US Policy to Achieve Internal and External Balance Essay Example for Free

US Policy to Achieve Internal and External Balance Essay The United States has been suffering recently from recessionary pressures which have decreased economic activity in the country while increasing concern amongst the population about the lack of supportive economic policies that can support the country to survive through the recession times. In the recent months the country has seen its mortgage and housing market fail dramatically due to bad management and selling of mortgages to the sub prime market. Similarly in early 2009 the country also saw the major banks go bankrupt which sent a major blow to the capital and financial markets further weakening the economy of the United States. As a result the nation now required an economic policy enables an internal and external balance while providing more control on the economy. US Economic Policy The economy normally behaves in a cyclical fashion with booms and expansions depicted by high GDP growth, higher level of disposable incomes for the people, low levels of unemployment, low levels of poverty and increased spending by the consumer. The recessions and contractions in the economy on the other hand are characterized by the low or stunted GDP growth, low levels of disposable income for the people, high levels of unemployment, as well as decreased consumer spending which is brought on by the lower disposable incomes available to the public. The US economy currently is in the recessionary phase as the disposable incomes for the public have significantly increased while there is an increased level of unemployment in the country. Similarly the growth in the economy has also slowed down considerably which is adding to the snowball effect leading to low levels of consumer spending and therefore economic growth. The current balance of payments position of the United States is such that the country is facing both ups and downs. In the short term however the United States is reporting a deficit based position in its balance of payments. â€Å"This deficit was above 57 billion dollars in February 2007 which scaled up to 63. 9 billion dollars in March07 which has again decreased to $58. 5 billion in April2007. Trade deficit increases when import exceeds export and vice versa. † (‘American Economy Recent Trends’, 2008) Similarly when it comes to international institutions and international relations, the country is facing high level of competition form countries like India and China that are depicting high levels of economic growth despite the global recessionary environment. US Economic Policy Propositions The internal and external balance is are managed through the Keynesian model which incorporates consumption as a function of the disposable income and the current account is associated with the real exchange rate (Reinert et al. , 2009). The internal balance and equilibrium in the product market is achieved when the economy is facing full employment levels and stable prices in the market. However shifts in the internal balance can occur when the unemployment occurs or inflation occurs in the market with increasing prices indices. In the money market internal equilibrium is achieved the internal balance can be adjusted through interest rates and the supply of money in the market. As a result the in order to improve the internal balance, the United States economic policy needs to focus on improving the consumption in the nation which needs to be supported by increased disposable income and opportunities for employment for the public. The increased employment will result in higher disposable income available to the public which can in turn be used in consumer spending to generate more economic activity and positive GDP results. The external equilibrium in an economy can be achieved when the balance of payments position is in equilibrium in the economy. A positive relationship is required between the government expenditure and interest rate for an external balance position in the equilibrium. The US economic policy should focus on improving the current account balance in order to have positive effects on the external balance. The current account balance for the United States can be improved through increasing the exports of the nation, particularly those of the much needed commodities like wheat and copper, introducing protectionist measures for trade, as well as constantly accessing and revaluating the exchange rate for a beneficial balance of payments position. Similarly the capital account balance also needs to be supported through inflows particularly in the form of investment in the regional businesses by international institutions. Expenditure switching policy is used to attain a positive balance between domestic expenditure and foreign expenditure, particularly in terms of the balance of payments of a country. This is a macroeconomic policy which can help an economy attain its internal and external balances. More over â€Å"nominal exchange rate changes can lead to expenditure switching when they change relative international prices† (Engel, 2002). The US economy can improve its internal and external balance position by manipulating the demand for the domestic and the foreign products through changes in the exchange rate of the country. In order to achieve both the internal balance as well as the external balance positions simultaneously through policy moves, the US government can value the dollar at a real exchange rate that reflects the real demand of the domestic products and the demand that exists for the imports in the region. This can be favorable for the balance of payments position for the United States. The expenditure changing policy is also one of the economic policies that are used to attain an internal and the external balance for an economy. The expenditure changing policy involves fiscal and monetary policies which have the aim of making the domestic expenditure equal to the production level in the economy. The policy for the US economy that can be employed to support the aim in the present times can be to improve the level of investment in the job market to increase the level of employment which can increase economic activity and production in the economy. Similarly the increase in the employment also results in increased disposable income which therefore increases the consumer expenditure in the market. However in order to retain this expenditure for the domestic market only, regional businesses need to be promoted to increase domestic trade. The current account position for the United States can also be improved by implementing measures that focus ion the transaction in the current account. Direct controls can be employed on the transactions and elements in the current account (Bergsten, 1996). The domestic expenditures need to be improved for the economy by reducing them while the direct controls in terms of import surcharges, and taxes on imports can improve the revenue level in the current account through foreign trade. Subsidies provided to local businesses and sectors with high demand of export for their products and services can also take the form of direct controls which improve the current account statistics for the United States. The international institutions that are being faced by the United States in the recent years pertain to other economies like those of China, India, Singapore and those of countries in Latin America. These countries have large levels of population, which combined with the developing nature of the economy and the increased economic activity are showing increasing levels of GDP growth. These international institutions are therefore stabilizing their external balance and balance of payments positions which can be seen form their developing positive exchange rate. Moreover other countries are also observing growth and developmental opportunities in these economies and therefore are investing in operations in the above mentioned countries to support their own economic activity. The United States can develop international relations with these economies too enable an exchange and flow of ideas, trade, business and human resource that can support the local economic activity and growth of the United States by bringing new businesses, products and services as well as revenue form exports into the region. Conclusion The United States can improve its current economic status by attaining a positive position for its internal and external balances. Strategies and policies that impact the balance of payments position for the country can be employed which can take the form of expenditure switching policies, the expenditure changing policies and direct controls. These policies are highlighted in terms of how they can improve reduce domestic expenditure while also increasing the exports of the US and increasing the revenue and economic inflow from the imports of the country. References (2008), American Economy Recent Trends, Economy Watch, retrieved July 6, 2009 from http://www. economywatch. com/us-economy. html Bergsten, C.F. , (1996), Dilemmas of the dollar: the economics and politics of United States international monetary policy, 2nd Ed. , M. E. Sharpe Bergsten, C. F. , (2005), The United States and the World Economy: Foreign Economic Policy for the Next Decade Engel, C. M. , (2002), Expenditure Switching and Exchange Rate Policy, NBER Working Paper No. W9016, retrieved July 6, 2009 from http://papers. ssrn. com/sol3/papers. cfm? abstract_id=316795 Reinert, K. A. , Rajan, R. S. , Glass, A. J. , Davis, L. S. , (2009), The Princeton Encyclopedia of the World Economy, Princeton University Press