Evaluation of the Current State of the U.S Economy
The state of the economy is essential because it influences decisions made by the government, entrepreneurs, and citizens at large. The Bureau of Economic Analysis produces the U.S economic statistics. Therefore, the evaluation relies solely on the data from this department.
The U.S Gross Domestic Product has gone down by 32.9% in the 2 nd quarter, 2020. During the 2020 1 st quarter, the GDP went down by 5%. The decrease in GDP during the 1 st quarter was caused by industries that deal with accommodation, insurance, healthcare, and food services. The real GDP went down in all the fifty states of America during the first quarter of 2020The citizens’ income also went down by 1.1%, and the spending by consumers has gone up by 5.6% in June 2020. The current account deficit moved from -$104.3 billion in the last quarter of 2019 to -$104. 2 billion in the 1 st quarter of 2020. This is an improvement of 0.1%. The BEA and Census bureau reported that the international trade deficit in the U.S went down by $4.1, that is, $54.8B in May 2020 to $50.7 in June 2020. This resulted from a higher number of exports compared to imports. Looking at the statistics above, the Gross Domestic Product has decreased; thus, measures have to be put in place to save the economy.
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How a Keynesian Monetarist and Neoclassical Theorist Would Each Propose Promoting Economic Growth
As illustrated above, the U.S economy is going through a recession due to the effects of the covid-19 pandemic. Different theorists will have different ways of saving the economy. A Keynesian theorist would propose an increase in the consumers' consumption of goods and services to correct the economic recession. John Maynard Keynes did not ignore the fact that people will prefer spending less and saving most due to uncertainties that may arise during the economic recession. To a Keynesian theorist, this is a cycle of problems as it will lead to fewer profits by businesses, which will lay off workers leading to more suffering. Thus, a Keynesian theorist would propose that the government increases expenditure to compensate for less demand; this will lead to job protection and increased productivity. The citizens will have the power to purchase, thus increase consumption. The theory was developed to determine the conditions necessary for a country to achieve full employment (Adilson et al., 2017). A Keynesian theorist could also propose the use of labor-intensive means of production and building of the government infrastructure to increase demand for goods.
A monetarist theorist will emphasize on the need to control inflation during the economic recession. The supply of money in the U.S economy should not be too high or too low. The government should not increase its expenditure to save the economy because it can increase the money supply in the economy, which will lead to inflation.
A neoclassical theorist would propose that the U.S government concentrate on labor, capital, and technology to improve its economy. The capital in the U.S economy should be used productively. Labor and capital are the determiners of the economy's growth. The use of technology in the production process will improve labor that increasing output.
Cause and Effect Variables that Each Theory Uses to Explain Business Cycles
The neoclassical theory uses Gross Domestic Product, capital, labor and technology as Its variables to explain the business cycles. A variation in labor, capital, and technology has an impact on the GDP. If labor, capital, and technology are equal, the GDP goes high and vice versa. For example, if there is enough capital in the economy, but the labor is weak, and technology is not used well, the output will be low. The formula used by the neoclassical theorists is “Y= F (K, AL), where Y is the GDP, K is the c capital, L is the unskilled labor, and A is the level of technology used.” The GDP is, therefore, directly proportional to the capital, labor, and technological level.
The Keynesian theory uses propensity to consume, the marginal capital efficiency, and the interest rate as the independent variables, and the employment volume and the national income are used as the dependent variables. When the demand is high, there is employment, which increases the demand for goods and services, thus increasing spending by consumers, which leads to economic growth. When people are spending less, the demand is low, productivity slows down, leading to unemployment. When there is an instability in the economy, the government policies on the economy are the source of the entrepreneurs' expectations on investment (Arestis et al., 2018). Therefore, the government has to intervene by increasing its expenditure to save the economy.
The monetarist theory uses money supply, the velocity of money, products’ prices, and the amount of products and services at its variables. A rise in the money supply in an economy will result in increased productivity, thus economic growth. The theory uses the formula: “MV=PQ where M=money supply, V=velocity of money spent, P=price of goods and services, and Q=quantity of goods and services produced” (Adjei, 2018). If the money supply in the economy (M) increases, the price of products and services (P) tends to go up, the quantity (Q) will also go up, taking the velocity (V) to be constant. Thus, more money injected into the economy will increase productivity, which will lead to an increase in the GDP if the economy is in slack. According to Adjei (2018), there exists a correlation betwixt inflation and the growth of money in any economy. Therefore, the U.S government should come up with policies targeting the money control to reduce inflation during an economic recession; this will keep the economy at equilibrium by controlling the liquidity in the economy.
Conclusively, the U.S economy has noticeably declined as a result of the globally-felt effects of Covid-19. The monetarists, Keynesian and Neoclassical theorists will have different proposals on the best way to deal with the economic recession in the U.S. Each school of thought has its variables that it uses to illustrate the business cycles. The government should borrow from these schools to bring the economy back to normal.
References
Adjei, S. (2018). Inflation determinants-Milton Friedman’s theory and the evidence from Ghana, 1965-2012(using ARDL Framework). International journal of applied economics, finance, and accounting 3 (1). 21-36.doi: 10.33094/8.2017.2018.31.2136.
Adilson, G., Einloft, P., & Basilio, P. (2017). The incorporation of structural change into growth theory: A historical appraisal, EconomiA, ISSN 1517-7580, Elsevier, Amsterdam 18(3). 392-410
Arestis, P., Filho, F., & Terra, F. (2018). Keynesian macroeconomic policy: Theoretical analysis and empirical evidence. Journal of panoeconomicus 65 (1). 1-20. doi: 10.2298/PAN1801001A
