Economic Growth in the United States
During Bush’s first year as president, real Gross Domestic Product (GDP) grew very slowly in the second half of 2000 and the first half of 2001, and then actually declined in the second half of 2001. (Baumol) In the year 2001, the United States realized that we were experiencing a recession. A recession is a period of time during which production falls and people lose jobs. (Baumol) Over the pass four years, our economy has been moving very slow. Many people are losing jobs, and the GDP has fallen. Below is a graph of a recession: The tax cut of 2001 turned out to be remarkably well timed, however, and the war on terrorism led to a burst of government spending.
Both of these policies helped shift the aggregated demand curve outward, mitigating the recession. ” (Baumol) Over the past few months, the United States economy has experienced substantial growth in many ways. In the article titled, Positive Economic Data Rain Down, the authors Rebecca Christie and Deborah Lagomarsino state that, “the regional report from the Federal Reserve released on Wednesday gives us hope that there is light at the end of this tunneled recession. The report stated that economic conditions were improving in a number of industries.
After surveying business activities across the United States the Federal Reserve found that most labor markets improved or remained stable. “The Labor Department said new claims for jobless benefits fell for the eighth straight week, reaching a 34-month low. ” (Christie) Claiming for jobless benefits involves unemployment insurance. Unemployment insurance is a government program that replaces some of the wages lost by eligible workers who lose their jobs.
Initial claims fell by 11,000 to 351,000 in the week ended November 22nd, marking the lowest level since the week President Bush was inaugurated. (Christie) This is good news, especially since cyclical unemployment (The portion of unemployment that is attributable to a decline in the economy’s total production. ) rose due the to recession. (Baumol) This is a sign that prosperity is being restored. The ideal situation would be the have full employment. Full employment is a situation in which everyone who is willing and able to work can find a job.
At full employment, the measured unemployment rate is still positive. (Baumol) At full employment we are at our potential GDP, which means that output is at the highest level possible. Because our equilibrium level of real GDP fell short of our potential GDP we had a recessionary gap. Below is a graph of a recessionary gap: Also the FED found that the “regional manufacturing index soared to a nine-year high in November. ” (Christie) This is especially important because the manufacturing sector was the hardest-hit part of the economy during the recession.
The manufacturing sector was hit hardest because the prices of resources went up as demand for the goods went down. Because the economy went into a recession, people decreased their spending. As a result, it was difficult to make a profit. Below is a graph showing the shift in supply. Because employment is stabilizing and we are recovering from the recession. The public is more willing to spend money; therefore the supply curve shifts back out. There was also positive information about the retail sector in the report.
It stated that, “spending was up on a year-over-year basis, with retailers “generally positive” about holiday sales. ” (Christie) The Department of Commerce reported this week that gross domestic product, the value of the nation’s output adjusted for inflation, “grew at an annual rate of 8. 2% in the July-to-September quarter. ” (Christie) It also reported that, “while personal income rose 0. 4% in October – the biggest one-month gain since June – personal consumption was unchanged last month after sinking 0. 3% the month before. (Christie)
This means that the Consumption Function Curve shifted inward. William J. Baumol, one of the authors of Macroeconomics: Principles and Policy, states that Consumer Wealth, the Price level, the Real Interest Rate, and Future Income Expectations can cause the consumption function curve to shift. I believe the reason that consumption function shifted inward during the recession is because the price level increased and therefore “eroded the purchasing power of consumer wealth. ” (Baumol) Because the economy was slow, prices went up to compensate.
The public then stopped spending and began to save because they realized the economy was bad. This would fall under the category of future income expectations. Below is a graph of shifts of the consumption function. In conclusion, the article Positive Economic Data Rain Down contains data that shows that the United States is coming out of its economic recession. Which is good news for the GDP and employment. No the United States is not inferior to recessions, but we know that we can over come a recession.
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