Economics: Application of Concepts
An Analysis of the Economic Situation in the U.S.
In the last five years, we have seen the U.S. economy expand but at a pace that is seen as being relatively moderate. In conducting an analysis of the current economic situation in the U.S., I will largely limit myself to inflation, interest rates, and unemployment.
Although the current economic situation is better than it was five years ago, there are signs of uncertainty that continue to suppress economic activity. This is more so the case taking into consideration the prevailing unemployment rates. For the most part of year 2008, the unemployment rate was stuck between 5% and 6% (Bureau of Labor Statistics, 2013). As at January this year, the nation’s unemployment rate stood at 7.9% (Bureau of Labor Statistics, 2013). This is an indication that in comparison to five years ago, the total unemployed labor force increased significantly.
Standing at 1.6% on January 1st of this year, the U.S. inflation rate during a similar period five years ago stood at 4.3% (Multpl, 2013). The relatively high inflation rate five years ago can be attributed to the adverse effects of the 2007 — 2010 financial crisis. It is however important to note that in the recent past, the cost of imported raw materials has fallen and labor costs have stabilized. This has helped rein in inflation.
When it comes to interest rates, it should be noted that in an attempt to stir economic activity and neutralize the effects of the recent downturn in economic activity, the Federal Reserve has in recent times attempted to keep interest rates low through the maintenance of near zero interest rates (Board of Governors of the Federal Reserve System, 2012). In comparison to five years ago, the current performance of the stock market as well as GDP growth can be regarded impressive.
Strategies the Federal Government Could Implement to Encourage People to Spend More
The federal government could make use of a number of monetary and fiscal policy tools in an attempt to encourage individuals to expand their spending. In this scenario, I propose two fiscal tools that the government could utilize.
To begin with, the federal government could in this case increase its spending. This would ordinarily be through an increase in the acquisition of goods and services including but not limited to expenditure on defense and health, construction of military barracks and roads, etc. If the said spending leads to the creation of more jobs for those who happen to be unemployed, then the federal government would have succeeded in stimulating spending.
Secondly, the federal government could decrease taxes in an attempt to stimulate the demands for goods and services. For instance, decreasing direct taxes would have the effect of increasing the disposable income of individuals (and hence their demand for goods and services).
The above approaches are in some quarters seen as being effective in stimulating aggregate demand. However, it has been argued that tax cuts are more rapid than increased government spending when it comes to the stimulation of aggregate demand (Gwartney et al. 2010). Spending projects as the authors point out are in most and in that regard; their impact may not be felt immediately.
An Analysis of a Past Monopoly Situation
AT&T for most of the as a monopoly (Samuelson and Nordhaus, 2010). Indeed, the company had entered into an agreement with the government in a move that allowed it to act as a monopoly sanctioned by the government. For some time, this offered the company reprieve from the scrutiny of regulators. However, in 1974, a suit against the company was filed in what eventually led to the mandatory splitting of AT&T into seven different entities. In this particular instance, the Department of Justice according to Samuelson and Nordhaus (2010) accused the company of monopolizing “the by anticompetitive means, such as preventing MCI and other carriers from connecting to the local markets” The company according to the authors was also accused of monopolizing “the telecommunications-equipment market by refusing to purchase equipment from non-Bell suppliers” (Samuelson and Nordhaus, 2010). These are the reasons that prompted the government to step in.
Had the monopoly succeeded, competitors would have been edged out of the market. Those who would have been affected in this case include carriers like MCI and a host of telecommunication-equipment suppliers. With no competitor to watch out for, AT&T would have been tempted to charge prices higher than those possible in a competitive market. It is also likely that the quality of services offered by the company would have suffered.
Methods of Identifying Customers to be Offered Discounts
In some instances, an attempt by a given company to offer discounts to some groups of customers could have the effect of alienating some of its consumers. To avoid this, business entities should embrace fair and creative methods of identifying those who should be offered a discount. The said customers in this case could be selected on the basis of volume of purchase or on the basis of customer loyalty. In regard to the volume of purchase, this is akin to a quantity discount in which case the customer to be offered a discount is selected on the basis of the number of items bought. For instance, those who purchase three cans of product X could be offered a discount without alienating other customers. Secondly, customers could be offered a discount on the basis of loyalty to the seller, i.e. On the basis of the cumulative value of purchases done over time. For instance, the seller could in this case decide to offer those who have purchased goods worth $100 dollars during a specified period of time, i.e. quarterly, a discount of 8% in their next purchase. This in my opinion would bond buyers to sellers. Those who do not qualify in this case would be motivated to increase the value of their purchases with a specific seller so as to qualify for the discount.
Why a Monopoly May not be Efficient in an Economy
To begin with, it is important to note that given the absence of stiff competition, a monopoly may not produce goods and services having the best possible value as would be the case in a competitive business environment. In this case, the monopoly also has no significant incentive to embrace innovation. Over time, this would effectively affect the value and quality of goods and services offered to customers. Secondly, a monopoly could also seek to stifle output in an attempt to trigger an increase in prices. In the words of Baumol and Blinder (2007), “monopoly breeds inefficiency in resource allocation by producing too little output and charging too high a price.”
Next, it should also be noted that as a monopoly grows larger, diseconomies of scale could result. According to Gwartney et al. (2008), an increase in the size of a firm could bring about bureaucratic inefficiencies. According to the authors, a very large corporation could face challenges executing managerial directives, keeping the workforce motivated, etc. In such a case, it becomes costly to effectively monitor not only productivity levels but also the quality of output. In the final analysis, this ends up impacting negatively on efficiency.
Baumol, W.J. & Blinder, A.S. (2007). Microeconomics: Principles and Policy (10th ed.). Mason, OH: .
Board of Governors of the Federal Reserve System (2012). Why are Interest Rates being kept at a Low Level? Retrieved March 2, 2013, from the Federal Reserve website: http://www.federalreserve..htm
Bureau of Labor Statistics (2013). Labor Force Statistics from the Current Population Survey. Retrieved March 2, 2013, from the Bureau of Labor Statistics website: http://data.bls.gov/timeseries/LNS14
Gwartney, J.D., Stroup, R.L., Sobel, R.S. & Macpherson, D.A. (2010). Macroeconomics: Private and Public Choice (13th ed.). Mason, OH: Cengage Learning.
Gwartney, J.D., Stroup, R.L., Sobel, R.S. & Macpherson, D.A. (2008). Economics: Private and Public Choice (12th ed.). Mason, OH: Cengage Learning.
Multpl (2013). U.S. Inflation Rate. Retrieved March 2, 2013, from the Multpl website: http://www.multpl.com/inflation/table
Samuelson, P.A. & Nordhaus, W.D. (2010). Economics (19th ed.). New York: McGraw-Hill Companies, Inc.