1. Why is the growth of the consumer spending considered a positive factor for e
ID: 1213718 • Letter: 1
Question
1. Why is the growth of the consumer spending considered a positive factor for expansion of GDP, even when personal saving is falling to a negative level? Are the long-term and short-term effects of a negative personal saving rate both favorable to economic growth? How would you graphically illustrate the short-term and long-term effects?
2. According to the report, inventories grew at about the same rate as the economy as a whole. Taken in isolation from other things going in the macroeconomy, would you expect this behavior of inventories to bias the economy toward faster expansion in the near future, bias it toward a slowdown in the near future, or to be roughly neutral in it effect?
3. According to the report, exports grew faster than imports during the first part of the year. Would you expect this to have a positive or a negative effect on future economic growth? Why? How would you graphically illustrate the effect of this on future economic growth?
4. The government budget remained in deficit during 2006. What information given here helps understand how the deficit was financed?
Case for Dliscussion EXCERPTS FROM THE ANNUAL REPORT OF THE PRESIDENTS COUNCIL OF ECONOMIC ADVISERS, 2007 The expansion of the U.S economy continued for the fifth consecutive year in 2008. Economic growth was strong, with real gross domestic product (GDP) growing at 3.4 percent during the four quarters of 2006. Consumer spending sustained its strong growth during the four quarters of 2008 (rising 3.7 percent in real terms), continuing its 15-year pattern of rising faster than disposable income. As a result, the personal saving rate fell to a negative 1.0 percent for the year as a wholerits lowest annual level during the post-World War lI era Corporate net saving rose to 3.8 percent of gross domestic income (GDI) during the first three quarters of 2006, its highest level since the 1950s. During 2006, real business investment in equipment and software grew 5 percent slower than the 7 percent average pace during the 3 previous years. Its fastest-growing components included computers, as well as machinery in the agricultural and service sectors, Investment in mining and oil fieid machinery was also strong, Ekely in response to elevated crude oil prices and to the need to replace Gulf of Mexico facilities damaged by the 2005 hurricanes Inventory investment was fairy steady during 2006, and had only a minor influence q arter-to-quarter fluctuations Real nonfarm inventories grew at an average $44 billion annual pace during 2006, a 30 percent rate of growth that is roughty in line with the pace of real GDP growth over the same period Real Federal (purchases of goods and services] grew 2.4 percent during 2006. This was the third consecutive year of growth at roughly 2 percent Defense spending accounted for al of the increase during the four-quarter period, while nondefense purchases fell Norminal Federal revenues grew 15 percent in FY 2005 and 12 percent in FY 2006. These rapid growth rates exceeded growth in outays and GOP as a whole, and the U.S. fscal def cit as a share of GDP shrank from 3 6 percent in FY 2004 to 2 6 percent n FY 2005 to 1.9 percent in FY 2006 The curent account deficit (the excess of imports and income lows to foreigners over rts and toreign income of Americans umped to 7.0 percent of GDP in the fouth quarter of 2005, partly due to petroleum imports that replaced lost Gulf of Mexico production. The current account deficit then retraced some of its earser increase in.the irst three quarters of 2008, when oil imports declined QUESTIONSExplanation / Answer
1)when consumption increases, people tend to consume a lot which means the production level has to be increased to meet the demand and hence the gdp of the country increases. although the savings were the negative teritory, domestic investment decreases but that could be financed by foreign investments. so in the short term gdp increases rapidly while in long term if foreign investment stops then the level of gdp decreases.
2)as the inventories are growing at the same rate the economy, the production level has neutral effect on the gdp but growth of gdp rate will remain same and it will slowdown the economy in long tem.
3) exports growing faster than imports means domestic production is on high level and also the consumption level can be me by domestic production. here gdp increases. but relayimg only on exports for gdp growrh will have a negative effect in long term.
4)budget deficit could be financed by borrowing from world financial institutions of foreign flow of money
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.