Millennials are often cited as the least well-informed demographic around. While the baby boomers— despite their other drawbacks — tend not to suffer from the same uninformed deficiencies, and Generation Z is rumored to have learned from the mistakes of their big-brother generation.
So, let’s catch up and give millennials some of the basic knowledge they need about the United States economy. Since the United States is among the world’s largest economies and the most powerful nation in the world, it engenders in its citizens something of the “born with a silver spoon…” effect, and so it is understandable that we might be missing some rudimentary information about our economy. That is to say, we often let information that we should know fall by the wayside precisely because we have the option and privilege to do so. So, yeah, whoever said that it was human nature to be lazy … they might have some examples to support their argument.
Don’t think that’s fair? Perhaps you’re right! But, how many of these basic tenets of the American economy do you already know? And if I have you there, don’t feel bad. You have lots of company! Plus, after reading on, you will know them.
What is GDP?
GDP stands for gross domestic product. Everything that America produces is measured by it. It is a primary way to measure the health and size of an economy. The GDP is, in essence, the total dollar value of all goods and services produced by a country in a specific time period. And when the GDP turns negative — that is, the GDP is less than it was during the previous fiscal quarter — the economy is said to be in a recession. And we all know that those economic downturns are bad – they could start as recessions and turn into something worse. Economic downturns are also marked by higher unemployment rates among other red flags.
If the downturn continues, that is, if the economy contracts, not for months but for years, a recession turns into a depression (also known as the economy just wanting to stay in bed and watch Nicholas Sparks movies). Currently, the U.S. GDP is not keeping up with the GDP in the European Union or China, and so we have lost our position as the world’s largest economy. That may come as a shock, but it is a good thing to know.
However, the U.S. economy still has a ton of clout for several reasons, one of which is that the global currency is still the dollar. This means that the U.S. dollar is still the most stable and the most widely traded currency in the world. And, although our GDP may be down, the U.S is also said to be one of the major drivers of the global economy. For instance, we have a very high standard of living, despite the downtick in GDP.
Supply and demand, another important economic concept
Supply and demand is a pretty simple concept. It is the driving force of a market economy. It’s basically the force that tells the economy what to do. Supply equals the goods and services available. Demand, on the other hand, is the desire for those goods and services.
There is a “supply relationship” between how much the buyer or consumer is willing to spend for the available goods and services and how much seller or producer is willing to supply them for. Supply and demand sets the groundwork for the employment rate, the price of commodities and other goods, and is the backbone of a market economy. For example, if there is a large amount of a natural resource such as oil, but the demand for gas falls, you will have lower gas prices.
Inflation and deflation, another set of terms to wrap your mind around
Inflation occurs when the demand for goods or services exceeds the nation’s supply, causing prices to increase. It also can occur because of an increase in the money supply of the nation. It is measured by the Consumer Price Index, however, the information that the index supplies can often be misleading or inaccurate. This is due to the fact that the commodities market, which determines things like oil and food prices, can skyrocket or plummet in a matter of months, sometimes even less. The Federal Reserve, for this very reason, uses something called the core inflation rate. This rate excludes energy and food costs from the equation.
You can find out the current inflation rate here. As for deflation, this is simply the opposite of inflation. Deflation occurs when prices drop, as well as the value of assets such as housing prices and stock portfolios. Deflation can create economic crises and stock crashes.
Fiscal policy is essentially the $4 trillion federal budget, the revenue for which is shored up by taxes. If you thought about what you do in your own household, economically speaking, you would have a fiscal policy, too. The money you bring in and the way you spend it is your fiscal policy. For the U.S., the fiscal policy is determined by what the government spends and how it taxes its citizens. The president makes a budgeting plan, which Congress then will have to authorize (kind of like a parent figure). Recently, spending has outpaced revenue, and thus, we end up with a national debt.
A major contributor to the national debt began with President George W. Bush’s tax rebates, which basically worked on the premise that if you cut taxes enough, the vitalization of the economy will serve to overgrow the national debt. This has yet to happen, but people still love rebates, or refunds, because, well, people hate taxes. Although the economy can be stimulated, guided or depressed by fiscal policy, ultimately, only the business sector can cause the economy to sustain growth.
Monetary Policy is different from Fiscal Policy
The Federal Reserve is in charge of the nation’s monetary policy. Monetary policy has to do with managing interest rates, inflation and the amount of money in circulation. The Federal Reserve handles this through a series of tools. The first is the Fed Funds Rate, which ensures that the Federal Reserve — if short of money — can borrow from other banks, but also can tack on interest for the privilege.
Secondly, The Federal Reserve also keeps track of the national money supply. They report on the present amount of currency circulating in the public each and every week. The Fed can increase this money supply by decreasing the Fed Funds Rate. This then lowers the banks’ cost of maintaining reserve requirements, which gives them more money to loan, which, in turn, gives consumers more money to borrow and therefore potentially more money in their pockets to spend.
Finally, the Federal Reserve has control over the national use of credit. This means that they lend funds on a very short-term basis to banks so that they may meet their liquidity and reserve requirements. By doing so, they help to maintain the flow of funds between consumers and banking institutions. Most importantly, these three tools are used together to control the effect of interest rates on the economy.
The main thing that monetary policy sets out to do is to control inflation. After that, they do their best to stimulate the economy. Lastly, they regulate and are in charge of the smooth operation of the banking system. The Federal Reserve Chair, currently Jerome Powell, is often considered to be the most powerful person on the planet.
Yet another policy that is important to understand: Trade Policy
Trade policy is how commerce is dealt with between nations. Therefore, the trade policy will affect the cost of exports and imports. An example of trade policy is NAFTA — The North American Free Trade Agreement, created 20 years ago and meant to expand free trade between the United States, Canada and Mexico. Other trade deals include the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership.
Exchange rates will affect trade due to changes in the value of the dollar against other currencies. When the dollar is strong, our goods become more expensive to people in other countries and goods from other countries become less expensive to buy here.
So, there is good news and bad news. The good news is, if you want to finally get in that visit to Tokyo, let’s say, it might well be less expensive to travel there if the dollar is strong against the Japanese Yen. Or, if you are craving Belgium chocolate or French wine, you can indulge more if the dollar is strong against the European Union’s Euro. But, on the other hand, people in Brazil will be less interested in buying Coca-Cola or Fords; exports suffer from a strong dollar. This can cause a trade deficit and boy, do we have a big one. But, although imports and exports are important factors in the health of our economy, like everything we’ve looked at so far, their impact can have both good and bad effects, and it is complicated.
Besides the basic economic concepts described above, here are some facts you can toss around:
The largest destination for U.S. exports?
Drum roll please! *drum roll sound.* The answer is Canada, and, in case you were wondering, the second- and third-largest is Mexico and China, respectively.
The No. 1 source of imports?
That one was easy. China, duh!
Our largest trading partner overall?
The most valuable export in real dollars?
Processed Petroleum Oils.
We’re also a service economy. So remember that for trivia night. Basically, we are killing it in this sector. We have a billion-dollar surplus against the rest of the world in “other private services” which is practically anything you can think of: finance, insurance, telecom, education, etc.
So there you have it!
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