Gross Domestic Product (GDP) is the measure of an economic growth of any given country. The United State of America is a consumer-based economy hence dependent on consumer spending. The factors of consumer spending are savings and investment, real interest rates, and level of employment in the country’s economy. The United State economy historically started functioning officially in 1929. There has been significant growth despite challenges like global economic pressure and other factors that tried to pull it down for about two decades. Constant growth of personal investment of 16% of GDP have been witnessed while public consumption and investment stood at 18% (Rachel 2015).
There has been an increase in retail sales as well as employment level after a long stagnation growth period. However, there is less growth in payroll than expected as well as unemployment remaining steady at 5% level. The trends aforementioned provides an easy avenue for predicting and forecasting the future economic outlook of U.S. GDP is expected to grow stagnantly while remaining at 3.28% for current year and 2.60% till it reaches the year 2020 in accordance with IMF and World Bank economic forecast estimation (Rachel 2015). Expectation is that both the interest rates as well as employment rate will hit 2.25% and 6.20% in 2020 respectively, which currently are 0.50% and 4.70% in the following order.
The government can employ two major policies that will automatically influence economic growth. Monetary policy which involves changing the interest rate thus affecting the supply of money. The government can lower the interest rates which increases spending thus increases economic growth however taking cognizant of the fact that reduced interest rates causes inflation increase. It can as well increase interest rate and lower the money supply hence discouraging spending. Fiscal policy entailing the government changing its spending and taxation in influencing aggregate demand. The government will lower its taxes thus increasing aggregate demand. On the other side, increasing taxation will culminate to decrease in aggregate demand hence decreasing government spending.
Monetary policy involves the increase or decrease of the money supply in the economy. It’s one of the practices that Central Banks of different countries use in manipulating factors concerning money supply in their respective economies. The manipulation of the monetary policy helps a country in the long-run if it wants the inflation rates are controlled in a better way. If the government does this, then it is in a position of controlling nominal variables which include, but not limited to; money supply, exchange rate, and inflation. The policy is a major determinant of goods being exported to other countries as well as imports from other countries thus affecting the net exports of a country hence determining its growth and profitability. An increase in money growth makes the inflation growth higher hence reducing money return rates as well as inducing a portfolio shift for real capital favor. In the long-run, it increases the capital stock and a higher level of output for each person.
When the real money balances and capital are performing complementary functions, they cannot act as supplementary for each other. The higher the monetary growth rate and inflation, the lower the capital accumulation contributing to the long-term growth rate. In economies where agents tend to employ money balances in financial consumption and investment characterized by cash in advance limits spending. On the other hand, when the money holding services are provided by the agents, higher inflation is usually depicted thus leading to lower output for every person in the long-run. It has been confirmed that the higher the inflation, the higher the capital stock hence raising the long-term growth rate. Therefore, high inflation rate of a given country reduces growth in the long-run.
The balance of trade has a collinear relationship with productivity and GDP. The GDP of a country is raised by trade surplus whereas lowered by trade deficits. There is no direct impact of trade surplus on productivity but it increases the productivity potential of which the vice versa is true to a trade deficit. Trade surplus is of great importance to countries that depend majorly on exports in driving economic growth. For instance, OPEC countries like Libya must rely on trade surplus for public funding programs. When the price of oil decreases in these countries, public funding is affected in a great milestone because it will lead to narrower trade surpluses culminating to public finances difficulties hence the creation of political risk in those countries.
Trade deficits are usually created when a country (economy) has incurred more imports than exports. There is a call for more regulation concerning imports upon the creation of the trade deficit. The country through its financial institutions impose more taxes and tariff on foreign goods coming from individual countries that come into the country. Through its agencies concerning trade, the government can review its agreements are honored and uphold with trading countries. On the other side of the coin, is trade surpluses which are goods created when exports override imports thus a country benefits from it enormously. A country has to ensure that it maintain its surplus through deploying different strategies. The government can buy more of its treasury shares to keep in check its trade balance and lower its inflation. The government through its strategic movements will create less money in the economy while pushing for more purchasing power for households to open new businesses which will increase the country’s GDP at the end. The adverse effects of deficits at times cause the government to increase stimulus package for injecting more money into the economy in an attempt to make up for the deficit. Additionally, the adverse effects of deficit increases the effectiveness of a country’s domestic product producing companies for borrowing and increasing productivity (Arjomand et al., 2016).
The importance of loanable funds and foreign currency exchange depends on the strategic plan of the country regarding effectuating economic derivatives. Strategic planning is the development of mission, goals, vision, and long-term objectives for business prosperity. Additionally, it encompasses tactics of venturing the market, resources required specifically the type and amount used. The way the resources are obtained as well as located are determined by the strategic plan put in place. The best way of helping the market solve these issues is by looking into loanable funds and foreign currency exchange importance. Capital flights implicates that large asset quantities or rather money leave the country thus capital outflow from the economy. It increases the demand for loanable funds which ultimately increase real interest rate.
The market provides the required amount of funds to enterprises which they use in purchasing the resources required in running the economy. Most of the organizations in the economy can depend on the two in meeting their financial obligations like loaning their clients in anticipation for higher interest pay at the end of the tenure (Aydin et al., 2016). Maintaining the liquidity of the firm is difficult without the help of loanable funds and foreign currency exchange. With the help of loanable funds as well as foreign currency exchange, conversion of other currencies to local currency is made simple hence the flow of trade. Capital requirement of the business is arranged in order due to the courtesy of loanable funds and foreign currency exchange which make the market players transact business without financial blockage. The real exchange rate determines the equilibrium to respond to the relative price of both domestic and foreign goods which ultimately affect the net exports. The net capital outflow links different economy markets in that the higher the domestic real interest rate giving rise to more attractive market.
Strategic planning can be achieved based on the above findings with relevant supporting reasons. In the context of the economy, a really practical strategic plan is attainable with regards to the above information of the economy such as tariffs, legislature, taxes, capital control and limitation on volumes which are constrained on the foreign capital in place. When a country continues to purchase its treasury and its currency, there has to be a government investment increment on exports which results in economic improvement. Furthermore, it leads to an end to a comprehensive monetary policy that raises interest rates as well as returns for both the treasury and currency exchange of which at the end add value to the investor. Additionally, the country can increase capital inflow by maintaining its currency while utilizing the integration of global finance as well as recent trends of economy. In an attempt to avert disaster, countries can implement certain steps in currency devaluation (Ehrhardt " Brigham 2016).
The recommendations concerning the money policy in long-run effects of economy vary for individual countries. For instance, United States of America can reduce trade restrictions that bar goods from entering the country. Such actions will increase in the US dollar amount as far as foreign currency exchange is concerned. Consequently, goods in local markets ultimately become so expensive that makes foreign goods cheap in balancing the trade. Therefore, restrictions on trade exports offsetting the initial effects of trade. As a result, there would be a profound effects on investors’ change of view with regards to country’s holding assets in ramifying the economy of the country.
Reference
Arjomand, M., Emami, K., " Salimi, F. (2016). Growth and Productivity; the role of budget deficit in the MENA selected countries. Procedia Economics and Finance, 36, 345-352.
Aydin, C., Akinci, M., " Yilmaz, Ö. (2016). The Analysis of Visible Hand of Government: The Threshold Effect of Government Spending on Economic Growth. International Journal of Trade, Economics and Finance, 7(5), 170.
Ehrhardt, M. C., " Brigham, E. F. (2016). Corporate finance: A focused approach. Cengage learning.
Rachel, L., " Smith, T. (2015). Secular drivers of the global real interest rate.
