Macroeconomic Analysis of a Country – USA

Group – 5 | Section – C | Submission – 2

Aastha PGP34101 Aaditya PGP34100 Abhishek FPM19006 Akshita PGP34105 Harsh PGP34116 Vinay ABM14021

Very Long Run Growth Story:

Table 1 shows that the US economy has been experiencing a low GDP growth rate in the range of (2-
3%) except for the 5-year period of 2005-09 during which US and the world economy experienced a
financial crisis. Also, the period from 1995-99 experienced an exceptionally high GDP growth rate of
~4%.
The inflation rate has seen a constant decline from 7.5% in 1980-84 to 1.2% in 2015-17.
The unemployment rate as expected is negatively correlated to the GDP growth rate over the time period
under study, However, it took an unexpected turn in 2010-14 when the unemployment rate went up
simultaneously with increase in GDP growth rate.

Structural Changes:
From Table 2, we can see that the share of the industrial/secondary sector in the GDP has gone down
from 24.75% during 1997-01 to 20.79% during 2012-16. Contribution of service/tertiary sector has
increased from 74% in 1997-01 to 78% in 2012-16. However, the share of agricultural/primary sector
has remained flat at around 1.1% - 1.2%. Since the service sector’s contribution is a little more than
three-fourths of GDP, we can conclude that the US economy is moving towards stability.

Analysis of Long Run:

The US economy experienced an unimpressive long run period from 1997 to 2018, witnessing a falling
GDP growth rate and rising unemployment numbers. Table 3 shows the GDP growth rates which
plunged from 3.74% to nearly half at 2% in 2017-18. The unemployment figures rose from 4.47% to
6.02 in this 20-year period.

Output Gap:
The long run trend line for the US economy (as shown in Graph 4) slopes downward which is typical
of a developed economy i.e. moving towards stability. The average growth rate of the US economy is
c2% which is in accordance with the growth rate of a developed economy. The output gap in the most
recent year i.e. 2017-18 is c0.7 (2.27%-1.57% = 0.69) percentage points.
Relationship between output gap, unemployment rate, inflation – when the output gap is increasing (for
e.g. in 2014-15, from 0.9 to 1.2 percentage points), unemployment rate is decreasing (from 6.2% to
5.3%) and inflation has increased soon after (i.e. in 2016-17, from 1.3% to 2.1%).

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Summary:
The US GDP growth rate was ~ 3% and has been reduced to ~ 2%, the lower growth rate validates US
being a developed economy. Though inflation rate is reducing over the years which is as low as 1.17%
(2017-18), whereas increase in unemployment rate (4.4% to 6%) may be the matter of concern.
American economy is mostly service dependent with around 3/4th of GDP coming from this sector.
Thus with low GDP growth rate, stable inflation rate and low unemployment rate we can conclude that
US qualifies to be called as a stable economy which can be easily validated from the flattish output
trend line curve.
Overall, we can see that the US economy has been quite stable over the last few decades barring some
years during which it saw the tech bubble, the housing price bubble, and the global financial crisis. The
US economy seems to be on a path of declining growth rate as seen in the trend line which is justifiable,
as, in a developed economy, there are very few opportunities for investments resulting in the slow-down
of the economy. GDP growth rate in the recent years has been very volatile with unemployment rate on
a continued downward path and inflation increasing slowly which is the major reason behind Federal
Reserve's belief that the US economy is finally recovering and interest rates must go up slowly to
prevent overshooting the inflation target.
 Very long run analysis (Tables - I):
GDP Growth Rate: Rate of Inflation: Unemployment Rate (seasonally adj):

Year GDP Growth % Year Inflation % Year Unemployment %

1980-81 to 1984-85 2.47 1980-81 to 1984-85 7.51 1980-81 to 1984-85 8.42

1985-86 to 1989-90 3.82 1985-86 to 1989-90 3.60 1985-86 to 1989-90 6.22

1990-91 to 1994-95 2.44 1990-91 to 1994-95 3.64 1990-91 to 1994-95 6.59

1995-96 to 1999-00 4.03 1995-96 to 1999-00 2.36 1995-96 to 1999-00 4.93

2000-01 to 2004-05 2.69 2000-01 to 2004-05 2.54 2000-01 to 2004-05 5.21

2005-06 to 2009-10 0.94 2005-06 to 2009-10 2.59 2005-06 to 2009-10 5.88

2010-11 to 2014-15 2.12 2010-11 to 2014-15 1.99 2010-11 to 2014-15 8.03

2015-16 to 2017-18 2.21 2015-16 to 2017-18 1.17 2015-16 to 2017-18 4.83

Source: The World Bank Source: The World Bank Source: Bureau of Labour Statistics
Structural Changes (Table – II):

Sector Primary % Secondary % Tertiary %

1997-01 1.20 24.75 74.03

2002-06 1.14 21.71 77.14

2007-11 1.16 21.01 77.82

2012-16 1.19 20.79 77.97

Source: The World Bank

Long run analysis (Tables & Graphs - III):

GDP Growth Rate: Rate of Inflation: Unemployment Rate:

Year GDP Growth % Year Inflation % Year Unemployment %

1997-98 to 2001-02 3.74 1997-98 to 2001-02 2.45 1997-98 to 2001-02 4.47

2002-03 to 2006-07 2.87 2002-03 to 2006-07 2.63 2002-03 to 2006-07 5.40

2007-08 to 2011-12 0.57 2007-08 to 2011-12 2.22 2007-08 to 2011-12 7.65

2012-13 to 2017-18 2.18 2012-13 to 2017-18 1.44 2012-13 to 2017-18 6.02

Source: The World Bank Source: The World Bank Source: Bureau of Labour Statistics

Output Gap analysis (Graphs – IV):

Source: The World Bank