SCHOOL OF MANAGEMENT
ATW108 MACROECONOMICS
SEMESTER II, ACADEMIC SESSION 2022/2023
COUNTRY: UNITED STATES
Prepared for Dr Eliza Binti Nor
Group 1 member:
MATRIC
ACADEMIC
NUMBER
PROGRAM
LEE NGEE CHENG
161230
ACCOUNTING
2
IMRAN DHUHA BIN MOHD FADHIL
164356
MANAGEMENT
3
GOH WEN KAI
164074
ACCOUNTING
4
CHUAH CHEE XIAN
164214
MANAGEMENT
5
LEE JIA HEE
162158
ACCOUNTING
6
LEE ZI YING
162443
ACCOUNTING
NO.
NAME
1
Acknowledgment
Throughout this report preparation, we feel pleasure gaining knowledge and experience to
learn more about the United States' economic conditions. In completing our assignment, we have been
guided and consulted by our respected lecturer of ATW 108 Macroeconomics, Dr Eliza Binti Nor,
who deserves our highest gratitude and appreciation. Thank you, Dr Eliza Binti Nor, for giving us
lectures and detailed guidelines for completing the assignment.
Then, we would also express our appreciation to our coursemates and friends, who have lent
their helping hands to us throughout the preparation of this report. Without the help mentioned above,
we may face more problems and dilemmas, which may be a big challenge throughout the report
preparation.
Lastly, we would like to express our gratitude to our group members who are cooperative and
willing to contribute their best effort in preparing this report. With the valuable suggestions and
participation of the group members, we felt motivated to complete the assignment while trying our
best to boost the report’s quality.
i
JOB DESCRIPTION TABLE
TEAM MEMBER
JOB DESCRIPTION
●
Economic Analysis of GDP & Productivity
●
Recommendation of GDP & Productivity
●
Introduction & Conclusion
IMRAN DHUHA BIN
●
Economic Analysis of GDP & Productivity
MOHD FADHIL
●
Recommendation of GDP & Productivity
●
Introduction & Conclusion
●
Economic Analysis of Inflation & Unemployment
●
Recommendation of Inflation & Unemployment
●
Data Collection & Chart/Graph
●
Economic Analysis of Inflation & Unemployment
●
Recommendation of Inflation & Unemployment
●
Data Collection & Chart/Graph
●
Economic Analysis of Savings & Investment
●
Recommendation of Savings & Investment
●
Table of content, Appendix, References, Revise &
LEE NGEE CHENG
LEE JIA HEE
LEE ZI YING
GOH WEN KAI
Checking
CHUAH CHEE XIAN
●
Economic Analysis of Savings & Investment
●
Recommendation of Savings & Investment
●
Table of content, Appendix, References, Revise &
Checking
ii
Table of Contents
TITLES
PAGES
Acknowledgement
i
Job Description Table
ii
Table of Content
iii
1.0 Introduction
1
2.0 Gross Domestic Product (GDP) and Productivity
1-6
2.1 Economic Analysis of GDP & Productivity
2.2 Recommendation of GDP & Productivity
3.0 Inflation and Unemployment
6-11
3.1 Economic Analysis of Inflation & Unemployment
3.2 Recommendation for Inflation & Unemployment
4.0 Savings and Investment
11-15
4.1 Economic Analysis of Savings & Investment
4.2 Recommendation for Savings & Investment
5.0 Conclusion
15
6.0 Appendix & References
16-25
iii
1.0
Introduction
The United States of America, also referred to as the United States (US) or America, is an
independent nation made up of 50 federal states, five significant autonomous regions, and nine minor
outlying islands. The nation is situated in North America and is bordered by the Pacific Ocean to the
west, the Atlantic North Ocean to the east, Canada to the north, and Mexico to the south. As of July
2022, the USA has over 332 million diverse individuals that make up the population of the country
(United States Census Bureau QuickFacts, 2022).
According to the United Nations Statistics Division (n.d.), the US boasts the largest economy
in the world by nominal GDP, which is strongly characterised by its highly developed infrastructure,
skilled labour force, and its advanced industries. The finance, industrial, healthcare, and technology
industries are just a few of the many industries that propel the US economy. The nation's financial
system is highly established, with the New York Stock Exchange (NYSE) being the biggest stock
market in the entire world. Besides, the US manufacturing industry is also a major industry that
contributes to the US economy, as the nation is a major manufacturer of electronics, automobiles and
aerospace gear. The information technology industry is also another major contributor to its economic
growth in the past few years with Silicon Valley in California being the centre of innovation of many
tech companies. With some of the top pharmaceutical businesses and medical research institutes in the
world located in the US, the healthcare industry is another significant component of the economy.
Even so, in the past few years, the United States economy has faced a variety of challenges,
such as increasing income inequality, stagnant wage growth and the effects of globalisation that
hugely impacts its manufacturing sector (Credit Suisse, 2021). The recent COVID-19 pandemic had
also substantially affected the economy, resulting in widespread unemployment and supply chain
disruption.
The US government took initiatives in addressing these issues through a variety of policies,
including tax reforms, domestic manufacturing promotion initiatives, and stimulus programmes to
boost economic development and job creation. The government also continuously works to sign free
trade agreements with other countries to boost economic expansion and competitiveness.
2.0
Gross Domestic Products and Productivity
Gross Domestic Product
Gross Domestic Product (GDP) refers to the overall monetary value of all the goods and
services produced within a country's borders during a specific period, typically a year
(Fernando, 2023). GDP is a commonly used indicator of a country's economic health and is often
1
used to measure the standard of living within that country. This is because it provides insight into the
economy's scale and growth rate over time by measuring the total output of a country. (OECD, 2022)
However, real GDP is a better measure of economic growth because it takes into account
changes in the general level of prices, while nominal GDP does not. Real GDP already removes the
inflation effect, so it provides a more accurate measure of the number of goods and services produced
instead of the monetary value of goods and services produced (Clemon, 2022). Hence, it will allow
economists to better understand the growth or contraction of a country's economy over time.
Productivity
Productivity refers to the amount of output or goods and services produced by a given
amount of input or factors of production, such as labour and capital (Kenton, 2022). Usually,
higher productivity will lead to higher economic growth in a country as it indicates that the country
can generate more output with the same level of resources or produce the same amount of output
while utilising fewer resources. Hence, higher productivity can lead to higher wages and profits and
eventually contribute to higher standards of living in a country. (Investopedia, 2009)
Usually, labour productivity growth rate, which is the growth of
Gross Domestic
Product (GDP) per hour worked, is often considered a more direct and easy-to-measure
indicator of productivity growth and it is often used as a key indicator of competitiveness and
economic performance (Krugman,1994). Not only that, the labour productivity growth rate can also
measure how efficiently an economy is using its labour resources to produce goods and services and is
more directly linked to changes in the standard of living of workers and the overall economic growth
of a country. Hence, the labour productivity growth rate is more suitable to represent the economic
growth of a country.
2.1
Economic Analysis of GDP & Productivity
GDP Trend Analysis
Based on Table 1.1 and Graph 1.1, both the nominal GDP and real GDP of the United States
show an upward trend from 2017 to 2019, increasing from 19.48 trillion dollars in 2017 to 21.38
trillion dollars in 2019 and from 18.92 trillion dollars in 2017 to 19.93 trillion dollars in 2019,
respectively. Strong consumer spending has been the main driver of growth in both nominal and
real GDP in the US from 2018 to 2021. According to economist Mitra Toossi, consumption
expenditures makeup over 60% of the U.S. GDP. (Mitra Toossi, 2002) Based on the U.S. Bureau of
Labor Statistics, US consumers' average annual expenditure grew by approximately five percent, with
an average annual growth rate of 2.5%. (CRS, 2022) Thus, this contributes to the consistency of the
growth of nominal and real GDP.
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However, in 2020, the nominal GDP and real GDP of the US show a downward trend,
decreasing 1.5% and 2.76% compared to 2019 respectively. The GDP of the US decreased in 2020
due to the COVID-19 pandemic. According to the Washington Post, the U.S. economy was severely
impacted by the coronavirus pandemic, leading to significant damage to factories, businesses, and
households. The pandemic caused the closure of many businesses, loss of jobs, and reduction in
consumer spending, which resulted in a decrease in both nominal and real GDP in the United States.
(Rachel Siegel, Andrew Van Dam and Erica Werner, 2021)
In 2021, nominal GDP increased from 21.06 trillion dollars to 23.32 trillion dollars, along
with real GDP which increased from 19.38 trillion dollars to 20.53 trillion dollars. The recovery of
the US GDP from 2020 to 2021 can be attributed to several factors, including the restoration of
domestic spending as people regained confidence in returning to pre-pandemic activities, the
significant amount of fiscal stimuli from the government, such as the $900 billion stimulus
package, and the revival of gross fixed capital, leading to high domestic demand (Milesi-Ferretti,
2021).
Productivity
Referring to the table and graph, the US labour productivity growth rate showed a slight but
consistent increase from 2017 to 2019, with an increase from 0.9% in 2017 to 1.22% in 2019. The
major event that led to this trend is the low rate of startup and firm exits, which has been persistent
since 1981. High-potential startups are more advanced, and they have a disproportionate impact on
driving productivity (Ritchie & Swisher, 2018). The low rate of startup and firm exits will discourage
the invention and innovation of technology that increases productivity. Hence, the US labour
productivity growth rate only shows an upward trend.
In 2020, US labour productivity shows outstanding growth which increased by 3.41%
compared to 2019. The pandemic-induced lockdowns caused a significant shift in the industry mix
of the US economy. Hence, this resulted in a decrease in low-productivity contact services such as
restaurants and hotels, while high-productivity work-from-home industries such as information
technology and financial services experienced an increase (Belsie, 2022). As a result, there was a rise
in productivity growth.
The labour productivity growth rate shows a downward trend which decreases from 3.41%
in 2020 to 1.2% in 2021. The ongoing supply chain disruptions and shortages of key inputs, such
as semiconductors and raw materials, are considered to be major factors that may have led to the
decrease in labour productivity growth. Records from The White House show that historic lows in
3
both economy-wide and retail-sector inventory-to-sales ratios suggest that many retailers are facing
insufficient inventory of their products, leading to a chain reaction in industrial supply chains. (Susan
Helper and Evan Soltas, 2021) The latest U.S. Census Small Business Pulse survey conducted in 2021
reveals that delays with domestic suppliers were encountered by 36 percent of small businesses,
especially those in the manufacturing sectors. As a result, the labour productivity growth rate
experienced a significant decline in 2021.
Actions taken by the government and its justification
To achieve a sustainable economic growth rate of over 3%, President Donald Trump
implemented new tax laws, including the 2017 Tax Cut and Jobs Act (TCJA), which involved a
reduction in the corporate income tax rate. The TCJA permanently lowered the corporate tax rate from
the previous high of 35% to a flat rate of 21%. The primary objective of the TCJA was to encourage
investment, increase the productivity of workers, and ultimately boost output and wages through
lower business and corporate tax rates, new domestic investment incentives, and measures to prevent
international profit shifting. According to Stephen Stanley, the chief economist at Amherst Pierpont
Securities, also anticipates a surge in business investment and further productivity growth with the
implementation of the investment-friendly tax reform and expects the productivity growth to approach
historically normal levels.
However, according to William G. Gale and Claire Haldeman's Brookings Economic Studies
program, the TCJA had a negligible impact on business investment up until 2019. The study
discovered that the investment reaction did not always correspond with a supply-side response. Much
of the investment growth was concentrated in the oil and related sectors in response to increasing oil
prices, rather than lower tax rates. Moreover, the growth in investment in equipment, structures, and
intellectual property did not correspond to variations in the corporate tax rate. The kinds of capital that
received the most significant tax reductions experienced the least growth in investment. (William G.
Gale and Claire Haldeman, 2022) Moreover, according to the US labour productivity annual growth
data, the labour productivity growth rate only increased slightly from 2017 to 2019. Hence, we
conclude that the 2017 Tax Cut and Jobs Act (TCJA) may not be a sensible approach to increasing
real GDP and productivity.
In 2020, the U.S. real GDP shrank by 2.76 percent due to the coronavirus pandemic. To
address the resulting economic crisis, President Biden signed a $1.9 trillion coronavirus relief
package in 2021. This plan includes direct payments of up to $1,400 to most Americans, an extension
of a $300 per week unemployment insurance supplement, an expansion of the child tax credit, and
funding for vaccine distribution. According to Wendy Edelberg and Louise Sheiner, this plan is likely
to boost economic activity and raise the level of real GDP by approximately 4% and 2% in 2021 and
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2022 respectively. (Edelberg, W., & Sheiner, L, 2022) The rationale of this expansionary fiscal policy
is to increase the aggregate demand of the U.S. and, thereby, raise real GDP.
According to data from The World Bank, the real GDP of the U.S. increased by about 5% in
2021, demonstrating the effectiveness of the coronavirus relief package in promoting economic
growth. However, expansionary fiscal policy alone cannot replace the fundamental drivers of
long-term economic prosperity, such as the accumulation of capital stock, increases in labour inputs
(such as workers or hours worked), and technological advancement (YiLi, 2015). Furthermore, if
expansionary fiscal policy is used for an extended period, it can lead to high inflation rates that may
harm economic growth. High inflation rates can discourage investment by increasing uncertainty,
raising interest rates, and reducing savings, ultimately damaging productivity. According to Michael
Strain, the recent rescue package implemented in 2021 has contributed to the increase in the inflation
rate by approximately 3 percentage points (Michael Strain, 2022). In conclusion, the coronavirus
relief package is a useful short-term measure to boost economic growth and real GDP but
excessive reliance on expansionary fiscal policy will harm productivity and economic growth in
the long run.
2.2
Recommendation for GDP & Productivity
The United States has always been at the technological forefront from the 19th century until
the 21st century and its technological advancement has contributed to nearly half of the US economic
growth since the end of World War II (The National Bureau of Economic Research, 2019). Even so,
the United States Chamber of Commerce (2020), reported that there is a shortage of qualified people
within the tech industry. This scarcity may cause enormous job vacancies and hinder the advancement
of new technology, which may ultimately reduce the industry's ability to stimulate the US economy.
The report also suggests that the US government should invest in training programmes and
education to produce more skilful labour in the tech industry.
To produce skilful labour in the tech industry, the US government must increase its allocation
for STEM education. STEM education is an education that is centred around science, technology,
engineering and mathematics. To provide children with the knowledge and skills they need to work in
the tech industry, the US government should raise funding for STEM education initiatives in schools.
This might involve taking efforts to make computer science courses, developing robotics programmes,
and making coding classes more widely available. Additionally, the US government should also
expand its vocational education that focuses on technology utilisation such as cybersecurity, financial
technology and data analytics.
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Besides investing in education, the US should also incentivize its technical R&D. There are
a plethora of ways in which the US government can invest in its R&D. One such method is through
enacting more statutes that help to create an efficient environment towards R&D activities. Statutes
may sometimes hinder the process of innovation, which may also deter companies from making R&D
investments. While still preserving public safety and environmental protection, policymakers might
think about simplifying laws to make it simpler for entrepreneurs to introduce new items to the
market. Although the US had already introduced the CHIPS and Science Act 2022, which allocates
$52.7 billion for R&Ds that are related to semiconductor and loosen a few regulations for
semiconductor production companies, it is still essential for the government to enact laws in the future
to ensure its spot as the leading nation for technological development.
Consequently, R&D investments enable businesses in the US to develop new products
and improve their production process. This leads to an increase in productivity in the United States.
According to the Organisation for Economic Co-operation and Development (2021), R&D
development played a positive role in increasing productivity for both developed and developing
nations. Investing in R&D also allows the US to maintain its position as a technologically forefront
nation. Additionally, developed R&D empowers the US to innovate and produce more advanced
technology. As a result of increased technological innovation and production, the US will be able to
attract more foreign investments, which in turn, increases its GDP.
3.0
Inflation and Unemployment
Inflation
Inflation is a rise in the general level of prices. (McConnell et al., 2021) The objective of
measuring inflation is to determine the total effect of changes in price for a variety of goods and
services. It is frequently stated as a percentage. Inflation can be translated as reducing the purchasing
power of the buyer to a range of goods and services over a period of time. This implies that as a result
of price increases, consumers will purchase fewer goods and services for the same amount of money.
On the other hand, deflation is characterised by a drop in prices and an increase in buying power.
(Fernando, n.d.)
According to economists’ general agreement, sustained inflation happens when a country
faces an imbalance between the growth of the money supply and the growth of the economy. Prices
increase and purchasing power decrease as a result of people trying to spend their money on more
products and services. In short, the common public’s cost of living is affected by this loss of
purchasing power, which eventually slows down economic growth.
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Unemployment
Unemployment consists of every noninstitutionalized person age 16 or older who is not
employed but who wants to work and is actively seeking employment. (McConnell et al., 2021)
The unemployment rate is the most widely used indicator of unemployment. It is calculated by
dividing the number of unemployed individuals by the total labour force. Unemployment is regarded
as an important indicator of economic health. The higher the unemployment rate the lower the total
economic output or country’s productivity. People who leave the workforce for other reasons, such as
retirement, higher education, or disability, are not included in the unemployment rate. There are four
types of unemployment - Frictional Unemployment, Cyclical Unemployment. Structural
Unemployment, and Institutional Unemployment. (Hayes, n.d.)
3.1
Economic Analysis of Inflation and Unemployment Rate of United States
Inflation Rate and Unemployment Rate Trend Analysis
Table 2.1 and Graph 2.1 show the inflation and unemployment rate of the United States from
the year 2017 to 2021. Based on the data shown, from 2017 to 2021, the inflation rate increased by
0.3%, from 2.1% to 2.4% while the unemployment rate decreased by 0.5%, from 4.4% to 3.9%. From
2018 to 2019, the inflation rate decreased by 0.6%, from 2.4% to 1.8% while the unemployment rate
continued to drop from 3.9% to 3.7% about 0.2%. Moreover, the inflation rate continued to decline by
0.6%, from 1.8% to 1.2% while the unemployment rate increased significantly by about 4.4%, from
3.7% to 8.1% in the year 2019 to 2020. Ultimately, the inflation rate decreased by 2.8% from 8.1% to
5.3% while the unemployment rate gradually grew 3.5% from 1.2% to 4.7% between 2020 and 2021.
In conclusion, the inflation rate peaked at 8.1% and bottomed out at 3.7% while the unemployment
rate hit its highest level at 4.7% while its lowest level was 1.2%.
Phillips Curve - Consistent and Inconsistent Between Inflation and Unemployment
In the United States, the inflation and unemployment rates in the year 2017 were 2.1% and
4.4% respectively. In the year 2018, the inflation rate increased to 2.4% while the unemployment
rate decreased to 3.9%. Based on the data, the trend is consistent with the trade-off theory between
inflation and unemployment, as an inverse relationship between the two. The significant event that
contributed to the trend was the incident of tariffs and trade war. In 2018, the United States
government imposed tariffs on various imported goods, including steel and aluminium, which in turn
increased the prices of goods that depend on those materials. Similarly, tariffs on Chinese imports led
to higher prices for a variety of consumer goods and eventually increased the inflation rate. By
making foreign imports more expensive, this increased demand for American-made products and thus
led to higher employment rate in those industries, which in turn decreased the unemployment rate.
(The 2018 Trade War: Consumers Are Paying a High Price, 2019)
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In the year 2019, the inflation rate decreased to 1.8% while the unemployment rate also
decreased to 3.7%. Based on the data, the trend is inconsistent with the trade-off theory between
inflation and unemployment, as it showed a direct relationship between the two. The major event that
contributed to the trend was the implementation of the Tax Cuts and Jobs Act (TCJA) at the end
of the year 2017. The amendments of TCJA included reducing individual tax rates and reducing the
corporate tax rate from 35% to 21%. The full effects of TCJA had been felt even in 2019 and has
helped to accelerate job growth by 1.3 percentage point. (Anil Kumar, 2019) However, the inflation
rate in the same year has declined because of other factors that are influencing the overall trend,
including the lower energy prices. According to the State Energy Data System (SEDS), U.S. energy
expenditures dropped to $1.2 trillion in 2019, 5% less in real terms than 2018. Additionally, U.S. per
capita energy expenditures were $3,728 in 2019, a 6% decrease from 2018. Thus, the decline in
energy expenditures contributed to a reduction in overall inflation. (U.S. Energy Information
Administration, 2021)
In the year 2020, the inflation rate decreased to 1.2% meanwhile the unemployment rate
increased to 8.1%. Based on the data, the trend is consistent with the trade-off theory between
inflation and unemployment, as an inverse relationship between the two. During the year, the major
event of the COVID-19 pandemic marks a historically negative shock to the world economy and is
associated with economic shutdown in the whole world including U.S.. The massive lockdown in the
U.S. had a huge effect on demand for social activities like dining out, travelling, and tourism. In
consequence of these, the overall consumer spending has decreased, causing the aggregate demand
and the inflation rate to decrease. Moreover, the massive lockdown during the pandemic also caused
a high unemployment rate in 2020. According to the Bureau of Labor Statistics, the U.S. economy lost
22.4 million jobs in March and April of 2020, with an unemployment rate of 14.8% in April 2020.
In the year 2021, the inflation rate increased to 4.7% meanwhile the unemployment rate
decreased to 5.3%. Based on the data, the trend is consistent with the trade-off theory between
inflation and unemployment, as a negative relationship between the two. The major event which
resulted in the trend was the supply chain disruptions. Port congestion brought on by an inability to
unload ships and obtain trucking services was a related factor. Product delivery delays led to
significant supply shortages and upward price pressure. According to U.S Bureau of Labor Statistics,
gasoline prices rose nearly 50%, food prices rose 6.3%, and rent prices rose 3.3% from December
2020 to December 2021. As a result, to consume the same amounts of each, consumers would need to
pay more. (Exploring Price Increases in 2021 and Previous Periods of Inflation : Beyond the
Numbers: U.S, 2022) On the other hand, the U.S. labour market shows improvement but still not fully
recovered. Employment in transportation and warehousing sectors continued to increase in 2021.
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(Ramos, n.d.) These sectors affected by COVID-19 are exerting substantial efforts to recover the
unemployment rate in the United States.
Action taken by the government and Justification
In March 2018, the United States government imposed tariffs of 25% on foreign-made steel
and 10% on aluminium imports from various countries, including China, Canada and Mexico, citing
national security concerns. (The 2018 Trade War: Consumers Are Paying a High Price, 2019) This
mainly to provide protection to the local steel and aluminium industry, support the industry to grow
and create more job opportunities. However, in reality, this move is interpreted as inviting retaliation
against American exports. According to Sen. Roy Blunt, a member of the Republican leadership,
materials like aluminium sheet that is the core component in making boats are not available in the
U.S. and need to be imported. Hence, tariffs on steel and aluminium will cause an accelerated increase
in prices of manufacturer products that rely on steel and aluminium. According to economist Christine
McDaniel of George Mason University’s Mercatus Center, the tariffs on steel and aluminium will
raise the cost of goods manufactured of these materials, which in turn will increase the production
cost for the local manufacturers. Consequently, instead of protecting the local steel and aluminium
industry, the tariffs imposed on steel and aluminium burdened the local manufacturing sectors that are
relying on these materials. (Lynch & Paletta, 2018) In short, the imposition of tariffs on steel and
aluminium undertaken by the U.S. government increased the overall inflation rate and may
eventually cause an increase in the unemployment rate in future years.
Coronavirus Aid, Relief, and Economic Security (CARES) Act, which President Biden
signed on March 27, 2020, extended unemployment benefits to self-employed individuals and
independent contractors, and provided an extra $600 per week for those who lost their jobs due to
COVID-19. It also included a one-time cash payout of up to $1,200 per person and $500 per child for
qualified Americans. (Unemployment Insurance Relief During COVID-19 Outbreak, n.d.) This action
is crucial to be taken to support businesses during the pandemic away from shutdown and avoid
cutting labour costs in order to lower the unemployment rate. In addition, the Paycheck Protection
Program (PPP), which provided forgivable loans to small businesses to cover payroll costs.
(Assistance for Small Businesses | U.S. Department of the Treasury, n.d.) According to the Small
Business Administration (SBA), over 5.2 million loans were approved for a total of over $525 billion
in funding to a wide range of businesses, especially small businesses hit the hardest by the pandemic.
Furthermore, the American Rescue Plan, signed into law in March 2021 by President Biden,
extended and increased unemployment benefits for those affected by the pandemic. The plan also
offered specialised aid to hard-hit sectors like airlines and restaurants. These strategies and
programmes implemented by the government during the COVID-19 pandemic had reduced the
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inflation rate and controlled unemployment rate in order to alleviate the economic impact of the
pandemic in the United States.
3.3
Recommendations for Inflation and Unemployment
Monetary Policy
Monetary policy is a set of tools used by a nation's central bank to promote economic growth
through controls on interest rates and supply of money. (Rathburn, 2023) This policy is to help to
better regulate the nation’s inflation and unemployment rates. In order to slow down the economy in
the United States, the Federal Reserve (Fed) could adopt contractionary monetary policy, either
by limiting the amount of money in circulation or by raising interest rates to combat inflation. Since
the majority of workers' pay has not kept up with inflation, households' buying power is severely
reduced, this policy change is expected to reduce the rate of growth in consumer spending, slow
inflation, and lessen the burden on supply chains. Government could implement a tight monetary
policy to address the current inflation issue, but that would increase unemployment. They were unable
to perform both simultaneously. (Hodge, 2022)
On the other hand, expansionary monetary policy should be applied to lower the
unemployment rate. When the interest rates are low, borrowings increase. Families tend to borrow
the money for expansion, especially in purchasing costly items such as properties and vehicles. Such
huge expenditures stimulate enough demand and promote economic growth. Businesses are also
prone to apply for loans to expand their operations. This eventually gives them the financial capital to
hire more workers to handle the escalating demand. In consequence, more job opportunities occur and
this encourages job growth and aids in reducing unemployment rate. (Rasure, 2021)
Fiscal Policy
Fiscal policy refers to the use of government spending and tax policies to influence economic
conditions, including aggregate demand for goods and services, employment, inflation, and economic
growth. (Hayes, n.d.) The United States government should practise contractionary fiscal policy
in the face of mounting inflation. To contract the economy, the government should either raise taxes
or cut its spending to reduce the money spent by consumers and companies. Higher tax rate charged to
the consumers and companies resulted in lower disposable income, lower aggregate demands, lower
profits and thus reduced the inflationary pressures. In terms of government spending, the lesser
spending on government projects, the lesser money that goes into household pockets. Hence,
consumers spend less, which results in a drop in aggregate demand and the inflation rate. (Fiscal
Policy, Economic Lowdown Podcasts | Education | St. Louis Fed, n.d.)
On the contrary, to lower the unemployment rate in the United States, the government
should pursue expansionary fiscal policy. Tax rates should be reduced and government spending
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should be increased. Tax reductions enable consumers as well as businesses to keep more income and
spend more. As the demand for goods and services increases, the companies will expand their
businesses and create more job opportunities. Moreover, the increase of government investment on
projects like the construction of new bridges and highways is creating job opportunities as well. It
may create a multiplier effect by causing a further rise in demand as more people are employed and
the economy has grown. (How Does Government Spending Affect The Economic Growth, 2022)
4.0 Savings and Investment
Savings
Savings are the money or funds which remain after subtracting a person's consumer spending from
their disposable income during a specific period. Thus, savings are what's left over after all bills and
commitments have been fulfilled for an individual or household. Besides, savings can be in the form
of cash or cash equivalents and are used to store savings since they carry no danger of loss but also
offer very low returns. Savings can increase through investing, but doing so involves putting money at
risk. People save their earnings for different purposes as well, such as retirement and emergency
funds. Without savings, a person may have the risk of falling into debt or bankruptcy when he/she is
facing financial problems which happen out of the blue. (Kagan, 2022)
Investment
According to the Consumer Financial Protection Bureau (CFPB), an investment is “something you
spend money on that you expect will earn a financial return.” In general, an investment is a valuable
item or an asset bought with the intention to increase one's wealth. For example, stocks, bonds, and
other financial instruments are frequently included when discussing investments, and assets like real
estate, works of art, collectibles, and even wine are also frequently mentioned. Investing generally
comes with dangers, but for numerous investors around the world, those chances have consistently
paid off. (Eric, 2021)
4.1
Economic Analysis of Savings and Investment Rate of the United States
Trend Discussion
Based on Table 3.1 and Graph 3.2, the investment keeps increasing from 2017 to 2019, with
the rate increasing from the beginning 20.8% to 21.3%. While the savings rate was increasing steadily
by 0.1 % from 2017 to 2019, from 19.6% to 19.8%. In 2020, the investment dropped from 21.3% to
21.1% and remained unchanged in the following year, 2021. On the other hand, the savings rate has
dropped from 19.8% in 2019 to 19.4% in 2020. Then, the savings rate fell to 18.1% in the following
year, 2021. Overall, the direction and growing pattern of savings and investment have a direct
11
relationship, which means they both go up and down in the same direction during the period from
2017 to 2021.
Trend & Major Events- Same Direction - Raise (2017-2019)
From 2017 to 2019, the trend of savings and investments in the United States was growing
steadily and in the same direction. To explain this trend, there are some significant economics from
2017 to 2019. The first one is the return on economic growth in the year 2017. The statistics point to
the fourth quarter of 2017 showing three consecutive quarters of real GDP growth of over 3%. That
would be the first such three-quarter-long streak in fourteen years. (Dorfman, 2017) This huge
economic growth lowered the unemployment rate and inflation, thus making everyone's real incomes
increase. Hence, people have more choices other than consumption, which is investing or saving. The
positive economic growth in the U.S. has brought confidence in the U.S. economy.
Confidence in the U.S. economy also contributed to the increment in savings and
investments during the period. Their major factor brings to this trend is that many investors were
optimistic about the future of the U.S. economy in 2017 as they anticipated continued economic
growth and low inflation. The Dow Jones Industrials gained more than 25%, the S&P 500 rose 20%,
and the Nasdaq increased nearly 30%. (Egan, M., & Wiener-Bronner, D., 2017). The stock market
was driven by factors other than tax cuts, such as corporate profits, global economic expansion, and
low inflation. According to the World Bank, the inflation between 2017 to 2019 is stable which is
around the range of 2% only. The low inflation rate together with the continued economic growth
made 2017 the best year for the market since 2013. As a result, people have more incentives to invest
and save because the risk is predicted to be lower than the benefits. Hence, the investment and savings
activities in the U.S. from 2017 to 2019 were boosted.
Trend & Major Events- Same Direction - Fall (2019-2021)
The trend of savings and investments in the United States was dropping slowly from 2019 to
2020 and dropping fast from 2020 to 2021. There are some major events happening from 2019 to
2021 that can explain these trends. The Covid-19 pandemic did have a significant impact on savings
and investments in 2020. The economic disruptions caused by the pandemic led to increased market
volatility and many individuals and businesses facing financial challenges. In the early months of the
pandemic, the stock market experienced significant declines, causing many investors to see a
decrease in the value of their portfolios. This led some investors to sell off their investments, which
further contributed to market volatility.
Besides, the Covid-19 pandemic also had an impact on retirement savings. The Corona Virus
Disease 2019 (COVID-19) is an infectious disease caused by a novel virus affecting the human
12
respiratory system. A report by McKinsey stated that almost one-fourth of households reduced their
expenditure, and around 36% of people reduced their savings because of COVID-19 (Mckinsey,
2020). Many individuals saw their retirement savings decrease in value due to market volatility
and decided to take out their savings. Additionally, some individuals were forced to dip into their
retirement savings to cover expenses during the pandemic.
In 2017, the United States originally introduced the Tax Cuts and Jobs Act (TCJA) in the
115th United States Congress and its effects continued to be felt in 2019. It changed deductions,
depreciation, expensing, tax credits and other tax items that affect businesses. This side-by-side
comparison can help businesses understand the changes and plan accordingly (IRS, 2022). Since the
TCJA was enacted, corporate tax revenue has been down from its projected level by about one-third,
even as pre tax corporate profits have continued to rise toward historic highs. Besides, business
investment has been declining since the TCJA was signed. Factory closings and mass layoffs have not
ended. Wage growth is tepid, despite the continuation of the economic expansion that began 10 years
ago, and gross domestic product (GDP) growth is slowing and projected to revert to its long-term
trend or below (Galen Hendricks and Seth Hanlon, 2019).
Actions taken by The Government and its justification
The United States government has implemented a few policies and changes on the current act
that brings positive impact for the investment and savings activities. In December 2019, the SECURE
Act 2019 (The Setting Every Community Up for Retirement Enhancement Act of 2019) was
approved by the Senate on Dec.19, 2019, as part of an end-of-year appropriations act and
accompanying tax measure. This act was signed into law on Dec. 20, 2019. The important key
takeaways of the SECURE Act include easing the process for small business owners to create "safe
harbour" retirement plans that are less expensive and simpler to manage, enabling many part-time
employees to get qualified to join an employer-sponsored retirement plan, which the requirement is
lower than 401K plans. (Kurt, 2022)
Before the SECURE Act, the 401K plans allow employers to contribute funds to retirement
accounts for their employees. But not many of the employees in the U.S. participate in the plan. U.S.
officials now understand that higher levels of saving lead to more investment and quicker growth,
but legislation to promote higher levels of personal saving has failed to reverse a severe declining
trend. Hereby, the SECURE Act has been executed as a legislation approach to achieve a higher level
of savings, and boost the economic investment. In addition, it is more approachable for the employee
to participate since the requirements are lower compared to the 401K plan. Hence, the SECURE Act
is indeed a better retirement enhancement policy to motivated public to plan their retirement plan
through savings and also increase the savings rate in the U.S.
13
In February 2018, President Trump unveiled his infrastructure plan that going to use private
investment, combined with local, state, and federal funds, to leverage $200 billion in federal funding
into $1.5 trillion for improving America's infrastructure over ten years, with the main goal to
create jobs and to boost the economic growth through this economic investments. The favourable
outcome is that the $100 billion grant program would lead to an increase in infrastructure investment.
But the problem here is, this infrastructure plan is going nowhere without funding. On a practical
level, the plan faced challenges related to funding and implementation. The Trump administration
proposed allocating only $200 billion in federal funds for the plan, with the rest coming from state and
local governments and private investors. But in reality, the government faces challenges in funding.
Hence, the whole infrastructure is just an idea, without realisation which eventually does not
increase the economic investment rate at all whether in short-term or long-term.
4.2
Recommendations for Savings and Investment
The savings and investment rate of the United States have been in a decreasing trend. To improve the
savings and investment rate, here are some recommendations:
Automatic enrollment saving plans.
Due to the expense of setting up and maintaining 401k plans, millions of small businesses did
not implement them. Additionally, employers have been reluctant to force workers to deduct money
from their pay in order to contribute to these plans even though they are aware that the money won't
be available until they are retired. Giving small firms the chance to develop "automatic enrollment
plans," has shown to be highly effective in encouraging workers to join and maintain savings in 401k
plans based on the research. (Feldstein, 2018) In this case, employees are enrolled in a 401(k) plan by
default with the understanding that they can take money whenever they choose, without having to
wait until they are eligible for retirement. Hence, the United States government should consider the
implementation of automatic enrollment plans in the SECURE Act 2019 to give more incentives and
motivation for the public to participate in savings plans.
Raise up the concern in economic investment
Compared to its counterparts in the industrialised world, the United States are left behind in
infrastructure development (economic investments). The United States fell from fifth place in 2002 to
thirteenth place in2019 based on a comprehensive measure of infrastructure quality. (World Economic
Forum's Global Competitiveness Report) Economists believe that investing in infrastructure has a
strong "multiplier effect”, especially during recessions. According to a 2014 University of Maryland
study, infrastructure spending increased GDP growth by up to $3 for every $1 invested. The U.S.
government should come with a more practical plan to improve the shortcomings of President
14
Trump’s Infrastructure Plan in 2019. The funding of the plan must not rely solely on direct federal
funding, whether financed by debt or higher taxes only. The government should also consider
collaborating with the private sector in infrastructure development, which the costs might be
lower Besides, private financing via municipal bonds are also easier to obtain in the United States
as well as financing mechanisms or tax incentives, which enables local governments to finance their
infrastructure projects with low-interest loans and other credit support. (Moss, 2020)
5.0
Conclusion
In conclusion, the United States is one of the wealthiest nations with high living standards
globally. Overview, the economic growth of the US is quite stable from 2017 to 2021. This can show
that the real GDP and labour productivity growth rate show an upward trend from 2017 to 2021 even
though they dropped in 2020 and 2021 respectively. This shows that real GDP growth is consistent
with labour productivity growth. From 2017 to 2020, the trends of inflation and unemployment rates
in the US complied with the trade-off theory between inflation and unemployment, except in 2018
which showed the downward trend for inflation and unemployment rate. Moreover, most of the saving
and investment rates also show a consistent trend from 2017 to 2021 except 2021.
There are a huge number of major events that have led to the trends of the economic
indicators in the US from 2017 to 2021. Several major events which are the COVID-19 pandemic,
supply chain disruptions and government policy such as which influence the economic indicators.
Therefore, the US government also implemented several policies to improve these indicators such as
the Tax Cuts and Jobs Act (TCJA) and coronavirus relief package.
Moreover, some recommendations were also revealed to help the US government to improve
these indicators rather than only rely on monetary policy and fiscal policy. For instance,
the
government should invest in training programmes and education as well as to incentivize its technical
R&D to increase the productivity and aggregate supply so that it can get consistent economic growth,
low unemployment rate and mild inflation rate in the US. The US government also has to compulsory
implement automatic enrollment saving plans and raise the concern of economic investment to
improve the saving and investment rate.
Overall, the United States has demonstrated significant economic progress despite facing
several challenges. The government has taken proactive steps to improve economic growth and
citizens' welfare further.
15
Appendix
Appendix 1: Gross Domestic Product of the United States
Year
Real GDP constant 2015
Nominal GDP
(US$ trillion)
(US$ trillion)
2017
18.92
19.48
2018
19.48
20.53
2019
19.93
21.38
2020
19.38
21.06
2021
20.53
23.32
Table 1.1 Real GDP constant 2015 and Nominal GDP of the United States from the Year 2017 to 2021
(Sources: The World Bank, 2021)
Graph 1.1:Real GDP constant 2015 and Nominal GDP of the United States from the Year 2017 to
2021
16
Appendix 2: Gross Domestic Product of the United States
Year
Labor Productivity Annual Growth (%)
2017
0.9
2018
1.13
2019
1.22
2020
3.41
2021
1.2
Table 1.2 Labor Productivity Annual Growth of United States from the Year 2017 to 2021
Sources: (OECD, 2021)
Graph 1.2:Labor Productivity Annual Growth of the United States from the Year 2017 to 2021
17
Appendix 3: Inflation and Unemployment Rate of United States
Inflation Rate, Consumer Prices
Unemployment Rate
(% Annual)
(% of total labour force)
2017
2.1
4.4
2018
2.4
3.9
2019
1.8
3.7
2020
1.2
8.1
2021
4.7
5.3
Year
Table 2.1: Inflation and Unemployment Rate of United States from the Year 2017 to 2021
Sources: (The World Bank, 2021)
Graph 2.1: Inflation and Unemployment Rate of United States from the Year 2017 to 2021
18
Appendix 4: Phillips Curve (Relationship Between Inflation and Unemployment)
Inflation Rate, Consumer Prices
Unemployment Rate
(% Annual)
(% of total labour force)
2017
2.1
4.4
2018
2.4
3.9
2019
1.8
3.7
2020
1.2
8.1
2021
4.7
5.3
Year
Table 2.2: Inflation and Unemployment Rate of United States from the Year 2017 to 2021
Graph 2.2: Phillip’s curve of United States from the Year 2017 to 2021
19
Appendix 5: Savings and Investment Rate of the United States
Gross Savings
Fixed Capital Formation
(% of GDP)
(% of GDP)
2017
19.6
20.8
2018
19.7
21.2
2019
19.8
21.3
2020
19.4
21.1
2021
18.1
21.1
Year
Table 3.1: Savings and Investment Rate of the United States from the Year 2017 to 2021.
(The World Bank)
Graph 3.2: Savings and Investment Rate of the United States from the Year 2017 to 2021
20
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