According to N. Gregory Mankiw's textbook, Macroeconomics is the study of economy-wide phenomena, including inflation, unemployment, and economic growth (Mankiw, 2007). In the billions of Macroeconomics classes across the world, we study these god-like wonders and how they affect our economies. With graphs more fun than fifteen roller coasters combined, data sought after more than the meaning of life, and articles from real economists, I've come up with some conclusions about the state of the U.S. economy. The growth rate of GDP is slightly above average, and the inflation and unemployment rates are both slightly below average. To the untrained eye, one might think we're doing poorly with the second two areas being below average, but in this case it is actually a good thing to be an underachiever. All three areas of Macroeconomic phenomenon are slightly better than the average of the past twenty years. In my analysis of GDP, inflation, and unemployment, I can confidently say that the American economy is running slightly well.
Gross Domestic Product is about the value of goods and services of each year. A more exact definition of GDP is the market value of all final goods and services produced within a country in a given period of time (Mankiw, 2007). What that means is GDP is the nation's total income for that year or quarter. “GDP measures the value of all goods and services produced within the United States and is considered the best barometer of the country's economic fitness” (Business Week). This is because a higher income in a country will give its citizens a higher standard of living. Since we always want what is best for others, an increase in economic growth is important, so GDP therefore has to go up each year.
Over the past 20 years, Americans have enjoyed a steady level of economic growth and the past year is no different. Thanks to the help of the Bureau of Economic Analysis's website, I found that GDP has increased at an average rate of 2.98% over the past 20 years (BEA, 2007). The current average increase in GDP from 2006 to the first three quarters of 2007 is 0.2 percentage points higher at a grand total of 3.1%, the previous increase of 2006 being 2.9% (BEA, 2007). That 3.1% change is very good compared to the past twenty years. As shown by the graph below, the highest increase in GDP was 4.5% in 1999 and the lowest was -0.17% in 1991, so a 3.1% increase is actually pretty good (BEA, 2007). We are closer to the highest increase than the lowest increase. As shown by the graph below, there have been many different increases and decreases in GDP from 1987 to 2006 (BEA, 2007). For example, 2001 was the year that the Terrorists attacked the World Trade Center. Big things like that tend to affect GDP in different ways.
2007 has so far had some good actions taking place to increase GDP. An older article from July 22nd, 2007 on the New York Times webpage, entitled “Two Sides of Economic Growth” gives the credit for the economic growth of 2007 to businesses buying new inventory and increased consumer spending (NY Times). The businesses purchasing new inventory according to the article was because they were replacing the items they didn't replace from higher earlier sales this year (NY Times). Real personal consumption, which takes into consideration the negative effects of inflation, also increased during 2007 by an excellent rate of 4.2% according to the article (NY Times). My example in the previous paragraph of how 9/11 affected the economic growth of GDP in 2001 is from an economic standpoint similar to how the increased consumption and investment spending helped out 2007's growth in the article. People buying, replacing, and investing more isn't going to affect the U.S. economy's growth positively as much as a terrorist attack will affect it negatively, but due to the economic law of diminishing returns, the amount that Americans helped GDP is actually quite good. We aren't in a time of economic prosperity, but even the slightest above average GDP growth is a very good thing for any economy.
While above average GDP growth is a good thing, it's actually a bad thing to have a highly above average inflation rate. According to Mankiw's (2007) textbook, inflation is defined as an increase in the overall level of prices in the economy and the inflation rate is the percentage change in the price index from the preceding period (Mankiw, 2007). What that means is the amount of purchasing power goes down quicker when the inflation rate is rising more quickly every year. A controlled inflation rate is ok and actually good sometimes, but when it rises too quickly, like with a Hyperinflation rate of 20 to 30%, the economy can suffer because people can barely purchase as much as they want to with their savings or wages (Investopedia, 2007). And with the opposite happening, stagflation, going in the economy, it is most likely experiencing a time of no economic growth.
