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US economy grew at an annualised rate of 2.7% in the third quarter of the year, revised data has suggested. Much of the growth was due to companies rebuilding their inventories, and is not expected to be sustained. Developments in The US housing market are being watched closely by economists, as they are likely to determine the durability of the recovery.
US economy grew at an annualised rate of 2.7% in the third quarter of the year, revised data has suggested. Much of the growth was due to companies rebuilding their inventories, and is not expected to be sustained. Developments in The US housing market are being watched closely by economists, as they are likely to determine the durability of the recovery.
US economy grew at an annualised rate of 2.7% in the third quarter of the year, revised data has suggested. Much of the growth was due to companies rebuilding their inventories, and is not expected to be sustained. Developments in The US housing market are being watched closely by economists, as they are likely to determine the durability of the recovery.
Title of extract: US economic growth rate revised up to 2.7%
Source of extract: bbc.co.uk
Date of extract: 29 November 2012
Word count: 749
Date the commentary was written: 08 September 2013
Sections of the syllabus to which the commentary relates: Section 2
Candidate Name: evval Beli
Candidate Number: 006615-006
evval Beli 006615-006
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US economic growth rate revised up to 2.7% The US economy grew at an annualised rate of 2.7% in the third quarter of the year, revised data has suggested. The figure is significantly higher than the 2% initial estimate that the Commerce Department released just before the presidential election. Much of the growth was due to companies rebuilding their inventories, and is not expected to be sustained. The first estimate itself had beaten analysts' expectations, and fuelled the suspicions of some Republicans. The growth rate for the second quarter was confirmed at 1.3%. Housing rebound
The revised data confirmed that a 9.5% jump in spending by the federal government during the quarter - compared with a 0.2% decline the previous quarter - played an important role in the pick-up in growth. What the first estimate had failed to pick up was the scale of restocking by private- sector businesses. This inventory build-up effect - which typically provides a temporary boost to economic activity early on in the recovery from a recession - added 0.77 percentage points to the pick-up in the overall growth rate in the third quarter, the Commerce Department said. Other factors that boosted growth included the continued rise in consumer spending, stronger exports, and a slight rebound in homebuilding activity from historically low levels. There were also some negative factors in the data, including further cuts in state and local government spending, and a fall in construction of commercial property. Developments in the US housing market are being watched closely by economists, as they are likely to determine the durability of the recovery. Normally, periods of recovery in the US economy are led by residential construction, as building firms quickly get back to work on a backlog of projects as soon as the recession is over. But this time round, the recession was in large part caused by the bursting of a housing market bubble, that left behind a glut of unsold homes, bankrupted many homebuilding firms, and saw the sharpest and most sustained collapse in homebuilding activity in recorded US history. Further evidence that the housing market may be on the mend was provided by the National Association of Realtors on Thursday. Its index of pending home sales - which tracks sales that have been agreed but not completed, and provides an early indicator of market activity - rose 5.2% to 104.8 in October, its highest level in five years, despite subdued activity in the north east due to the impact of storm Sandy.
Data controversy
Some Republicans had expressed incredulity at a string of unexpectedly strong economic figures released in October, in the run-up to the presidential elections. evval Beli 006615-006
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The initial growth estimate followed jobs figures that showed the unemployment rate falling in September from 8.1% to 7.8% - its lowest rate since January 2009, and well below market expectations. The positive jobs data came shortly after Mr Obama put in a poor performance during the first of the three presidential debates, and prompted some Republican supporters to call foul. However, the latest growth estimate strengthens the evidence that the US economy genuinely enjoyed a rebound over the summer. Meanwhile, weekly data on the number of people claiming unemployment benefits, also released on Thursday, added to the picture of recovery. The number of claimants fell 23,000 to a seasonally adjusted 393,000 - the second such fall in as many weeks, suggesting that a sharp run-up in the number of claimants in parts of the US struck by storm Sandy four weeks ago may prove to be temporary. The claimant count had been averaging about 375,000 before the storm struck, and peaked at 451,000.
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Commentary Number 2 A sustainable economic growth is one of the macroeconomic objectives of governments. Economic growth can be explained as an increase in the output of a nations economy and this increase is achieved via enhancement in the nations aggregate demand 1 (AD) and aggregate supply 2 (AS). i The level of economic growth of a country in a year can be examined by calculating the annual gross domestic product 3 (GDP) of that country. The title of the extract states that the US growth rate revised up to 2.7% indicating that the US economy was in recession, a general drop in the economic activity, and is now recovering.
In the extract, the author mentions the reasons behind this recovery of the US economy. One of them is the restocking of companies inventories, which can also be explained as a growth in productivity. Productivity is the amount of output per unit of input; quantity and quality of physical capital and labour force affect the productivity levels. In the US, companies
1 AD is the sum of all demand for goods and services in a nation at a certain price level and period of time. 2 AS is the complete amount of goods and services that all firms in a nation will produce at all price levels in a certain period of time. 3 GDP is the total value of all final goods and services within a nation in a given period of time. Typical Business Cycle of a Country Time Real GDP Peak Trough Recovery Recession evval Beli 006615-006
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increased the amount of goods produced without changing the number of workers significantly; hence the amount of output per input (worker force in this case) has increased. However, this growth is only for a short term because after the rebuilding of the inventories comes to an end, productivity will decrease again. To enhance the productivity levels for long run, long term demand and supply side policies should be implemented and the US government should recognize the significance of the labour force. With demand-side policies and high national investment levels of private investment the US have, companies can increase the amount of physical capital (ex. machinery, tools) any time they want, but this will only have a limited effect on the overall productivity levels. Labour force, on the other hand, can be trained and improved infinitely with suitable equipment and supply-side policies; and will cause the actual growth in the long-run aggregate supply, then consequently, in the economy.
Increase in actual output, which is induced by an increase in productive efficiency will cause the PPF to shift rightwards. Production Possibility Frontier (PPF) PPF 1
PPF 2
Production of capital Production of consumer goods evval Beli 006615-006
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Full employment 4 is another macroeconomic objective of governments. If every citizen who wishes to work would be able to do so in a country; crime levels will fall, government will not have to pay unemployment benefits and the nations resources will be fully utilized. Also citizens purchasing power will advance, causing an increase in the AD of the country. Unemployment levels and the number of unemployment benefits claimants fell in the US, causing an increase in both AS and AD, and hence promoted economic growth. As seen in the graph below, an increase in the productive potential of the economy caused the LRAS curve to shift rightwards, hence advancing the real GDP.
When this article was written, the US was in the process of recovering the damage caused by Hurricane Sandy. Sandy collapsed the homebuilding activity in the US, which have normally led the recovery process in the country. Even though Sandy caused the construction of new buildings to be cancelled or postponed, it has also provided employment for many workers to reconstruct damaged buildings. Big disasters often decrease the AD and AS levels in a country, causing the economy to drift toward recession. However, the US seems to be
4 Full employment means nearly all people in a country who are aiming and able to work are employed. Economic Growth in the AD/AS Model Y FE Y FE2
P E
Real GDP Price Level SRAS 1
AD 1
LRAS LRAS 2
SRAS 2
AD 2
P E =Equilibrium Price Y FE -Y FE2 =Real GDP at full employment LRAS-LRAS 2 =Long- run Aggregate Supply SRAS 1 -SRAS 2 =Short- run Aggregate Supply AD 1- AD 2= Aggregate Demand evval Beli 006615-006
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recovering quickly from the second costliest hurricane in its history because of decreased levels of unemployment and rising production. Author of the extract gives continued rise in consumer spending and stronger exports as other factors that gave cause to unexpected economic growth in the US. These factors are linked to increases in AD and GDP levels, respectively. If the US government succeeds to keep AD and AS in balance and rapid growth, the country's economic growth rate will be able to reach even higher percentages.
i I got help from (Maley S. & Welker J. (2011). Pearson Baccalaureate Economics. Pearson Education Ltd.) and (Blink J. & Dorton I. (2011). Economics Course Companion. Oxford University Press.) books to define terms.