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The GDP Of The United States

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The global financial crisis started to show its effect in the middle of 2007 and into 2008 because of this the world stock market had fallen and large financial institution had collapsed and been bought out and the government in the wealthier nation had to come up with rescue packages to bailout their financial system.

The financial crisis had been hit due to reckless and not proper lending practices by the United States which resulted in deregulation and securitization in real estate, mortgages in United States. The US backed securities were marketed all around the world. A broad base credit boom led a global speculative bubble in real estate which led to risky lending practices and the financial situation were made more difficult by sharp increase in oil prices. So the immerging subprime loan losses in 2007, it began the crisis and it exposed all risky loans and over hiked assets. As the Lehman brother crashed in September 15 2008, this caused the started of US crisis which led to many job cuts, bankrupts, over inflation, decline in interest rate.

The global economic crisis hit the world mainly due to the credit crunch in the America and over lending which led to bankruptcy of many top banks in the United States and which caused high unemployment and which lowered the GDP of America

This affected the United States and the world in a very bad way as there were increase pay cuts and job cuts everywhere around the America.

United States GDP growth rate

Now the economy in United States is the world largest nominal economy. Its nominal GDP is estimated at $14.2 trillion in 2009 which is about 3 times more than that of the world 2nd largest national economy Japan and its GDP by PPP (purchasing power parity) is almost twice of that of China. So this shows that US economy maintains a very high level of output per person. This US GDP per capita is $46,442 in 2009 is ranked around number 10 in the world.

Decline in GDP of America in 2009

America's GDP declined in 2009 due to negative contribution from the non residential fixed investment, exports, and private investment.

The GDP of United States in the last quarter of the year was expanded at the annual rate of 5.6%. The gross domestic product of United States is 14204 billion dollars of the world economy it has the highest GDP compare to other countries in the world. The economy is market- oriented where most of the decision our taken by business firm or private individuals.

Country: United States

Interest Rate0.25%

Growth Rate5.60%

Inflation Rate2.10%

Jobless Rate9.70%

Current Account-116

Exchange Rate81.0730

Despite they have such a huge growth in the GDP, but they are still weak. They expanded in the fourth quarter by an annual rate of 5.9% giving an idea that the strongest and the largest economy in the world is recovering, but the growth was mainly from inventory rebuilding.

Years over years, the economy of USA has grew up just 0.1% which is not that strong and keeping in mind about the last 3 months of 2008 USA output got worst by 1.9%. The expansion in the 4th quarter of 2009 may not last in 2010 as the major portion of the growth GDP has come from inventory rebuilding i.e. in 2009 the GDP had gone to 5.9% but 3.9 % was just from inventory rebuilding and once the demand is equilibrium the production is likely to slow down.

The US economy has lost 7.3 million jobs after the recession which had began in December 2007 and the promise which was made by politician to increase employment did not work out and they had the highest unemployment rate after 26 years.

The things got even worst when there was a low rate of interest which was disappointing the investors to deposit money in USA. The US economy will face a slowdown when the FED will exit from his unconventional policy easing, and they are required to increase rate to battle inflation.

The inflation rate in United States

In February 2010 the inflation rate of USA was 2.1%. It refers to the rise in price against the purchasing power. The measure of inflation can be done by consumer price index (CPI) and the GDP deflator which measure the whole of the economy.


Interest rate

Growth rate

Inflation rate

Jobless rate

Current account

Exchange rate

United states




9.70 %



The rise of 0.1% in consumer price index in USA

In March the cost of living had gone up, but the prices of food and energy were surprisingly unchanged indicating that the domestic inflation was recovering. Excluding the food and fuel the core rate was steady after the rise of CPI to 0.1% in February, reflecting cheaper clothing and housing. One of the reason why Federal Reserve policy makers kept the benchmark to interest rate zero because the absence of price pressure so that they can improve the economy.

US Inflation After the Recession of 2007-2009

To fight back the slowdown of the economy and credit crisis of 2007- 2009, the federal reserve had taken some action which had not been taken for last 50 years, the interest rates were cut down to nearly 0 and they enlarged their balance sheets by purchasing securities like treasury bonds. In the previous topic of monetary policy we had discussed the action taken by Federal Reserve.

There are many economists who believe that there is a relation between money supply and changes in the price level that is inflation, but as the relation between money and inflation is not accurate, few economists says that increase in money supply will not lead to increase in prices.

Many economists don't care about the short run they believe that when the economy is below its full capacity the monetary expansion will not result in inflation, but as they recover inflation is likely to increase.

The economy is 6% below is capacity in may 2009, in September 2008 after the collapsed of Lehman brothers the Fed had enlarged their balance sheet, doubling the money supply or we can say balance of trade in approximately 3 months as to control the problem of credit crisis they purchased assets. The expansion has only led to reasonable expansion as there is a very little effect on inflation.



According to the intercontinental exchange (ICE) the United States dollar stands at 81.07. in march the united states dollar index were trading at 80.3620 that means from the previous month dollar has been appreciated by .88%. Last year that is in 2009 the dollar was trading at 85.4300 and that has been depreciated by 5.10 % over that past 12 months. The US dollar is a benchmark for the other international currencies as it has to measure it performance with lots of countries.

The dollar of United States has gone up significantly against the euro if we see in the last few months. We may believe that the greenback i.e. the US dollar will recover in long term but after some time it may lose its position.

The recent fluctuation in US dollar and EUR has lots to do with the growth and interest rate in the area of US and euro. Firstly, the growth rate of euro was just 0.1%, while the United States grew up to 5.7% in the fourth quarter of 2009. The second thing is the Federal Reserve had signaled an exit strategy. Third, the fed surprisingly raised the discount rate from 25bp to 75 bp in the financial market. They are making the foreign investors more positive about the gains in the United States dollar holdings.

On the other side the US labour market is weak and will recover after September 2010 as the fiscal and monetary fades away. The fiscal instability of Greece, Spain and Ireland and pushed the euro to fresh new lows. A long time ago investors were concern about the rising fiscal deficient and national debt in the US which was depreciating the US dollar. Sooner or later the US will take the center stage of currency market due to the structural imbalance.


Money supply of United States

M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.

M1: The total of all physical currency part of bank reserves + the amount in demand accounts ("checking" or "current" accounts).

M2: M1 + most savings accounts, money market accounts, retail money market mutual funds, and small denomination time deposits (certificates of deposit of under $100,000).

M3: M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of Eurodollars and repurchase agreements.

In 2005 the Federal Reserve had announced that they would cease publishing of M3 and in March 2006 they explained that M3 did not convey any additional information about the economic activity compared to M2 and that M3 has done nothing in the process of monetary policy for few years. Some of the congress man has claimed that M3 is the best mode in creating new money and credit. If we use our sense we can say that by generating more amount of money the value of each dollar will depreciate.


The Federal Reserve on November 4, 2009 as reported that the US dollar monetary base or in UK term we can say Narrow money is $1,999,897,000,000. This is an increase of 142% in just 2 years. The monetary base which means the amount of money which is there in the economy is only 1 component of money supply, the M2 is the widest money supply which has increase approx. from $7.41 trillion to $8.36 trillion from November 2007 to October 2009 that means it has increase to nearly 12.9%

Purchasing power

The purchasing power of US dollar increase or decreased until the federal act of 1913 came into existence. From the time of 1913 the purchasing power of dollar has deprecated significantly "$1 in 1913 has the same buying power as $21.89 in 2010". It has lost nearly 95% of its value since the formation of Federal Reserve.

Reserve currency

The United States dollar is the most widely used currency all around the world and that's why it has been held as a reserve currency. In the last decades, average of the two thirds of the foreign exchange reserve of the countries has been in US dollars. This is why the reserve currency status is said to be the US dollar. It makes it easier to run higher trade deficit with a later economic impact.


Unemployment occurs when a person is available for work but is currently without work.

Types of unemployment

frictional unemployment :- this unemployment is caused by people moving between jobs e.g. graduates changing jobs

structural unemployment :- this is caused due to mismatch of skills in the market. It is caused by

(a). occupation immobility

(b). geographical immobility

©. Technological change

(d). structural change in the economy

3. Classical unemployment: - this is caused when wages in a competitive market is pushed above the equilibrium this is also called disequilibrium unemployment this is caused by minimum wages or trade unions.

4. Demand deficient or "cyclical unemployment:- this occurs when there is not enough demand to employ all those who wants to work. It is a type that Keynesian economist focused on. This is also called cyclical unemployment because it varies with trade cycle.

5. Natural rate of unemployment: - this occurs when there is low level of unemployment which economies faces a stable inflation rate.



Unemployment in USA

The main problem of unemployment in USA after global financial crisis was outsourcing. The outsourcing of American job to other countries has become a problem of a classic proportion a report shown on CNN documented that approx. 48,000 US job were outsource from January to march 2008 to other countries or were publicly announced as been schedule for outsourcing. It is how ever unclear that how many accounting, engg. , technical supports have moved offshore in recent years. For eg. If you have a customer service question for Toshiba computer u will be directed to an employ in India. Expert believes that as many as 200,000 service jobs could be lost for next 15 years.

There are many negative effects of unemployment like those who are unemployed can no longer support country's economy because they cannot purchase anything which they could purchase before. It also forces people in poverty.

After the global financial crisis president Barak Obama has given Americans the hope for the future. He has spoken about that he will extend unemployment benefits for the American who needs it. He has also spoken about the outsourcing of job by big multinational companies and he has said that he will provide companies incentive for keeping job in US.

This is the graph showing the worst years for job since the end of World War 2. This also shows after global financial crisis the unemployment rate has raised to 7.2%.



Americas unemployment structure after financial crisis

A sobering US labour department reported that the economy had lost 524,000 jobs in December and 1.9 million jobs after the credit crisis began in September. The unemployment rate raised to 7.2% after the credit crisis to 6.7% its highest rate since January 1983.

Underemployment at a record high

A growing number of workers finding full time job were only able to find part time work because they were unable to find full time jobs or there hours had been cut. This type of people number rose from 715,000 to 8 million since such record was kept in 1955.

The under employment rate in America which counts those people who are part time workers as well as those who don't have job rose to 13.3% from 12.2%.

Job losses wide spread after global financial crisis

Job losses spread like fire in wide variety of industries. Manufacturing lost 149,000 jobs the leisure and hospitality lost 22,000 jobs.

Professional and business services jobs a category seen by many people as an alternative for economic activity felt by 113,000.

Only 2 of 10 industry categorized were hiring, how ever government hiring stated relatively long through out the crisis. Government added 7000 jobs in December 2008. Education and health service also grew by 45,000 employees.

Structural unemployment in USA

Million of American job seekers are risking permanent unemployment as industries has gone into radical change and sum skills have become irrelevant.

Government data show that in September 5.4 million people and been out of work for more than 27weeks. This represented startlingly 35.6% of total of unemployment Americans.

These figure reflects that the jobs lost are probably lost for good and it high lights that unemployment is rising because structural change in economy. Peopling statying out of work for longer period of time have tend to lose their skills as workers compare to people who have been unemployed for shorter period of time.

This can hurt the American economy because the cause of maintaining unemployment could add to government burden as it tries to catch down a record $1.8 trillion budget deficit.

The current recession has been the longest since 1930 because it was due to the collapsed of the US housing market and the global credit crisis.

Called for stimulus

President barak obama has began his push for a massive stimulus plan which aims at creating and saving 3 millions job over the coming 2 years. Law makers have called for fast action to address the astonishing stresses facing the labour market and including spending of billions of dollars on new infrastructure project.


Unemployed persons by reason for unemployment


Table A-11. Unemployed persons by reason for unemployment Numbers in thousands

This figure shows us the unemployment rate in United States from 1890-2009

Unemployment rate as a percentage of the civilian labor force in the United States according to the U.S. Bureau of Labor Statistics, Coen and Romer.

International trade and America's place in global economy

World merchandise trade total $7.3 trillion in 2006 and trade in commercial services reached $1.8 trillion according to world trade organization (WTO). Despite America's dominance it is only 1 player in this larger global economy

According to US trade transaction 2005 goods exported totaled$ 713.8 billion in 2005 a $31.9 billion increase over 2004. There was seen an increase in trade with Asia excluding Japan it accounted to 385 of the growth.

The areas in which US international trade decline were telecommunication, equipment and civilian aircraft

Import by USA

Imports were totaled $1.26 trillion in 2005 and 8% increase in 2004. The value of petroleum import were increase by 29% which included 21% increase in the price of oil and 8% increase in the number of barrels imported. This data is according to international trade transaction 2005.

USA balance of trade

When a country sells his goods and services to consumer and other nations and when it buys goods and services from producers in other countries this is called import and export of products and the difference between them is called balance of trade.

The USA government knows what is the importance of having a surplus balance of trade but from the year 1976 till 2009 it has been deficit in their balance of trade. The United States have performed worst in its current account balance this also includes balance of trade as well as investment by foreign in US and government bonds. According to recent report china sold 760 billion government bonds of USA.

According to March 2005 a press release from the bureau of economy analysis the current account balance of USA reached a record deficit in 2006 of 665 billion this was a record 25.5% from the 2005 figure of 530.7 billion.

The US economy has been unable to stop such enormous and ever mounting deficit, but some economist are concern about the risk of this imbalances because the main reason why foreign country invest in united states Is because of the strength of the US dollar and if there is such large deficit in the balance of trade in USA the foreign investors may lose their interest and this can lead to interest rate going up.

America's international trading partners

Americas important trading partners are those countries with which the United states makes most of his trade as of December 2007 these countries accounted for 67.5% of US imports and 64.7%of us export in goods according to the US census bureau in foreign trade statistics.

Top 3 trading countries which trades with United States includes Canada ($329 billion), Japan ($179.9 billion), and Mexico ($173.7 billion).

By December 2010 the US trading partner and the value of their import and export are as follows

Americas trade agreement

The US government has long been part of free trade agreement with other countries which are also known as bilateral agreement and with group of countries which are known as trading blocs. Free trade means the facility to buy and sell goods across international countries with minimum tariff or other interferences.

Opponents to trading blocs argue that when strong countries like USA, Japan and countries of European Union negotiated agreement with smaller nations and with developing economies because of that they are left at unfair disadvantage because they are excluded from favorable term of agreement.

During the recession of 1970 the producers called for high tariff to protect them international competition, but now when there is a period of growth the companies are focusing on their own international expansion so because of that the push for free trade has gained a momentum.


Unites states, Canada and Mexico implemented the North American free trade agreement NAFTA on January 1st 1994. Agricultural products were an integral part of NAFTA the primary objective of NAFTA has been a complete elimination of barriers to trade among the 3 signing countries.

NAFTA has had a positive effect on the marketability of goods among the participating nation. Efficient production of goods in 1 country that exported to another country keep pricing fare and competitive as nation produce and export goods for which they are already have national resources.

America's international trade the future

Increasing the scope of NAFTA

Now spreading free trade remains the key objective of US government in 2009. In the early month of his administration president of America met with Quebec, Canada and agreed to build on the success of NAFTA by establishing free trade area stretching from the article circle to the tip of Chile. There has also been effort to include china in NAFTA but has produced limited result. US is also persuading free trade Asian countries through Asia pacific economic corporation APEC. it is an organization which promotes liberal trade and economic policy along the pacific rim.

Expanding trade with European Union

Humanizing stronger economic partnership with EU is also the priority of United States in future. Although the 2 treading giants have history of policy disagreements for e.g. The countries of EU have banned the import of genetically modified foods, because they are determine to avoid unforeseen dangers to public help and the environment while the united states says that the GM food for being cheaper, more flavor full and more resistance to disease. Seen 2002 the EU have developed "clear, transparent and stringent" system to regulate GM food, feed and plants.

In addition to disagreement over GM food the United States is also not happy with the European steel industry by imposing tariff on all steel imports. So these are the reasons which have led to disagreements between the two super powers.

So in future they r looking to resolve these issues so that they work together in future properly through which both of them can be benefited.

Monetary policy

The monetary policy in the USA is determined and implemented by the US Federal Reserve. It was established in 1913 to provide the central banking functions. It is an independent in the sense that they currently operate without official request to advice of any elected official with regard action of money supply and its method of funding. The president of FED bank is nominated by each banks respective board of directors.

The Federal Reserve has 3 main systems for manipulating the money supply. It can also buy or sell treasury securities. Now purchasing the treasury securities increasing the monetary ways (because it pays hard in exchange of securities).

Assuming a closed economy were foreign capital doesn't effect money supply were interest rate goes down so money supply increases, conversely were interest rate goes up money supplies fall increase the cost of capital and leading to more conservative spending and investment.

Significant effects of monetary policy

In 2005, the Federal Reserve held approx. 9% of national debt as assets again the liability of printed money. Experts are hopeful that other assets can also take place of the national debt to back Federal Reserve notes.

The US government receives income of issuing of currency. There are costs associated with maintaining the money supply. Many economist claims that the 95% of money supply in US is created by private banking system. The private banking system charges interest rate to borrowers as a cost to borrow money so without this borrowing system the open market operation would be unsuccessful in maintaining the broad money supply.

Goals of Federal Reserve

There goals are

high employment

sustainable growth

stable prices

Many critics believed that their monetary policy in united states have not achieved a sustainable growth under Federal Reserve.

Throughout the period of Federal Reserve the relative weight given to each of these goals have changed depending upon political development. The theories of Keynesianism and monetarism have had great influence on the implementation of monetary policy and this has changed the view of financial communities over the year.

The Federal Reserve has been unable to stick to his goals as:-

unemployment has experience significant increased despite the efforts of federal reserve e.g. black Monday and 2007 financial crisis

The growth of economy may not be sustainable as the overall ability of household has been declined and the household debt is consistently rising.

Monetary policy during the recession of 2007- 2009

According to FED chairmen Ben Bernanke said that the depression was longer then it would have been if the FED had adopted more aggressive policies. When the real estate bubble began to unfold there were problem seen in credit market which led to collapsed to Wall Street institution such as Bear Stearns and Lehman brothers that has led to Fed act aggressively.

The time line of the current crisis in the financial market started when there were problems at the Bear Stearns funds in June and July 2007, which led to economic growth slow down and because of this recession official started in December 2007 and in march 2008 Bear Stearns collapsed followed by Lehman Brothers in September 2008.

There are many ways by which we can think about Federal Reserve action the main tool which the Federal Reserve used during the crisis was to cut the federal funds rate. The Federal Reserve had raised its rates to 5.25 % in July 2006 and the rates remained the same until the 1st rate cut which was cut to 4.75% in September 2007. The Federal Reserve continues to cut rates 6 more times until the rates were down to 2% in April 2008. The Federal Reserve paused until the Lehman brother's crisis and after the crisis it cut it rate twice in October 2008 and again in December 2008. So this led to the rate reached between 0- 0.25%.

Fiscal policy of United States

As we see the history the United States government has spend more rather than what they take. The national dept was close to $1 billion in the beginning 20th century. This pattern was broken in fiscal years from 1970- 1997. Although the country was nominally was in peace during most of this time, the federal budget accelerated in absolute term at $290 billion for 1992.

In fiscal year 2008 the deficit increase to $455 billion and is projected to continue to increase dramatically for the years to come because of current recession and highest spending fiscal policy which federal government has adopted to tackle the nation economic problems.

Fiscal policy before and after global financial crisis

The United States was running into large fiscal deficit in late 1980 and in early 1990 the deficit came down significantly during the late 1990 and moved to surplus during 1998 -2001. Now with the rising entitlement spending and 2001- 2003 tax cut the fiscal deficit how ever remained low during the year 2002- 2007 because of the strong economic growth boosted revenue from the large corporate and financial sectors. While the cyclical factors such as dipping revenues due to the financial crisis and high stimulus spending have led to rising US fiscal deficit during 2009-2010. the deficit is suffering from structural problem like lose fiscal policy during the growth year, delayed tax and right reforms and lack of political power to tackle the deficit. With the ageing US population and the rising dept burden, the increase share of government expenditure will be allocated to interest payment and entitlement in the coming years which will reduce government productive investment and this will lead to crowding out private investment. After proving $787 billion fiscal stimulus package in February 2009, the capital of united state Washington will continue to implement smaller stimulus measures to support employment in near future. After the recovery is set the government must run a primary surplus by combination of higher taxes and spending cuts this might lead to weaker economic recovery by itself.

If the United States doesn't tighten the fiscal policy it will raise long term yields and pose a great risk in US dept rating.


We have understood that after the global financial crisis it has been a difficult time for US economy. The correction of excesses in the sector of the economy and financial market has been spilled over more broadly. Growth as slowed down and unemployment has increased both the borrowers and lenders are facing problems and due to this the function of financial market has been disrupted. At the same time inflation is also rising.

We believe that we will see a return to stronger growth, lower unemployment, lower inflation and improve flow of money supply in financial market in near future, but it will probably take time. We should also not lose sight of some fundamental strength of US economy. US market has proven too flexible and tough and are able to absorb shocks and they can quickly adapt change in circumstances.

Monetary policy has proven itself under wide variety of circumstances and it is very effective in recent decades. It is also effective in damping inflation when it is needed and also inspiring demand when it has been appropriate.

We can conclude by saying that USA were the first country to get affected by the global financial crisis but it has properly come up of its crisis in recent times and it is quickly trying to change its scenario so that people can again trust the American dollar and invest in United States of America.

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