Did you ever think about what is the US economic system and how does it work? Well, questions like this are common to arise in people’s minds and the answer to it requires attention to detail.
The US economy banks upon individuals, businesses, banks, social institutions, etc. Everything that these entities produce makes up the US economy. There are various factors that influence how the US economy works. Let’s look at some of these factors in detail.
The Measurement Criteria
The first and most important measurement criteria of the economy is the GDP, i.e. Gross Domestic Product. It includes everything that is being produced in the country, by citizens, non-citizens, or companies. To understand it better, let’s look at the three main measures of GDP.
- The GDP growth rate is calculated using the real GDP numbers from the year or quarter to compare to the previous year or quarter.
- Nominalized GDP is used widely. It works on an annual rate and projects the economic health of the country if the economy will go on the same rate the next year.
- The Real GDP is the same as nominalized but it is without the effects of inflation and is used by economists to compare GPD growth over a period of time.
Read full article: JPMorgan predicts the US economy will shrink in early 2021
Apart from these, to understand the US economic system, it is critically important to know what GDP figure is comprised of:
- 70% of GDP is based on consumer spending
- Intellectual properties, manufacturing, real estate construction are all a part of business investment.
- The federal, state, and local expenditures are included in government spending.
- The last one is the measure of net exports. This includes all the export items that add to the economic system and the imports that are subtracted from it.
What Influences the US Economic System?
The Federal Reserve System
This is the country’s national bank and manages the nation’s money supply. This money supply is managed by adjusting the money, the banks have available to help with the open market operations. It also adjusts the interest rates and ensures inflation and unemployment rates are managed properly.
The Federal Reserve System is responsible for the expansionary monetary policy. This is when it adds to the money supply. This happens when the national bank lowers the interest rate or adds credit to the banks. This helps in really speeding up growth and reducing unemployment. If the opposite happens and the growth is too fast and ends up creating inflation. At this point, the federal reserve system uses a contractionary monetary policy. This removes the credit from the bank’s balance sheet and raises the inflation rate. This then slows down the process and allows for more growth.
Then comes the commodities market which has an unregulated and unmeasured effect on the US economy. To understand what the US economic system is, you need to know that the commodities market is where food, oil, and metals are traded. The reason it is difficult to regulate these is that the traders change prices on these every single day. The same is the foreign exchange market that has an effect on the value of the dollar and has a direct impact on imports and exports.
The Government’s Impact on the US Economy
The US government has always had a stronghold on the economy. As time passed, most of the markets and institutes became a part of the public realm. At a point in history, the economic situation was moving towards a free market economy. In a free-market economy, the private sector that includes businesses and individuals are mostly unaffected and unregulated by the government economic laws.
The US economic system, which is a mixed economy system is governed by the laws of both, a free market economy and centrally planned laws that are designed by the government. These regulations vary. For example, private institutions can be required to have a government-granted license to carry out certain activities. The government might even ban some activities altogether. The government may also hold and own certain public properties and exercise through tax policies in the private sector.
In the case of the US economy, the government exercises a command economy over most goods and services like education, sports, courts, roads, and hospital care. It also provides a good amount of subsidiaries to oil companies, agricultural producers, etc. There are certain substances that private individuals cannot purchase on their own. These include cigarettes, cocaine, and raw milk, etc. The goal here is to discourage their use.
Every type of consumer good out there is regulated by the US government, specifically, food and drugs have to be approved by the FDA to be available in the market for selling and buying.
The US economic system has a good balance between a free-market economy and a command economy. It is a perfect example of a mixed economy. The US government exercise control and regulates the buying and selling of most of the goods in the market.
US Economy System – FAQs
2. Centrally planned economy
3. Socialist and communist economies
4. Mixed economy
5. Command economy