A Survey of USA: ----- American Economy

Prof. Niangen Huang

American Economy

1. What is a market economy? What a role does the federal government play in economy?

2. How does the Federal Reserve influence the volume of bank lending? And what is open-market operation?

3. What is bond? Who can issue bonds in the United States?

4. What is inflation? When an inflation comes what will happen?

5. Why does America have such a large deficit? How do you comment on the U. S. Policy of deficit financing?

General Introduction American economy is now the largest in the

world Output: roughly 25% of the world total, Population: 5% of the world total, Natural bases for the industrial development: the great

variety of climatic conditions, soil types, and minerals The size of labor force and capital stock.

The American capitalistic economy has developed largely by a process of continual change. The dominating force has not been a central plan but individuals and associations of individuals trying to advance their own interests by producing, buying, and selling in predominantly free and competitive markets.

General Introduction

General Introduction In American economy, privately owned

and operated businesses, including farms, produce about 85% of the total final output of goods and services.

People in independent professional practice, such as doctors lawyers, and accountants, produce about 3% of the total.

Government units, including school districts, turn out most of the rest of the country's products and services.

General Introduction Business employees, including the self-

employed, such as farmers, make up the largest proportion of the working population, accounting for more than 75 %.

Government workers at national, state, and local levels come next, with approximately 21%.

Employees of nonprofit organizations and domestic servants account for most of the others.

General Introduction The United States operates with a competitive

market economy. Wages, prices, the allocation of goods and services, and the employment of resources are generally regulated by the law of sup- ply and demand. The market has the advantage that the process of decision-making is decentralized and responsive to the expressed wishes of consumers. A desire on the part of consumers for a given product will induce business firms to produce the product, so long as it can be done at a profit

General Introduction The role of the federal government:

The government can still exercise some control over the market economy through taxation, federal banking system or by other means.

Generally, the role of government in American economy is to function as an additional part protecting each element of the economy from abuse, or to improve markets when they do not function effectively.

American Agriculture While agriculture has a comparatively small

share of the national economy (3%) and employment (3%), the industry nonetheless remains one of the country's most important.

American Agriculture meets the nation's principal domestic requirement for food and natural textile fibers, while supplying about 20% of the value of American exports.

Cereal grains constitute the second most important export, with vegetable oils and related products not far behind.

The United States is the world's leading exporter of agricultural products.

American Agriculture The position of the United States in World

agricultural trade is explained by the extraordinary productivity of U. S. farm labor. With perhaps half of 1% of the world

agricultural labor force, the United States produces nearly 20% of the grains, including 50% of the corn (maize), grown in the world.

It ranks first, second, or third in the production of corn, wheat, soybeans, oranges, meats, milk, apples, oats, cotton, tobacco, peanuts, and edible vegetable oils.

American Agriculture Agricultural activities are widely distributed

regionally. The leading producing areas for field crops are the

plains states for wheat; the Midwest for corn and soybeans; the southern states for cotton, tobacco, and rice;

and the area of the pacific coast for fruits, vegetables and wheat.

The leading sources of livestock and other products are the Midwest, Oklahoma, and Texas for cattle;

Wisconsin, New York, Minnesota, and California for dairy products; and Arkansas, Georgia, Alabama, and North Carolina for poultry.

American Agriculture Most farms are family owned, although

large corporations have made inroads into the farming industry since World War I. The scale of operations has increased

dramatically, and the volume and value of capital used per farm have risen.

While many small farms remain, production is now dominated in many subdivisions of the industry by large family-owned and corporate farms.

American Manufacturing Manufacturing is the largest sector of the American

economy, accounting for about one quarter of Gross Domestic Product (GDP), about one quarter of the national income, and over one fifth of the U. S. work force.

It is a highly diversified sector, producing a wide variety of goods on a large scale.

The United States ranks first, second, third, or fourth in the world in the production of crude steel, cotton fabrics, radio sets, television sets, passenger cars, commercial vehicles, synthetic rubber, sulfuric acid, fertilizer, and aluminum.

The U. S. manufacturing sector is the largest in the world, almost three times the size of the manufacturing sector of Japan, the second largest producer in the world.

American Manufacturing Division of Manufacturing Activity:

The leading region is the East North Central, which accounts for over25 % of manufacturing capacity in terms of value added by manufacture and is particularly important in the production of motor vehicles and other transportation equipments, nonelectrical machinery, and fabricated metals.

The Middle Atlantic region is in the second place, with almost 20% of the total value added. The region specializes in chemicals and machinery, both electrical and nonelectrical.

The Pacific coast region, dominated by the manufacturing activities of California, falls into the third place with about 15% of the total value added. It is particularly important in the production of transportation equipments, food products, and electrical and electronic equipments.

American Manufacturing Division of Manufacturing Activity:

The South Atlantic region, which specializes in textiles, chemicals, tobacco products, and apparel, is the fourth- leading region in the United States, producing well over 10% of the total U. S. manufacturing output.

The West South Central and the East South Central regions together produce about 15% of the total national output, specializing in chemicals, food products, electrical and electronic equipments, and nonelectrical machinery.

The remaining 15% of the national output is divided among the West North Central, New England and the Mountain states region. New England produces electrical and nonelectrical machinery, and fabricates metal.

The West North Central States also produce machinery and food products, while the Mountain states concentrate on food products, primary metals and nonelectrical machinery.

American Manufacturing Manufacturing remains in persistent flux, with

the regional division of activity as well as the lines of national specialization shifting constantly.

Since the 1970"s the automobile industry, one of the most important in the United States, has suffered from sharp competition from Japanese producers.

On the other hand, the United States, strong for many decades in nonelectrical machinery, has also gained a comparative advantage in the high-technology areas of electrical and electronic equipments.

American Finance The U. S. banking system is unusual in that it

consists of many banks, many of them quite small.

For nearly 80 years the United States had no central bank, although on occasion the Treasury performed some central banking functions.

In 1913 the Federal Reserve System was created, a system that remains in operation.

Today it is directed by a board of governors in Washington D. C. Twelve regional Federal Reserve banks hold deposits for member commercial banks, make loans to them from time to time, and carry out the policy established by the Board of Governors.

American Finance Central banks typically influence the economy

by affecting the terms on which commercial banks lend and the amounts they lend.

Bank lending depends upon the demand for bank credit, the terms on which banks can lend, bank expectations about the future, and the volume of excess bank reserves in existence.

All banks are obliged by law or custom and good business practice to hold reserves against deposits.

In the United States the law establishes reserve requirements. Individual banks can lend only when they hold reserves in excess of their requirements.

American Finance The Federal Reserve (the Fed) can influence the

volume of bank lending by influencing the volume of excess reserves. This it can do through its own lending policy to banks and through "open-market operations". Open-market operation consists of the purchase and

sale of securities by the Fed in the open market. When the Fed buys securities, bank reserves are created, whereas when the Fed sells the securities, bank reserves are destroyed.

When the Fed follows a policy of monetary ease, by allowing bank reserves to grow rapidly, bank lending will increase and the rate of interest will be low. On the other hand, a policy of monetary tightness will restrict the growth of bank credit and increase the rate of interest.

American Finance American financial markets today are numerous

and diverse. A number of them, the most famous and largest of which

is the New York Stock Exchange, handle trades in stocks and bonds.

Stock prices often reflect the health of the economy. When business conditions are good, stock prices tend to rise, creating what is called a bull market. When conditions are poor or threatening, prices drop, creating a bear market.

Because of the inflationary nature of the American economy, every year more and more Americans invest in stocks. Although many people who buy and sell stocks on a daily basis lose money, most long-term investors have profited.

American Finance Bonds are another type of investment, which

are very popular in the United States. The bond itself is the borrower's written promise to

repay the loan on a certain date and also to pay a certain rate of interest on the borrowed money.

The individual who buys bonds does not share in the company's profits, but neither does he run the risk of losing money if the stock goes down in value.

Corporations may issue bonds to obtain money for expansion. State and local governments issue bonds to raise funds for community improvements such as highways, bridges, schools, and hospitals. Even the Federal government borrows money from individuals.

U. S. savings bonds are available in various denominations and are often purchased as gifts.

American Economic Problems American capitalism is not ideal. Weaknesses in the

system sometimes create economic inflation in the country.

Inflation is a general rise in the prices of goods and services, such that the real value or purchasing power of money is reduced. Three dollars are necessary today to buy what two dollars bought yesterday.

When inflation occurs, usually wage earners and all those on fixed incomes stand to lose, often severely, from inflation.

If the expectation of inflation is widely shared, common Americans may act to protect themselves by purchasing commodities frantically, and speculators may sell their holdings of currency for a stronger currency, thereby creating further devaluative pressure in the country.

The result of such speculation may be instability throughout the international monetary system, interfering with normal world trade and causing unemployment in various countries.

American Economic Problems

Another strange phenomenon in American economy is her deficit financing.

During military and economic crises the Federal government has gone heavily into debt. But lately America has also gone into great debt during a period of peace with a relatively healthy economy. America borrowed $ 23 billion during World War I, about $13 billion more during the 1930s, and $ 200 billion more during World War II. By 1988 the gross federal debt has reached $ 2 trillion. The interest on the federal debt is over $150 billion a year. The size of the debt and interest payments alarms many Americans.

Gross Federal Debt Current Amount 10/28/2005 $8,030,056,674,506.24 (The Debt To the Penny) 10/27/2005 $8,026,029,628,861.82 12/31/2004 $7,596,165,867,424.14

Prior Fiscal Years 09/30/2005 $7,932,709,661,723.50 09/30/2004 $7,379,052,696,330.32 09/30/2003 $6,783,231,062,743.62 09/30/2002 $6,228,235,965,597.16 09/28/2001 $5,807,463,412,200.06 09/29/2000 $5,674,178,209,886.86 09/30/1999 $5,656,270,901,615.43 09/30/1998 $5,526,193,008,897.62 09/30/1997 $5,413,146,011,397.34 09/30/1996 $5,224,810,939,135.73 09/29/1995 $4,973,982,900,709.39 09/30/1994 $4,692,749,910,013.32 09/30/1993 $4,411,488,883,139.38 09/30/1992 $4,064,620,655,521.66 09/30/1991 $3,665,303,351,697.03 09/28/1990 $3,233,313,451,777.25 09/29/1989 $2,857,430,960,187.32 09/30/1988 $2,602,337,712,041.16 09/30/1987 $2,350,276,890,953.00

American Economic Problems When we consider her huge deficit we must be clear

that the American government owns most of the money to its own people rather than to foreign governments or persons. These deficits are not the result of a weak economy.

Why does the United States have such huge deficits? The fact is that the U. S. is committed to spending more for

defense and domestic programs than current tax revenues can afford, even though the economy with unprecedented deficits runs well on its way in recent years.

The huge buildup of deficits is anyway a hidden trouble to put the nation in jeopardy of greater inflation and unemployment, and a further loss of international competitiveness.

American Economic Problems Now America is facing a serious situation in world

economy. She was once the dominant exporting nation, but her competitive superiority lost gradually in the 1970s and 1980s.

America's biggest challenge is coming from Pacific rim countries such as Japan, South Korea, and Singapore. American leadership and research in technology and her vast agricultural industry are being threatened by other nations.

In 1971 the United States experienced its first trade deficit in more than a century. By the late 1980s, her foreign trade imbalances grew to nearly $ 200 billion a year. The trade deficit of the United States is only one of the many symptoms of more profound economic problems.

American Economic Problems “The trade deficit continued to widen in the fourth quarter and has

been a drag on growth for five straight quarters. The deficit increased by $48.7 billion in real terms in the fourth quarter, reaching a record $631.9 billion, and subtracted 1.73 percentage points from GDP growth. Over all of 2004, the deficit took about 1 percentage point from real GDP growth. The increase in the deficit in the latest quarter reflected a 9.1 percent annual rate rise in total imports. In contrast, real exports decreased 3.9 percent. The relatively stronger performance of the U.S. economy compared to its major trading partners, such as the eurozone countries and Japan, continues to be a factor in the widening trade gap. This trade profile underscores the need for our trading partners to adopt policies that accelerate economic activity, so that the United States is not the only engine of world growth. Greater currency flexibility in those economies that lack flexibility would also help to improve trade imbalances.”

----January 31, 2005Assistant Secretary of the Office of Economic PolicyMark J. WarshawskyStatement for the Treasury Borrowing Advisory Committeeof the Bond Market Association

Current American Economic Status The economy continued to grow at a solid pace over the final

three months of 2004, bringing real GDP growth on an average annual basis to 4.4 percent last year, up from 3.0 percent in 2003. Last week's advance report on fourth-quarter Gross Domestic Product showed that real GDP grew at a 3.1 percent annual rate following a 4.0 percent gain in the third quarter. Virtually all of the slowdown in the fourth quarter reflected a wider trade deficit. Excluding net exports, gross domestic purchases grew by a strong 4.7 percent annualized rate in the quarter.----January 31, 2005

Assistant Secretary of the Office of Economic PolicyMark J. WarshawskyStatement for the Treasury Borrowing Advisory Committeeof the Bond Market Association