Economics IA2 - Economic Growth - US economic growth hits fastest rate since
Economic growth is an increase in real gross domestic product (GDP) or the real
quantity of goods and services produced over a period of time, usually a year. There are
two types of economic growth: actual and potential growth. The United States of
America’s (USA) economy grew at its fastest pace in four years in the second quarter of
2018, expanding at an annualised rate of 4.1%. There are several reasons and
consequences of this economic growth that I will analyse.
Firstly, the US government implemented expansionary fiscal policies to increase
aggregate demand (AD). A US$1.5 trillion tax cut was granted to businesses and
households which gave them more money to spend. This caused a 4% increase in
consumer spending in the USA as consumers have higher disposable income and
hence, purchasing power. This tax cut may also encourage firms to increase investment
as it increases the expected rate of after-tax return on investment. Consumer
expenditure and investment are both components of aggregate demand (AD), hence an
increase in both would lead to an increase in AD from AD0 to AD1 in figure 1.
Furthermore the US government also increased government spending, which further
increases AD from AD1 to AD2 in figure 1, as government expenditure is another
component of AD. Hence, real GDP increases from Y0 to Y2, showing actual economic
Secondly, just before Beijing’s retaliatory tariffs against USA started, US soybean
exports to China skyrocketed as firms rushed to beat new trade tariffs. This led to US
exports increasing by more than 9%, thus total revenue of exports in the US increased.
Exports is also a component of AD, hence an increase in exports caused an increase in
AD, reflected as a rightward shift of the AD curve from AD2 to AD3 in figure 1. Real GDP
increases from Y2 to Y3, showing further actual economic growth.
One benefit this economic growth has brought about is that cyclical unemployment in
the US has been driven to record lows after a long stretch of job gains. This happened
as economic growth helps to promote full employment of resources in the US economy
as firms in the US will need to hire more factors of...