Macroeconomic Comparison Essay
A Macroeconomic Comparison of the United States of America and Germany (2002-2012) Thomas Edison State College Macroeconomic Comparison By warehouseman USA: GAP is an important measure of the health and wellness of an economy. GAP in short is, the total expenditure of an economy through its consumption, investment, government purchases and net exports. According to data release by the world bank, the United States has the largest national GAP on the planet by almost double its next closest competitor (GAP ranking).
Using this fact as a starting point, it is logical to ay that the United States has had the largest GAP for quite a few years and in-fact the US have been the worlds biggest economy since 1871 (Staff 2). The visual trend that can be seen in the graph is that the economy experienced fairly steady growth from the early assess and then around 2007 we seemed to have leveled Off bit. I believe this to be because of a drop off in the investment component of GAP. Home prices peaked in 2006 and then over the next 5 years began to steadily decline. Trivial) This decline in one component of GAP caused a stagnation of the growth in
Need essay sample on "Macroeconomic Comparison"? We will write a custom essay sample specifically for you for only $ 13.90/page
The answer is yes, and I will elaborate on these points as we expand our comparison. Germany: When we take a look at Germany’s chart the first thing we notice is how much less hey produce than the US. Germany is known for having some of the most skilled and efficient workers in the world, so why are they not producing more? The reasons for this large difference is in the consumption rates between the countries. US citizens have this want and need to consume and since we have become so accustomed to a growing economy there is always that mindset of “we can afford it. In Germany it is not like that; people live more within their means and are a bit smarter with their money. Being that consumption is such a large component of GAP this is a major factor for why Germany is so far behind the US. Germany’s growth rate appears to be steady when you exclude the year 2009. Their largest growth occurred in 2010 at ?2%. When compared to the Use’s growth rate this looks tiny compared to their high of ?6%. When one considers the size difference of the two economies it makes it even more startling. Again as in the US there was a sharp decline in 2009.
I conceive that this drop was a reactionary result around the world. Just like during The Great Depression once everyone saw the US economy begin to weaken, other economies got thrown into recession as well. Why can the US have such large steady growth and the German’s can not. I believe this is due to a few reasons; the size of our population and therefore our work force is resources needed to make goods is much larger as well. Exchange Rate – The US dollar has historically had a strong exchange rate while also being the most traded currency in the world (Staff 1).
Over the 10 years that we are looking at in this paper it is evident that the overall trend is that of depreciation. This chart is compared to a basket of other currencies that include the Euro, Yen, and CAD among others; so it is fair to say that while the US dollar has been depreciating the other currencies in the basket are appreciating. This has both positives and negatives for the US. While the US dollar is becoming less valuable it is making the costs of our goods cheaper and along side the appreciation in the other currencies this is making our products more affordable world wide.
The negative is that it is making the products we buy more expensive, and seeing we are a major importing country this has a more negative effect on our economy. A large part of this drop could be due to the increase in money supplies following the collapse and during the Iraq war. Germany is apart of the rezone which uses the Euro as its primary currency. There are 18 member countries throughout Europe that use the Euro and so it represents a large piece of the continents economy.
In the grand scheme of things it is considered to be the second most important currency in the world behind the US dollar (Staff 1), so it’s USED to Euro exchange rate is also very important. As we can see it is almost the complete inverse of the US exchange rate, since the Euro makes up such an important component of the basket used to compare to the dollar. Over the past 10 years the Euro has appreciated strongly compared to the dollar who has depreciated. Inflation Rate – The US inflation rate compared to the ICP shows an economy with rather steady inflation over the past ten years.
Then came 2008, the housing market collapsed and inflation rose too 10 year high signaling what was coming next. As we will see later on in the paper, 2009 led too 100% increase in unemployment over previous 2 years. This is a tradeoff that Fed Chairman Paul Blocker made willingly to curb high inflation in the early ass’s (Manama). Only this time it was the market doing it to itself to try to reach its new equilibrium and even though it is taking a bit longer than his experience did we are finally beginning to level off.
The farther we get into our analysis the more we can see that in so many ways -2% inflation, Germany only suffered by about a half percent. The reason I postulate that our recession had so little effect on Germany’s inflation rate was that their economy may not rely on ours but they also had the benefit of all the other member nations economies. With this diversified approach to their currency they were able to salvage what they could. Interest rate on Short-term Government Debt – For short term debt we are going to look at the 10 year government bond rate.
Over the course of the 10 years shown here it is clear that interest rates have been rending down steadily, but why? When you take into account the items we have previously covered we can pull it all together and get a clear picture of the why. The housing market collapse was felt all over, the leveling off of GAP and its lack of growth caused inflation to fall sharply. To stimulate the economy and consumer spending the Fed pulled back interest rates along with its natural fall that was occurring due to falling price levels.
Since lower interest rates make borrowing less expensive and encourage investment spending the economy was trying to recover from its fall. The recess of recovery is still going on today and it is not clear yet if we have recovered yet or how long it will take. Keeping an eye on the government bond rate is a good indicator of how well we are doing. Germany’s government bond rates follows the Use’s, which seems to be the trend throughout this comparison. One can see the two distinct humps around 2002 and 2004 which once again shows how intertwined our two nations are.
Again the downward trend that is shown keeps driving the point home of how many different worldwide markets were effected by the US housing collapse. Unemployment Rate – unemployment rate was computed to be 4. %. (Manama) In 2012 the Cleveland Federal Reserve did research on the topic again and determined the new natural rate to be 5. 7%. (Madame) Over the course of 5 years what caused this nearly 1% natural unemployment rate change? This 1% may seem small but what should be stated is that in reality this is more than 3 million people who will be long term unemployed for the economy to stay ‘healthy’.
The collapse of our economy has had ripple effects through the employment sector, it has caused companies to close up shop as well as lay off its workers. Another point that should be noted that is not visible in charts or rapes is the mindset and positions of those who were unemployed following the collapse. There was a large influx of workers into the unemployed pool causing some to accept positions below what they are qualified to do or even take part time Jobs just to have some sort of income. There will also always be those who are over qualified for Jobs and these people in many cases Just decided to remove themselves from the pool.
While the US is near it’s worst unemployment rates in 2012 Germany is at its lowest point which illustrates there is little connection between the employment rates of the two nations. Germany’s unemployment rates in the early assess were varying and could be due in part to the reliance on seasonal positions or government projects. Later in the sass’s they clearly have a steadily improving unemployment rate. This can be attributed to the Hart II legislation that was enacted in 2003 which made new types of employment as well as offered grants to entrepreneurs to help increase employment.
This new found employment has not necessarily been of benefit to Germany with many saying it has led to even more social inequality (Knight). Trade Deficit/Balance of Trade – The first thing we notice on this trade deficit chart is that is we are in-fact in the negative. What this means is that we import more than we export. This is not a bad thing if we are getting goods at lower prices than what we could produce them for, government policies favor this arrangement or if our exchange rate is strong. Lets look at the mid sass’s inflation was hitting its highest point in the decade, unemployment was low, and our GAP was still rising.
Consumerism was in full swing, and since we can get items cheaper overseas that means more items overall and a greater standard of living. Then again that pesky housing collapse decided to show its head. Consumer confidence fell, unemployment rose, companies shut down and peoples wallets got tighter. This lead to the large reduction in imports that we see at 2009. While this could have been attributed to the nation exporting more, when one Germany on the other hand shows what it is like to be a major exporter. With a high rise from the beginning of the decade to the end; it hasn’t been smooth sailing throughout though.
The way the balance of trade compares to the Use’s leads me to believe that since it is a major exporter it may rely on other economies more than say n importing nation. Again it could also be correlated to a strong seasonal output seeing as Germany’s top two exports are machinery and vehicles which following a business cycle leading to the sharp peaks. (Workman) Strengths – Each nation has it’s strengths and it’s weaknesses when compared to the other. The US has large amounts of land and a large available workforce. These things do not make us necessarily efficient or a major exporter.
The fact that we have such a large population with high expectations and a high standard of living lead us to be a major consumer of the worlds products. This in-turn makes our exchange rate very important. Our exchange rate has always been fairly strong but has been falling over the past decade which could be a sign of either uncertainty in the market place or the emergence of other markets abroad. When compared to Germany with its low unemployment rate, stable inflation, and low interest rates, it makes Germany seem like a very good place to live.
When you add a variable on top of the comparison, like GAP per capita, you can see that even with these strengths Germany is nearly $10,000 a year less per resident. (GAP per capita) Conclusion- Over the course of this class I have learned about a large amount of different economic variables. What I found to be unique about these different variables is that very rarely can you only change one for the betterment of your economy. Many are intertwined with others such as the money supply and inflation, GAP, and unemployment, as well as national saving and its relations to domestic investment and net capital outflow.
These points are only driven home when comparing two countries who have a strong relationship with each other such as these. Reports have said that has much as 50% of Germany’s FED (foreign direct investment) comes from the US and that about 8% off all FED coming into the US comes from Germany. This point along with the synchronicity of the inflation, government bonds rate, balance of trade, and GAP growth rate show how we are connected to Germany in more ways than one. So when a bubble bursts like it did in 2007 you can be assured that the decisions we make in the market here at home has affects that will be felt worldwide.