The Economy of the United States, Economic Indicators, Government Regulation, and International Trade

Economic Indicators: Used to evaluate the state of the US economy and try to predict what is going to happen to the economy in the future, The government studies these indicators to decide what to do to regulate the US economy to benefit the people Indicators: 1. Gross Domestic Product (GDP) – measures the market value of all goods and services produced in the United States during a period of one year ($54,600 = 2014) - can be used to compare the US economy year to year and with other nations 2. Consumer Price Index (CPI) – Measures the change in prices overtime of a set of ‘basket of goods and services’ typically purchased by an American family - Used to measure inflation (increase in general price level, reduction in the value of money) and deflation (decrease in the general price level, increase in the value of money)

3. Business Cycle: fluctuation in economic activity – how much is spent in the US - Contraction v. Expansion - Recessions and Depressions 4. Standard of Living: how many goods and services are produced per person, indicates the level of economic prosperity in a country 5. Unemployment – percentage of Americans who are actively seeking work and cannot find it – 5.5% - Underemployment – workers who are over qualified for their jobs or are working less hours than they desire 6. Poverty Rate: percentage of Americans living in poverty (1- $11,888, Family of 4- $23,834) – 16%

The United States government regulates the economy to try to move the economy towards full employment, price stability (no inflation/deflation) and a stable expanding economy. Three Means: 1. Fiscal Policy: Government Spending and Taxation 2. Monetary Policy: Regulation of the Money Supply, Interest Rates, and Banking 3. Regulation of Foreign Trade and International Aid

Government spends money in three ways to help the economy: 1. Public Goods – goods available to all whether or not a person pays for them – Police, National Defense, Disease Control, Schools - Increase quality of life of Americans - Increase private sector revenue - Creates jobs 2. Entitlement Programs (Social Insurance) – Provided by law to everyone who qualifies regardless of need, designed to make up for lost income of people who worked but are now retired or unable to work – Social Security and Medicare 3. Means–Tested Programs (Income Assistance) – provide money and assistance to those living in poverty, need based qualifications – TANF, Medicaid, CHIPs

US Government must tax people to pay for its spending, but it also uses tax policy to help the economy: Proportional Taxes/Flat Taxes – Sales Taxes Progressive Taxes – The higher the income, the higher the percentage of that income paid in taxes – US income taxes - Individual Income Tax v. Corporate Income Tax - Earned Income Tax Credit - Income taxes are disproportionately paid by the wealthy and disproportionally help the poor Regressive Taxes – People who make less pay a higher percentage of their income – Payroll taxes – SS, Medicare

Income Taxes: Payroll Taxes: 2015 EmployeeEmployer Social Security Taxes 6.2% in earnings up to $118,500 Medicare Taxes 1.45%

Keynesian Economic Theory – John Maynard Keynes In order to stimulate the economy and reduce unemployment, the government can alter its spending and tax policies. Demand-Side Economics – Belief that the economy can be stimulated and unemployment reduced by increasing government spending and shifting the aggregate demand curve to the right, increase money supply

Supply-side Economics – Belief that the economy can be stimulated and unemployment reduced by decreasing government taxation and shifting the aggregate supply curve to the right, can help control inflation The United States Government has done both since the Great Depression and often tries to do both at the same time.

When the government tries to reduce taxes and increase spending this creates a deficit. Deficit- amount which total government expenditures exceeds government revenue, measured annually ($483 Billion = 2014) National Debt – Total amount the US government owes – sum of the deficits ($18 Trillion) Problems with the National Debt: 1. US Government must fund the debt by borrowing money: - This increases the demand for loans which causes an increase in the equilibrium interest rate - Increase in the interest rate discourages private borrowing which reduces spending - Reduces corporate investments - All of this hurts the economy 2. The US Government must pay interest on these loans

1. Quickly look at labels, headings, legends, units of measurement 2. Does it have a title? If not, what should it be? 3. Summarize the main point 4. Generalizations/Trends - starting and end points - highest and lowest data points - largest and smallest changes - tipping points - gradual/dramatic increases/decreases - constants

The Federal Reserve Central bank and monetary authority in the United States - Role is to conduct the nation's monetary policy, supervise and regulate banking institutions, maintain the stability of the financial system - Seven member board of governors makes decisions - 14 year non-renewable terms - One member is appointed every two years - Chairman is appointed every four years - can be renewed - 12 District Reserve Banks - each has a president - implement Fed policies and hold member bank reserves - FOMC - Federal Open Market Committee - make actual decisions regarding money supply and interest rates - 7 members of board of governors and five district bank presidents

In order to keep the country prosperous the FOMC (Fed) can regulate the money supply, set the discount rate and federal fund rate, and set the required reserve ratio 1. Money Supply - Doesn’t print money but is responsible to put money into circulation - If it wants to increase the money supply it buys government bonds from member banks - If it wants to decrease the money supply it sells government bonds to member banks 2. Set the discount rate and the federal fund rate Discount Rate = rate at which federal reserve loans money to banks Federal Fund Rate = rate at which member banks can loan money to one another - Can either encourage or discourage banks to borrow money 3. Set the Required Reserve Ratio - the amount of deposits a bank must hold in reserve (cannot loan) - can encourage banks to increase or reduce the number of loans

In an economic downturn or recession the Fed will: 1. Increase the Money Supply by buying bonds 2. Decrease the discount rate and federal fund rate to increase the supply of loans 3. Reduce the required reserve ratio to free up more deposits for loans All of this will decrease the market interest rate (by increasing the supply of loans) and encourage consumers to borrow and spend and businesses to borrow and invest In a period of economic expansion where inflation becomes a problem the Fed will: 1. Decrease the money supply by selling bonds 2. Increase the discount rate and federal fund rate 3. Increase the required reserve ratio All of this will increase the market interest rate (by decreasing the supply of loans) and encourage consumers and businesses to save money instead of borrowing and spending

The Government attempts to regulate international trade and aid to foreign countries to expand and stabilize the US economy. History of Protective Policies : In early American history, the United States government used trade barriers to help the economy Quotas: limit on the amount of a certain good that can be imported Tariffs: taxes on imported goods Embargos: completely cutting off trade with a country Benefits of Restrictions: - Protect American Jobs - Support and Protect American Industry - Help with national security Problems with Restrictions: - Higher prices on consumer goods - Higher prices on consumer goods - foreign countries did the same to us - stifles trade (trade wars)

Free Trade Policies: Beginning in the 1990s the United States government began signing Free Trade Agreements to get rid of restrictions on Trade - NAFTA, WTO and GATT, CAFTA, etc. Benefits: - idea is countries will specialize in producing the goods that they can produce at the lowest opportunity cost Absolute Advantage: Ability of one nation to make a product more efficiently than all other nations Comparative Advantage: nations will specialize in what it can produce at a lower opportunity cost than other nations - advantage based on resources, climate, and labor supply - prices on goods will decrease and consumers will benefit –Wal- Mart phenomenon - Raises the standard of living for Americans and across the world

The Problems with Free Trade: - The United States Labor Laws and Environmental Laws make it difficult for us to have a comparative advantage in manufactured goods - Result is loss of American jobs (outsourcing) and trade deficits - Trade deficits result in American currency leaving the country and we must sells bonds and assets to get it back - the country then owes interest on these securities to foreign governments - More American money worldwide decreases the value of American money Solutions: 1. Find areas of the economy where we do have a comparative advantage - retraining and services 2. Find ways to encourage production here in the United States 3. International Aid - improve their economies, adopt labor and environmental laws, US companies can compete, more foreigners can afford US products, who gets the aid money?