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Analyzing American's economy strenghts and weaknesses through its Gross Domestic Product

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Macroeconomics Project: Assessing our Nation’s Economy

How do economists assess the economy’s performance? National income accounting measures the economy’s overall performance. The Bureau of Economic Analysis (BEA), compiles the National Income and Product Accounts for the U.S economy. The primary measure of the economy’s performance is its annual total output of goods and services, better known as aggregate output. Gross Domestic Product or GDP defines aggregate output as the dollar value of all the final goods and services produced within the borders of a country during a specific period of time.

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Real GDP is a GDP that has been deflated or inflated to reflect changes in the price level. Nominal GDP is a GDP based on the prices that prevailed when the output was produced. Over the course of the past 10 years real GDP has grown from 14,234.2 billion in 2005 to 16,348.9 billion in 2015. Economic growth has varied from 3.4% in 2005 to -2.8% in 2009 and back up to 2.4 by 2014. Economic growth can be considered as either an increase in real GDP occurring over some time period or an increase in real GDP per capita occurring over some time period.

There are two problems that arise over the course of the business cycle, the first is inflation and the second, unemployment. Inflation is a rise in the general level of prices. When inflation occurs, each dollar of income buys fewer goods and services than had before. In 2005 the average inflation rate was 3.4% and over the course of 10 years’ deflation set in and the average inflation rate of 2015 was 0.1%. In recent years the U.S inflation rate has been neither unusually high or low. From a rate of 3.4% in 2005, by 2009 inflation was at the lowest point in the 10-year span from 2005-2015 at just -0.4%. The main measure of inflation in the United States is the Consumer Price Index or CPI. The CPI reports the price of a market basket of some 300 consumer goods and services that are purchased by a typical urban consumer. CPI is calculated by taking the price of the most recent market basket in that particular year and dividing it by the price estimate of the market basket in 1982-1984 and then multiplying that total by 100. The inflation rate is related to CPI in the fact that the rate of inflation is equal to the percentage growth of CPI from one year to the next. In 2005 the consumer price index was at 195.3 and jumped to 229.6 by 2012.

The unemployment rate for the United States in 2015 was 5.3%. The U.S Bureau of Labor Statistics conducts a nationwide random survey of some 60,000 households each month to determine who is employed and who is not employed. From these answers the unemployment rate is determined. The unemployment rate is the percentage of the labor force, 16 years of age and older, who are unemployed. That number is found by taking the number of unemployed divided by the labor force and multiplying that answer by 100. There are three difference types of unemployment: frictional, structural, and cyclical. Frictional unemployment pertains to those who are between jobs or searching for a job while structural is more likely to be long-term, structurally unemployed workers find it rather hard to obtain jobs without relocation, continued education, or retraining. Lastly is cyclical unemployment which typically begins in the recession phase of the business cycle. Over the past 10 years, unemployment was at its lowest in 2006 and 2007 at 2.6%. However, it is rather close to that now as the month of May 2016’s unemployment rate was 4.7%. Unemployment was at its highest in 2010 at 9.6% after the few years of economic hardship we encountered in the mid-2000’s. Unemployment that is excessive involves great economic and social costs such as forgone output.

The Business Cycle is a series of alternating rises and declines in the level of economic activity, sometimes over several years. There are four phases to a generalized business cycle: the peak, recession, trough, and expansion.

At a peak business activity has reached a temporary maximum and the economy is at or near full employment. The price level is likely to rise during a peak and the level of real output is at or very close to the economy’s capacity. Next we have a recession, which is a period of decline in total output, income, and employment. Lasting six months or more, a recession is evident through the widespread contraction of business activity all throughout the economy. Since 1950, the recession of 2007-2009 has been the greatest period of economic decline our nation has seen. The recession lasted 18 months and there had been a decline in real output of -4.3%. During a recession or depression comes the trough. A trough is when output and unemployment bottom out at their lowest levels. Lastly, the final stage of a business cycle following a recession is an expansion or recovery. It is a period where real GDP, income, and employment rise and at some point the economy will once again reach full employment.

Currently in 2016 the United States economy is still in the expansion phase of the business cycle. As we continue to watch our economy grow, we can see the unemployment rate declining as well as the inflation rate. Both the short and long term goals of the U.S economy are to keep inflation rates low, resulting in a lowered unemployment rate. Monetary policy is made by the Federal Open Market Committee (FOMC), which consists of the members of the Board of Governors of the Federal Reserve System and five Reserve Bank presidents (Monetary Policy). Economic growth and recovery is essential to a stable U.S economy. So far we can see how our economy fluctuates and see that the unemployment rate is declining. We can use this data to predict what we believe will come next for the U.S economy.

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