a negative impact on dollar value which continues today.

We can conclude that currently U.S. economy is experiencing inflationary period according to its macroeconomic indicators: economy has growing GDP, growing customer price indices, growing producer price.....

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