While many of us may choose to avoid acquiring economic literacy if it’s irrelevant to our line of work, this isn’t a recommended practice. There’s no denying that economics impacts our everyday lives. Understanding how the resources limited in quantity get distributed within a society influences how we spend our money on a daily basis.
This leads us to the question, what is the US economy system? Moreover, how does it work? In this article, our aim is to answer these questions and make you aware of the US’ current standing when it comes to the economy.
Which economic system does the US follow?
The economic system that the US follows is a mixed economy. The said system comprises traits of both capitalism and socialism. Even though the capital expenditure is subject to economic freedom, the government might interfere if it feels necessary to do so to protect the interests of the public.
It should also be noted that the government of the US regulates a portion of the economy that ensures its intervention in numerous areas such as hospital care, education, roads, courts, etc.
Working of the US economy
If you are interested in finding out what is the US economy system, gaining an understanding of the following concepts might be a good first step.
1. Gross Domestic Product (GDP)
GDP or Gross Domestic Product is calculated by summing up net exports and the expenditures of consumers, companies, and the government itself within a specific timeframe, usually a quarter. As revealed during the Federal Open Market Committee (FOMC) meeting held in December 2021, an increase of 4.2% must be expected in the US GDP growth over 2021.
It should be noted that a negative GDP growth rate paves the way for recession and that continual decline in the growth rate leads the country to enter a state of depression.
Currently, the US economy is the 2nd largest in the world, edged out by China.
2. Supply & Demand
Labor and natural resources make up Supply. On the other hand, Demand, responsible for powering about 70% of the economy, indicates personal consumption. A significant portion of Demand happens over the last quarter of the year which comprises holiday shopping.
One of the reasons why the US economy isn’t improving considerably since the early 2000s is that more than 10% of the population is filed under the “poor” or “near poor” category.
3. Federal budget deficit
When expenditures surpass the generated revenue, a budget deficit happens. In the wake of the coronavirus pandemic, the US economy was forced to enter a recession. Moreover, it was predicted that the federal budget deficit would amount to nearly $4 trillion before the start of 2021.
It’s common knowledge that the annual deficit is added to the country’s debt. And as per a prediction made by the CBO last year, the US’ federal debt to GDP ratio would exceed the 100% mark.
4. Inflation & Deflation
If demand exceeds supply and this results in an increase in prices, inflation happens. Inflation doesn’t affect everyone in the same manner. Instead, a person’s income and its sustenance rate in comparison with the rising prices direct the extent of the impact.
One mistake that people generally make when inflation hits is that they start hoarding stuff in fear of the rising prices. This leads to the demand getting even more.
Contrary to inflation, deflation is a condition that reflects a decrease in prices. When it comes to the national economy, deflation is way more damaging than inflation since it prompts an economic crisis.
5. Monetary & Trade policies
The Federal Reserve is tasked with regulating the monetary policy and boasts tools that govern the impact of interest rates on the economy.
Coming back to monetary policy, its major goals are to manage inflation, prompt the economy, and ensure that the banking system is running fine.
As for the Trade policy, it impacts the import/export cost by supervising inter-country trade agreements. The motive behind a well-crafted trade agreement is to lower trade expenses and boost the GDP of all the countries involved.
The US has been a staunch supporter of bilateral and regional trade contracts.
It should also be noted that almost every international trade contract proceeds in US dollars since USD happens to be the conventional global currency.
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If you are to manage your expenses the right way and look at the bigger picture, a firm understanding of the US economy is a must. Gaining insight into concepts such as GDP, inflation, deflation, supply, demand, and different policies (trade, monetary, fiscal, etc.) will tell you where the current US economy stands.