Saturday, June 20, 2009

The US Economy


The largest and still the most important market in the world, the United States of America’s economy is driven by consumers but is troubled by high debt levels. The United States of America (US or USA) has the world’s largest economy. According to the CIA World Factbook, 2007 GDP is believed to be $13.84 trillion. This is three times the size of the next largest economy, Japan, which has a GDP of $4.4 trillion. US dominance has been eroded however by the creation of the European Union common market, which has an equivalent GDP of over $13 trillion, and by the rapid growth of the BRIC economies, in particular China, which is forecast to overtake the US in size within 30 years. The recent failure in the US housing and credit markets have resulted in a slowdown in the US economy. 2007 GDP growth was estimated at 2.2% but in 2008 it is projected to be just 0.9%, down from the 10-year average of 2.8% (see chart at end of article).

In common with most developed countries, Services is the key sector of the economy. In 2007, services made up 78.5% of GDP, industry 20.5% and agriculture less than 1%. Around two-thirds of the total production of the country is driven by personal consumption. Although the US is often referred to as a free market economy, this is not entirely true, since there are government regulations protecting certain sectors, notably energy and agriculture. It can be more accurately described as a ‘consumer economy’. Since the US economy is also the largest economy in the world, and the US consumer drives two thirds of the US economy, the US consumer is also a big driver of global economic activity.
The forces of supply and demand directly drive the price levels of goods and services. What to produce, and how much of it is to be produced depends on the price level fixed by the interaction of supply and demand. The role of government in the US economy is crucial when it comes to decision-making regarding monetary and fiscal policies. The federal government takes all the necessary initiatives to ensure the growth and stability of the United States. The US government makes full use of economic tools such as money supply, tax rates, and credit control, among other things, to adjust the rate of economic growth. For the most part, the US Federal Government also regulates the operations of private business concerns in order to prevent monopolies. The government renders a number of direct services in the form of providing support for national defense, monetary aid for research and development programs, and funds for highway construction & infrastructure in general. The question of national debt is a controversial one within the US. At the start of 2008, the US federal debt stood at $9.2 trillion. This is a worrying 67% of GDP and equates to $79,000 for each American taxpayer, a number just over 117 million people. To add to the concern, American consumers are also increasingly dependent on debt and have been re-mortgaging their houses to higher loan amounts, and using the extra cash to fund high street purchases. This debt figure is the largest in the world in absolute terms, but as a percentage of GDP it is less than Japan and similar to several European countries. Most of the debt is funded by central banks and sovereign wealth funds from Asia, Europe and the Middle East.

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