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FINANCIAL LITERACY PROGRAM

The State of the US Economy (November 2022)

By Humza Hussaini, M.A.

  1. Gross Domestic Product (GDP)

AThe  country’s GDP measures the final value of all goods and services produced within that country’s borders in a given time period. While most countries report their GDP on an annual basis, others report GDP on a quarterly basis. Economists and news outlets will often talk about GDP growth, which is the change in a country’s GDP across time periods, expressed as a percentage. If that percentage is positive, then GDP grew across the time periods; if it is negative, then GDP shrunk across the time periods. You may hear of “slowing GDP growth” – this indicates that the percentage growth is still positive, it is just a smaller positive. Similarly, accelerating growth just means that a positive percentage growth rate has gotten even larger. Currently the GDP for the US and most economies is growing as productivity returns to normal.

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2. Unemployment Rate

People who are willing and able to work but can't find a job are called Unemployed. The Unemployment Rate tells us what percentage of those looking for work can't find a job. A high unemployment rate is a sign of an economy that is producing less than what is possible. There is always a small percentage of the workforce that is unemployed due to workers in between jobs. This is called the Natural Rate of Unemployment and is around 3%-5%. In March 2020, the US unemployment rate was 4.4%. When the Coronavirus lockdowns started in April this year, the unemployment rate jumped to 14.7%! A drastic rise in the number of people who are looking for work but can't find a job.

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3. Inflation Rate

The prices of goods and services change over time. The percentage change in the price of goods and services over time is called the inflation rate. It is the job of the US Federal Reserve Bank to keep inflation between 2% - 3%. This is so that the US Dollar maintains its value over time . In April 2020, the inflation rate dropped under 1.2%. This was because of a sharp reduction in demand for goods and services. Many people lost their jobs and reduced their spending. Those who had jobs started saving more of their income in the off chance that they lose their job.

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4. Interest Rate

The cost of borrowing money is called the interest rate. The US Federal Reserve Bank sets the interest rate in the United States. The Fed uses the interest rate to affect the inflation and unemployment rate. This is called  "Monetary  Policy".  lf the inflation rate is low and unemployment is high, the  Fed lowers the interest rate. This makes it cheaper for businesses to borrow money and invest in new ventures. It also makes it cheaper for ordinary people to borrow money to buy a house or buy more goods on credit. The Fed hopes that when businesses invest to increase production and consumers can borrow cheaply, there will be more demand for goods and services which in turn creates more jobs for people to make those goods and services. This is what the Fed has been doing since April 2020. In the graph below we can see the sharp drop in the interest rate! As of today the interest rate is 0.25%, the lowest it's been since 2016.

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