1. Introduction

Leading the charge in terms of economical size, measured by annual GDP, among all nations in the world is the United States (US) (World Bank, 2015). When considering the level of advancement among countries, the US is also probably the most technologically powerful and is constantly at or near the forefront in technological advances (CIA, 2015). The US is no doubt the most observed and studied upon country by economists as any impact on its economy tends to ripple throughout the world.

Despite being the top economy in the world, the US still faces multiple long-term issues that are yet to be resolved, such as the stagnation of wages for lower-income families and the rising medical costs of an aging population (CIA, 2015). However, the most prominent issue as of late was probably shone under the spotlight in 2013 as its government agencies underwent a brief shutdown due to excessive deficit spending (McCullough, 2013).

Notwithstanding the long-term issues, the US has managed to sustain the position of being the top economy in the world since the end of World War II. Its advantage over its counterparts, however, gradually narrowed over the years and in 2014, was finally superseded by China in terms of GDP in terms of purchasing power (Bird, 2014). Nonetheless, the US remains as the largest economy in terms of nominal GDP and is still regarded as the most important economy in the world given its presence in many different aspects.

2. Production Output Performance Analysis

2.1 Gross Domestic Product (GDP)

The strength of a nation’s economy is typically measured via its GDP value on an annual basis. There are, however, a few different types of GDP and the most important above all is to understanding the difference of nominal GDP and real GDP. Nominal GDP measures the value of its GDP at the current price level. Real GDP, on the other hand, takes into account the changes in price level and adjusts the value based on the rate of inflation (Nordhaus, n.d.).

2.2 Historical U.S. Real GDP Data

In billions of dollars, the US produced 13,606 of output in the first quarter of 2004. Its GDP figure then grew at a constant rate before tumbling in the period of the subprime mortgage crises and resuming growth up to 15,761 by the fourth quarter of 2013 (FRED, 2015a). This is equivalent to compounded annual growth rate (CAGR) of approximately 1.48% over the period of ten years.

The stable growth in the US’s GDP figure is even more discernible in Figure 2 (below) as it indicates an average of approximately 2% real GDP change in percentage from a year ago. The annual growth rate also reached a historical low in the midst of the great financial crisis (GFC) in the second quarter of 2009 at about -4%.

Aside from the real GDP and its growth rate, one other indicator also plays an important part in measuring an economy’s strength, namely GDP per capita. GDP per capita essentially takes the total output of a country and divides the figure by the total amount of population in the corresponding country (Investopedia, n.d.). GDP per capita is widely regarded by economists as one of the most important indicator due to its nature of measurement. For instance, comparing China’s raw GDP figure with Singapore’s would draw meaningless conclusions due to the vast difference in population.

Through the availability of GDP per capita data, economists can compare the efficiency of nations via an apple-to-apple comparison. Evidently, the US’s GDP per capita figures are in line with its real GDP figures as it displays a similar trend where it was growing at a steady rate before the GFC. Led by Qatar, the US ranks 11^th in terms of GDP per capita as of 2015 in the world (IMF, 2015).

2.3 Real GDP Analysis

Whether it is nominal, real or per capita, it is no doubt that GDP figures play a vital role in assessing the strength of an economy. With an average of 2% historical GDP growth rate, the US has always been a leading powerhouse in terms of economic fundamentals. However, due to its economical positioning, the US was also the root of various infamous global crisis.

Aside from the Great Depression, a monumental disaster to the economists made history when the subprime mortgage bubble burst in 2008. In light of the severity of crisis following the fall of major investment banks, the US responded with a series of monetary policies, including but not limited to, bank “stress tests” and financial institutions bailouts (Mishkin, 2011). US’s central bank, Federal Reserve (FED), also commenced quantitative easing (QE) programs where it engaged in aggressive asset purchasing to supply money into the economy, resulting in the depreciation of USD by 4-11% (Chen et al., 2015). Furthermore, the FED also implemented zero interest-rate policy (ZIRP) where it brought its interest rates to a range of 0% – 0.25%, to which it still remains to date.

One might argue that the policies US undertook is too radical and repercussions may only surface in the long run. However, it is undeniable that the policies were effective as it successfully brought the US out of recession back to a route of stable growth as shown in Figure 1.

3. Labour Market Analysis

3.1 Types of Unemployment

Simply put, unemployment is a situation where an individual is looking for an employment opportunity but is futile in doing so (Beggs, n.d.). There are primarily three types of unemployment in an economy, namely ‘Frictional’, ‘Structural’ and ‘Cyclical’.

As Mark Thoma (2010) explains, frictional unemployment occurs as long as there are people moving or changing occupations within the labour force. An important feature of this type of unemployment is that it is voluntary on the part of the laborer. Structural unemployment, on the other hand, is involuntary and arises when an economy undergoes a fundamental shift in technologies or from changes in the composition of outputs, causing a mismatch between the skills of workers and what is required by the economy. This type of unemployment was the most palpable during the age of industrialization. Third and lastly, cyclical unemployment, is present when workers are out of job due to business cycle fluctuations.

It is commonly heard that economies strive for full employment. However, it is worthwhile to note here that ‘full’ employment do not really mean that every single person in the labour force is employed. Instead, full employment is merely a level where cyclical unemployment is at zero. In fact, a literal full employment is undesirable as it will drive wages and inflation higher, something which policymakers do not wish for (Henley, 2014).

3.2 Historical U.S. Unemployment Rates

An economy’s unemployment condition is usually correlated to its GDP level. Figure 4 (below) plots the annual unemployment rate during the period of 2004-2013. During the peak of the crisis when US’s economy contracted by -4%, the unemployment figure spiked to 9.9%, a level that second only to 1982 levels (FRED, 2015b). The surge in unemployment during crisis can be categorized to being cyclical as the economy was then undergoing a period of bust. Hence, workers were out of job primarily due to business cycle fluctuations.

3.3 Labour Force Analysis

Looking at the raw data of unemployment may provide a skewed picture as it does not take into account the changes in demographics and size of the labour force. Unfortunately, this is the case for the US. While the overall unemployment rate signifies a declining trend, if not stable, the same applies for its labour force participation rate

As data from the US Labor Department shows, the participation rate has been on a declining trend, reaching 62.6%, the lowest level since October 1977 (Stilwell, 2015). With reference to the statistics, an individual might thus argue that the decrease in unemployment is not to be attributed to the improving job condition but instead, to the fact that workers have been leaving the labour force. While critics are quick to blame Obama for its liberal policies, shifts in demographics is instead the primary culprit to this phenomenon as the US faces an aging population as baby boomers are gradually retiring the workforce (Philips, 2014). Nonetheless, the US government has been creating more jobs in the economy in hopes of lessening the adverse impact brought upon by its demographic shifts.

4. Price Level Analysis

4.1 Inflation

There is a reason why economists use real GDP as opposed to nominal GDP when assessing an economy’s health, and it is because of inflation. Inflation is “a sustained increase in the aggregate or general price level in an economy” (EconomicsHelp, 2015).

Year on year inflation can be calculated by dividing the change in consumer price index (CPI) by the previous year’s figure. While a common worker might find inflation harmful due to the increase in cost of living, economists and policymakers view inflation as helpful due to the increase in standard of living. However, not any amount of inflation is a positive sign. An inflation rate too high would suggest a hyperinflationary situation whereas a prolonged low inflation rate is termed as lowflation.

As Bayraktar & Saatcioglu (n.d.) puts it, there are primarily two types of inflation: Demand-Pull and Cost-Push. Demand-pull inflation occurs when the level of aggregate demand in an economy exceeds the level of output that the economy is producing. Due to such market shortages, the price level increases, resulting in inflation. Cost-push inflation, on the other hand, occurs when there is an increase in production costs, primarily in labour, capital, land and entrepreneurship. The increase in costs then puts upward pressure on the price level, resulting in inflation.

4.2 Historical U.S. Inflation Rates

During the historical inflation rates from 2004 to 2013, the US averaged about 2.4% inflation rate annually. While price levels have been fairly stable, the subprime crisis proved to hurt once again as inflation once shot to 5.8% before plunging down to a deflation of 0.2%. Notwithstanding the period of turmoil, the US is said to be rather successful in achieving its target inflation rate of 2% (Avent, 2015). As most countries generally strive to achieve a constant inflation rate of 2%, it is however important to note here that there is no single rate of inflation that applies in every economy (S., 1973).

4.3 Price Level Analysis

While there are notable cases of hyperinflation in some countries, few are aware that US itself has had its own sort of hyperinflation. Over the period of 1940 to 2005, the USD has lost 98% of its purchasing power via inflation. However, since the deterioration took place over the span of 65 years, the American population is unaware that their savings were eroded (Elliott, 2007).

 

Aside from hyperinflations or deflations, one tell-tale sign that the economy is ailing is through the phenomenon of stagflation. Stagflation is a situation where prices rise while national output decreases simultaneously and unemployment rises (Elliott, 2007). Evidently, the US went through a brief period of stagflation during the first phase of the crisis, before plummeting down to a deflationary state. The US government, however, were quick to act. Through aggressive fiscal stimulus and QE programs, the FED pumped huge amounts of money into the system and at the same time, managed to bring interest rates to near-zero. As such, price levels regained growth and the US government successfully steered the country out of deflation (Blinder & Zandl, 2010).

As important as it is to bring the US out of deflation, it is also vital for price levels to stay there. Henceforth, the US were reluctant to bring its fiscal and monetary policies to an abrupt end in fear of an economy “shock”. As a result, even though QE programs were terminated in 2014, interest rates persisted at near zero range to date (Monaghan, 2014).

5. Conclusion

Aspects of an economy are generally non-independent. For instance, Chow & Megdal (1978) studied the tradeoff between inflation and unemployment. Likewise, high unemployment tend to result in low output in an economy. As such, the three fundamental aspects discussed above display a similar trend over the same period.

The glory of being the top economy of the world does not come without a price. Due to the prestigious position, the policy choices and economical decisions of the US are constantly under heavy scrutiny as one wrong move will, more often than not, ripple throughout the world, especially since globalization. Nonetheless, the US government has time and time again proven that they deserve this prominence given the economical results it has provided historically.

6. References

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