MACROECONOMIC EVALUATION OF THE ECONOMIC PROSPECTS OF TWO DIFFERENT ECONOMIES WHICH ARE GHANA AND THE UNITED STATES OF AMERICA
Introduction and Definition of key concepts
Macroeconomics has been a major tool for many years in indicating viability of economies and forecasts, hence this topic purports, as a study of the macroeconomic evaluation of the economic prospects of two economies. This is a comparative analysis of two economies drawing on similarities and differences to make relevant observations, discussions and recommendations in key areas.
Macroeconomics is basically a study of the aggregate moods of the economy, with specific focus on problems associated with those moods; the problems of economic growth, unemployment, inflation and balance of payments. These four problem-areas have their causes, consequences, debated solutions and will be discussed and analyzed using relevant data. As Baumol (1967) said, ï¿½there are some economic forces so powerful that they break through all barriers erected for their suppression. Such, for example, are the forces of supply and demand which have resisted alike medieval efforts to abolish usury and contemporary attempts to control pricesï¿½. In analyzing macroeconomic problems economists usually use two frame works; a short-run frame work and a long-run frame work. Issues of growth are generally considered in a short-run frame work, however, unemployment, inflation and balance of payments fall within both frame-works.
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An evaluation which is an assessment is carried out on the economic projections and prospects of the two economies (Ghana and USA); supply and demand forces, aggregate production and consumption of goods and services over a specified period of time. However, economic growth in this study is basically measured by the market value of final goods and services produced in an economy, stated in the prices of a given year that is an increase in total output and total income.
Unemployment occurs when people are looking for a job and are unable to find one. The unemployment rate is therefore the percentage of people in the economy who are willing and able to work but who are not working. Inflation referred to in this work is basically a continual rise in the price level of an economy, whereas the price level is an index of all the prices in an economy. A balance of payments (BOP) is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, and financial capital, as well as financial transfers. The BOP summarizes international transactions for a specific period, usually a year, and is prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as a negative or deficit item.
Background of the two economies under consideration
The Ghanaian and United States of American economies are as stated earlier are under study. This section displays the contextual and related information of these economies.
The economy of Ghana, West Africa, has a diverse and rich resource base, and as such, has one of the highest GDP per capita in Africa. Ghana remains somewhat dependent on international financial and technical assistance as well as the activities of the extensive Ghanaian diaspora. Gold, timber, cocoa, diamond, bauxite, and manganese exports are major sources of foreign exchange. An oilfield which is reported to contain up to 3 billion barrels (480ï¿½106 m3) of light oil was discovered in 2007. Oil exploration is ongoing and, the amount of oil continues to increase.
The economy of the United States is the world's largest national economy. Its nominal GDP was estimated to be $14.3 trillion in 2009, approximately a quarter of nominal global GDP. Its GDP at purchasing power parity was also the largest in the world, approximately a fifth of global GDP at purchasing power parity. The U.S. economy also maintains a very high level of output per capita. In 2009, it was estimated to have a per capita GDP (PPP) of $46,381, the 6th highest in the world.
Historically, the U.S. economy has maintained a stable overall GDP growth rate, a low unemployment rate, and high levels of research and capital investment funded by both national and, because of decreasing saving rates, increasingly by foreign investors. It has been the world's largest national economy since 1944 and remains the world's largest manufacturer, representing 19% of the world's manufacturing output. In 2009, consumer spending coupled with government health care spending constituted 70% of the American economy. About 30% of the entire world's millionaire population resides in the United States (in 2009). Furthermore, 40% of the world's billionaires are American. The US is also home to the world's largest stock exchange, the New York Stock Exchange. It also boasts the world's largest gold reserves and the world's largest gold depository, the New York Federal Reserve Bank. The United States is also home to 139 of the world's 500 largest companies, which is almost twice that of any other country. A large contributor to the country's success has also been a very strong and stable currency. The US dollar holds about 60% of world reserves, as compared to its top competitor, the euro, which controls about 24%.
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A ï¿½PESTï¿½ analysis of major macroeconomic indicators in the two economies
Macroeconomic indicators of the Ghanaian and American economies are analyzed in this section, measuring its impact on the political, environmental, social and technological advancements prevalent in both countries using the factors of economic growth, unemployment, inflation and balance of payments.
The pattern of the economic performance of Ghana over the years suggests little evidence of structural transformation. The economy still depends largely on agriculture accounting for at least 36 percent of GDP and 50 percent of employment. As suggested by table 1, the structure of the economy since 1984 has only seen a marginal decline in agriculture dominance in favour of service and industry owing to sluggish growth of agriculture. The growth of the agriculture sector until 2003 continuously lagged behind the other sectors, largely to due to inefficient farming practices, poor access to credit and profitable markets, and reliance on rain-fed agricultural production. The poor performance of the sector has led to the loss of its position as the major foreign exchange earner through cocoa exports since 1994.
An important macroeconomic indicator is inflation, as it provides a signal of how well the economy is being managed, Fischer (1993). The inflation picture has brightened considerably since the reform. At an annual rate of 15.0 per cent in 2005, this is a marked improvement from the 123.1 per cent peak annual rate in 1983 (Figure 1).
The declining trend in public sector employment continued in the 1990s as noted by Buckley (2005) with a 3 percentage points loss of public sector employment. The total labour force participation rate of the country dropped from 82.5 percent in 1984 to 74.7 percent in 2000 with the rate being slightly higher for males than females (table 2).
MACROECONOMIC INDICATORS FOR USA
Since the 1960s, the United States economy absorbed savings from the rest of the world. The phenomenon is subject to discussion among economists. The US is by far the most heavily invested-into country in the world, with foreign investments made in the US measuring almost $2.4 trillion, which is more than twice that of any other country. The US is also by far the largest investor in the world, with US investments in foreign countries totaling over $3.3 trillion, which is almost twice that of any other country. The United States public debt is in excess of $13 trillion and continues to grow at a rate of about $5.48 billion each day by direct calculation between Jan 31, 2010 and August 31, 2010. And total public and private debt was $50.2 trillion at the end of the first quarter of 2010, or 3.5 times GDP. Domestic financial assets totaled $131 trillion and domestic financial liabilities totaled $106 trillion.
The U.S. economy grew by an average of 3.8% from 1946 to 1973, while real median household income surged 55% (or 1.6% a year) The economy since 1973, however, has been characterized by both slower growth (averaging 2.7%), and nearly stagnant living standards, with household incomes increasing by 10%, or only 0.3% annually. The worst recession in recent decades, in terms of lost output, occurred during the 2008 financial crisis, when GDP fell by 3.9% from the spring of 2008 to the spring of 2009. Other significant recessions took place in 1957ï¿½58, when GDP fell 3.7%, following the 1973 oil crisis, with a 3.1% fall from late 1973 to early 1975, and in the 1981ï¿½82 recession, when GDP dropped by 2.9%. Recent, mild recessions have included the 1990ï¿½91 downturn, when output fell by 1.3%, and the 2001 recession, in which GDP slid by 0.3%; the 2001 downturn lasted just eight months The most vigorous, sustained periods of growth, on the other hand, took place from early 1961 to mid 1969, with an expansion of 53% (5.1% a year), from early 1991 to late in 2000, at 43% (3.8% a year), and from late 1982 to mid 1990, at 37% (4% a year).
The United States economy experienced a crisis in 2008 led by a derivatives market and subprime mortgage crisis, and a declining dollar value. On December 1, 2008, the NBER declared that the United States entered a recession in December 2007, citing employment and production figures as well as the third quarter decline in GDP. The recession did, however, lead to a reduction in record trade deficits, which fell from $840 billion annually during the 2006-08 period, to $500 billion in 2009, as well as to higher personal savings rates, which jumped from a historic low of 1% in early 2008, to nearly 5% in late 2009.
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In 1980, the U.S. public debt was $909 billion - or an amount equal to 33.3% of America's gross domestic product (GDP). By 1990, that number had more than tripled to $3.2 trillion - or 55.9% of GDP. In 2001 the national debt was $5.7 trillion; however, the debt-to-GDP ratio remained at 1990 levels. Debt levels rose quickly in the following decade, and on January 28, 2010, the US debt ceiling was raised to $14.3 trillion dollars. Based on the 2010 U.S. budget, total national debt will grow to nearly 100% of GDP, versus a level of approximately 80% in early 2009. The White House estimates that the governmentï¿½s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion in 2009.
Despite the above record, much remains to be done. Ghanaï¿½s income is still too low and its poverty rate of nearly 30 per cent too high. It appears that greater structural change is required, and the country needs to gradually wean itself away from international support of its domestic and external deficits. The good news, though, is that the country seems to be reaching democratic maturity that should provide the requisite environment for more productive domestic and foreign direct investments. At the very least, Ghana appears to have escaped the political disorder that accompanied liberalization in several African countries.
A central feature of the U.S. economy is the economic freedom afforded to the private sector by allowing the private sector to make the majority of economic decisions in determining the direction and scale of what the U.S. economy produces. This is enhanced by relatively low levels of regulation and government involvement, as well as a court system that generally protects property rights and enforces contracts. Hence, both the Ghanaian economy and the US economy have bright prospects while the Ghanaian economy has to maximize the deposits of its rich natural resource for rapid economic growth.