Analyzing Money and the Prices in the Long Run and Open Economies

Money and the Prices in the Long Run and Open Economies

Analyze the history of changes in GDP, savings, investment, real interest rates, and unemployment and compare to forecast for the next five years

The GDP of the United States in 2010, approximately five years ago, stood at $14.96 trillion. Fast forward five years to the present day, the GDP of the nation currently stands at $17.42 trillion. Looking forward, according to Trading Economics (2016), it is projected that the growth of the GDP rate will be in the scope of 2.00% in the year 2020. Therefore, it is forecasted that by 2020, the GDP for the country will be $20.33 trillion (Trading Economics). With regard to savings and investment, it is imperative to point out that the United States has been incessantly having trade deficits for the past four decades, owing to the high importation of oil and consumer products. As a result, the savings and investment of the United States have deteriorated significantly as a percentage of GDP and have just about completely collapsed since the financial crisis. Private savings hardly keeps up with total government deficits and in general, the nation saves very little. As a result, there are minimal domestic investments and the United States is substantially dependent on foreign investors to constitute the difference (Cole, 2014). In accordance to Trading Economics (2016), balance of trade in the U.S. was an average of $-13309.01m from 1950 until 2016, attaining an unprecedented high of $1946m in June of 1975 and the highest low record of $-67823m in August of 2006.

In a historic analysis, the unemployment rate of the United States had improved as it has declined from about 10% in the 2010 fiscal year and presently stands at about 4.7%. This is a massive improvement as it is deemed to be the lowest unemployment rate reading since 2007. In the long-term, the unemployment rate of the United States is forecasted to trend at around 6.20% in the year 2020 (Trading Economics, 2016). Lastly, the real interest rate of the United States has consistently increased from 1.2% in 2011 to 1.8% in 2014 and has presently slightly declined to 1.77%. Trading Economics (2016) projects that the real interest rate of the U.S. will increase to 2.25% in 2020.

Discuss how Government Policies Can Influence Economic Growth

Activities and policies implemented by the government can have a great impact on the growth of the economy. In particular, it is imperative to note that government policies impact the economy not only in the short-run, but also in the long-run. Government policies come in the form of monetary and fiscal policies. To begin with, the government sanctions monetary policies in order to ensure that there is a steady growth rate of money. In turn, this aids in controlling excess inflation as well as excess growth in the short-run, both of which can have an adverse influence on the economic growth in the long-run. Monetary policies encompass the government's decisions with regard to interest rates and money supply. For instance, an increase of the supply of money is done through the purchase of government securities, such as Treasury Bills and Bonds. On the other hand, decreasing the money is done through the sale of the government securities (Arnold, 2007).

Fiscal policies enacted by the government can also influence the economy through government spending and taxation. For instance, if the company thinks that there is an excessive fast growth in the company, then it can impact it through a decrease in spending as this reduces the general demand level in the economy. On the other hand, a decrease in taxation has a tendency of stimulating growth of the economy. This is because a reduction in tax level increases more money in the consumers' pockets, who might opt to save or spend such money. If spent, it increases more demand and if saved in the bank, the borrowers will spend the money (Arnold, 2007).

Describe How Trade Deficits or Surpluses Can Influence the Growth of Productivity and GDP

In definition, a trade surplus is a term that delineated the economic measure of a positive balance of trade, with the exports of a country surpassing its imports. On the other hand, a trade deficit is a metric that delineates a negative balance of trade, with the imports of a nation exceeding its exports. These two have an impact on the growth of productivity and also gross domestic product (GDP). The trade balance happens to be a major constituents of a nation's gross domestic product (GDP) formula (Ross, 2015). In particular, the formula for calculating the GDP is as follows: