ECON 2301- Writing AssignmentMalmi Senaweera1). 2). According to the two graphs above, the federal budget deficit and the budget deficit as a percentage of GDP shows that the government has been running with deficits for the most part of last twenty years. The graph shows a budget surplus from 1998-2001, but from 2002 to present year it shows a budget deficit. The deficit has been the largest in 2009 due to the Great Recession and the graph shows significant improvements in the recent years.3). 4). The U.
S. national debt graph illustrated above shows the increase of the national debt over the last twenty years. There shows no significant change from 1996-2001.
The debt rate has since gradually increased and after the Great Recession in 2009 it has been in an onward strike. The U.S. national debt as a percentage of GDP graph shows a downward trend from 1996-2001, but has increased gradually over time.
Even though the graph shows a drop in 2015, it has risen by the next year. 5). When the government revenue is higher than government spending there is a surplus, but when government spending is higher than revenue it is called a deficit. That is how a budget deficit comes into existence.
To deal with a budget deficit the administration can cut down on its expenditures and/or increase revenue generating activities like collecting more taxes. (class textbook)6). When government spending and borrowing results in the increase of interest rates and reduces business investment and household consumption, it is known as crowding out. The government should be concerned about crowding out because if an expansionary fiscal policy intended to increase aggregate demand, increases interest rates, discouraging firms and households from borrowing and spending, that creates a reduction in the aggregate demand. Crowding out depends on the state of the economy. It will not occur if the economy is producing below full capacity as the government is spending its unused resources. (class textbook and https://economictimes.
indiatimes.com/definition/crowding-out-effect)7). When the government employs an expansionary fiscal policy to boost the economy by increasing its spending, it can also increase the interest rates.
When the interest rates increase it affects the private investment decisions and household consumption. With high interest rates people tend to borrow less and this leads to a reduction in spending (investments and consumption) which results in a decrease in aggregate demand. Government borrowing can crowd out private investment. High government deficit leads to less private investment on physical capital.
(class textbook and https://economictimes.indiatimes.com/definition/crowding-out-effect)8). The administration and the congress can increase the budget deficit by any tax cut or spending increase. This is an example of expansionary fiscal policy and it helps solve a recessionary gap in the economy by increasing the aggregate demand. The government can decrease the budget deficit by any tax increase or spending cut. This is an example of contractionary fiscal policy and it helps solve an inflationary gap in the economy by decreasing aggregate demand. Therefore, it is clear that the government can increase or decrease the budget deficit to solve an overheated(inflationary gap) or an underperforming(recessionary gap) economy.
When the government increases the aggregate demand, it leads to an increase in the price level, reduce the unemployment rate and increase the economic growth. When the government decrease the aggregate demand, it can reduce the price level, increase the unemployment rate and decrease the economic growth. (class textbook) 9). The administration and the congress is able to change the size of the deficit by cutting down on expenditures and/or by collecting more taxes. By doing so they can reduce the budget deficit. This is most appropriate when the economy is in an inflationary gap and is producing above its potential GDP as it can reduce the upward pressure on prices and cool down the economy. The administration can also increase expenditure and/or cut taxes to increase the aggregate demand. This is most appropriate when the economy is in a recessionary gap and is underperforming.
(class textbook)10). As of June 30th 2017, the national debt was $19.8 trillion.Foreign and international entities- 31%Domestic non-federal entities- 29%Federal government funds- 28%Federal reserve- 12% http://www.justfacts.com/nationaldebt.asp#ownership11).
Debt instrument is an agreement between a lender and a borrower. Bonds, leases, notes, mortgages and debentures are different types of debt instruments. The government issue debt instruments to its debt owners promising them to pay back within the terms of a contract. These debt instruments have different maturity dates. The government pays interest as promised to the lender in addition to the total loan amount which is paid in full on the date of mature. They receive funds to pay off the debt through tax revenue and other government and foreign borrowings.
https://www.investopedia.com/terms/d/debtinstrument.asp?lgl=myfinance-layout-no-ads12). The U.S.
federal debt as of June 2017 was calculated up to $19.8 trillion. The size of the national debt and the interest payment on the debt has been increasing and I believe that it could cause problems if it keeps rising immensely. It could lower the standards of living and the future national income. Government will have to cut down on its spending to pay off the debts. There will be increase in taxes and inflation and budget deficits.
13). 14). The U.
S. trade balance from 1997-2017 is illustrated in the graph above. The graph shows wide fluctuations in the trade balance. It bottomed out in the years 2005, 2006 and 2008. The graph also shows a significant rise from 2008-2009. Since then it has been fluctuating between 50000 to 30000 (U.
S. million dollars). The second graph depicts the U.S. trade balance as a percentage of GDP from 1993-2013. The graph fluctuates and it peaks in 1995 with -1.19 percent of trade balance and bottomed out in 2005 with -6.21 percent of trade balance.
15). It is impossible to strive for both a trade surplus and a healthy inflow of financial capital in a country. Money flows into the country from foreign investments(income payments). A trade surplus is when a country’s exports exceed its imports. Economists consider trade surplus as literally the same as outflow of financial capital which is payments made to foreign investors who invested in U.S..
Trade surplus will not always mean the economy is in a good shape and the inflow of financial capital depend on government decisions and the current economy of the country as well as the world. For example, in 2013 the Democratic Republic of Congo has a trade surplus of $1 billion while the U.S had a trade deficit of $508 billion, but it does not mean that the U.S. economy was doing worse than the Congo economy.
https://opentextbc.ca/principlesofeconomics/chapter/introduction-to-the-international-trade-and-capital-flows/16). Protectionism protects local businesses and jobs from foreign competition.
It hurts international producers and domestic consumers. Without competition there will be no innovation. This will weaken the industry, decline the quality of domestic products and increase the prices. If our country closes its borders to trade so will the other countries, leading to layoffs in the export sector. (https://www.thebalance.com/what-is-trade-protectionism-3305896)17).
Tariffs, quotas on imports, and subsidies or tax cuts. A tariff is a tax imposed on imported goods and services. They increase the price of imported goods and services and provides additional revenue to local producers and the government. (https://www.investopedia.
com/terms/t/tariff.asp)Quotas regulate the volume of trade. By imposing quotas on trade, the government can limit the number of goods and services imported and helps the domestic production.
(https://www.investopedia.com/terms/q/quota.asp)Subsidies are financial support provided by the government, usually in the form of tax cuts or cash payments to assist struggling domestic businesses.https://www.investopedia.com/terms/s/subsidy.
asp18). I think trade should be inhibited in certain ways to prevent the losses. For example if we consider the workers who lose jobs due to foreign imports that will be a cost to the country no matter how much the benefits of international trade were. As a solution the government can inhibit trade by imposing tariffs on goods to imported goods to increase their prices, impose quotas on trade to limit the imported goods and services or give give tax reductions to domestic businesses. This will greatly help the local workers and reduce the number of unemployment due to foreign imports.