The Key Concepts in Economics
Identify at least four (4) key points of a relevant economic article from either the Strayer Library or a newspaper. The article must deal with any course concepts covered in Weeks 1-8.
Apply one (1) of the following economic concepts (supply, demand, market structures, elasticity, costs of production, GDP, Unemployment, inflation, aggregate demand, and aggregate supply) to the key points that you highlighted in Question 1.
Explain how the concept that you identified in Question 2 could affect the U.S. economy.
Analyze the dynamics of supply and demand to anticipate market equilibrium.
Analyze the elasticity of demand and supply and its importance, and the effect of taxes or other public policies.
Describe the impact of various forms of competition on business operations with emphasis on perfect competition.
Use technology and information resources to research issues in principles of economics.\
Grading for this assignment will be based on answer quality, logic/organization of the paper, and language and writing skills, using the following rubric found here.
Key Concepts in Economics
The first key point identified in the article is economic growth as reflected by the level of GDP. According to Torry (2016), the U.S economy achieved a 0.7% growth in the last quarter of 2015. The low economic growth recorded in the last quarter of the year was an indicator of the global financial market turmoil being experienced. Three major sectors of the U.S. economy recorded sluggish growth. These include trade, energy development and production, and the level of inventories. All these factors contributed to low economic growth. The second key concept covered in the article involves consumer spending. According to Torry (2016), consumer spending remained relatively stable in 2015. Stability in consumer spending was driven by low interest rates, higher wages, and constant job gains. The three aforementioned factors greatly influence the level of consumer spending in an economy. Rising wages increase consumers’ propensity to consume, as with steady job gains and low interest levels. This is because of higher disposable incomes.
The other key economic concept covered in the article involves inflation rates in the economy. According to Dwivedi ()sss, inflation can be defined as “considerable and persistent rise in the general level of prices” in an economy and usually over long duration. Persistent inflation was identified as one of the major macroeconomic problems facing economists in the last decade. Inflation is not just a problem in the U.S. economy but also being experienced in the global economy. According to Torry (2016), inflation levels were low in 2015, owing to lower energy costs and a stronger dollar, hence cheaper imports. Nonetheless, Fed projects higher inflation rates in the future. The fourth key concept covered in the article involves investment. Investment reflects purchase of goods which are meant for wealth creation in the future. According to Torry (2016), investment was low in 2015, especially investment driven by nonresidents. The low investment rates partly contributed to the low economic growth recorded in the last quarter of 2015.
Applying economic concepts (unemployment) to the key points identified
Unemployment rate and economic growth are two related factors in the economy. Low economic growth rate can lead to higher rates of unemployment. For instance during the 2008 recession, economic growth was at its lowest, with the highest recorded unemployment rates in the recent period. Negative economic growth results to unemployment because of three main reasons. First, during periods of negative economic growth (recession), the demand for goods is also low. Firms will only produce little and hence only a few workers will be involved in production. Secondly, firms my stope producing during the recession rendering workers redundant. Thirdly, firms engaged in production will be reluctant to add more workers during periods of low economic growth.
Unemployment rate significantly influences the level of consumer spending. When there is high unemployment rates in the economy, the level of consumer spending reduces. When the aggregate unemployment rate in the economy rises, consumers reducing their spending to a certain extent. An investigation conducted in Spain indicated that a 1 percent rise in the level of unemployment contributed to a corresponding decline in consumer spending by more than 0.7% per individual consumer (Campos & Reggio, 2014). Unemployment affects individuals either directly or indirectly. Those affected directly are those who lose their jobs and hence automatically reduce their spending due to reduced earnings. Unemployment impacts household spending indirectly through future income expectations. The research indicated that those who remain employed in periods of high unemployment gauge their expectations based on the current situation and reduce their consumption. Fear of job loss mainly drives this.
The other concept discussed is inflation. There is an inverse relationship between unemployment rate and inflation. This relationship is well depicted by Phillips curve. A decrease in unemployment is related to an increase in inflation rates. The Phillips curve is a downward sloping curve which indicates the inverse relationship between the two concepts. There is thus a tradeoff between inflation and unemployment rates. In the long-run, however, the situation is rather different as the unemployment rate is able to edge closer towards equilibrium. Inflation in the long-run is determined by the real output and rate of growth of the stock of money (King, 2012).
Unemployment and investment are also related. The rate of investment increases when unemployment is low. There exists an inverse relationship between unemployment rates and fixed investment. As the rate of investment increase, unemployment also falls drastically. Governments should encourage high fixed investments in the economy in order to stimulate job creation. Business investment as well as residential investment are important in the job creation process in the economy.
How unemployment affects the U.S. economy
Unemployment is one of the biggest challenges governments are facing worldwide. Unemployment has great negative impacts on the economy. First, unemployment reduces the spending power of people which leads to low aggregate demand. This has an adverse impact on the economy. The government suffers heavy costs in terms of unemployment benefits payed to those who do not have jobs. In the U.S., those who are unemployed receive benefits from the government which increases its financial burden. Unemployment may contribute to recession. During periods of high unemployment, there is reduced spending and low aggregate demand. Most firms cut production and also their employment levels. These are perfect conditions for a recession in the economy. Lastly, unemployment contributes to arise in social ills such as crime and drug abuse in the society. Most unemployed youth have so much idle time which they spend on drugs while others turn to crime.
The economic article is a true reflection of what is currently happening to the U.S. economy. Individual consumption of key concern to the economy. As personal spending decreases, the rate of economic growth also declines. According to the article, consumer spending accounts for almost 70% of the total GDP. This is true in the light that consumer spending increase aggregate demand in the economy and stimulate industrial growth and employment.
Campos, R. G., & Reggio, L. (2014). Consumption in the shadow of unemployment. Retrieved from Documentos de Trabajo: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/14/Fich/dt1411e.pdf
Dwivedi, D. N. (2005). Macroeconomics: Theory and Policy. India: Tata McGraw-Hill Education.
Harriet, T. (2016, January 29). Economists react to fourth-quarter U.S. growth: consumer spending and housing remain solid. The Wall Street Journal, p. 1.
King, D. (2012). Business & Economics. Oxford: Oxford University Press.