Download macroeconomic factors of the u.s. and south korea

PHASE 1 INDIVIDUAL PROJECT
KENNETH C HOLMES
ECON616-1601B-02
PROFESSOR KENRETT JEFFERSON-MOORE
FEBRUARY 22, 2016
MACROECONOMIC FACTORS OF THE U.S. AND SOUTH KOREA
Introduction:
In the last five years, Auto edge transitioned its auto parts manufacturing operations from
Detroit Michigan to South Korea, in an effort to reduce supply and labor costs, government
regulation, increase profits, and regain their competitive edge. The transition was initially
successful, but ended up diminishing quality, and created issues resulting in several auto recalls,
thus tarnishing their reputation of producing parts of high quality and dependability. To take
advantage of current U.S. economic conditions, the Board of Directors is considering
transitioning production back to Detroit, and closing their South Korea operations. Research
must be conducted to compare current macroeconomic conditions in the U.S. and South Korea,
comparing Gross Domestic Product, unemployment percentages, interest rates and inflation rate
statistics, to determine if moving operations back to the U.S. would be the best decision. The
following document discloses all research and findings.
U.S. macroeconomic conditions:
The current U.S. macro-economic conditions include: The GDP (Gross Domestic
Product), GDP by industry, personal income (nationally, state and locally), national deficit,
international investments, exports and imports (trade balance), foreign investment in the U.S.,
unemployment, interest rates and inflation. These are the major contributing factors to the
current U.S. economic state, and combined have major influence on economic stability and
growth (N.A., 2016).
National Deficit:
The national deficit rose $13 billion from $111.1 billion in the second quarter, to $124.1
billion in the third quarter of 2015, and continues to increase because of a serious imbalance of
goods and services, and investment and compensation income, and shows no signs of decreasing.
This situation will continue until trade and invested income reach a more appropriate balance
(N.A., 2016).
Trade Balance:
The national trade balance for December 2015 rose $1.2 billion from ($42.2) billion to
($43.4) billion, and shows no sign of changing. December figures state imports totaled $224.9
billion, and exports totaled $181.5 billion, leaving a trade deficit of $43.4 billion (N.A., 2016).
International Investment Position:
The international investments position decreased in the third quarter 2015 to ($7,269.8)
billion from the second quarter 2015 of ($6,743.1) billion, and correlates with U.S. liabilities far
exceeding assets (N.A., 2016).
GDP:
The GDP is the primary indicator used to measure the strength or weakness of a
country’s economy. It represents the total dollar value of all goods, products and services
produced in a specific country, usually over a quarterly or annual period, and is compared to the
same period of the previous year for statistical analysis (Jefferson-Moore, 2016).
The U.S. GDP is calculated on Purchasing Power Parity (PPP). For the year 2015, fourth
quarter figures were $18,286.69 billion, representing a 5% increase over 2014. For 2014, the
U.S. placed 2nd in global ranking. The GDP is expected to rise marginally for 2016. These
figures represent the value of goods and services produced in the U.S., less the value of goods
and services used in production, and reflect all price adjustments. The main industry contributors
to the fourth quarter GDP include: Retail, Food Service, Health Care and Social Services,
Agriculture, Forestry, Fishing, and hunting (N.A., 2016).
Employment:
There are currently 148,092,000 million employed in the U.S., contributing to the GNP
and the overall economy, and the U.S. ranking number 1 in global employment. Employment is
expected to maintain its level, with small annual increases expected. For the month of January
2016, non-farm employment increased by 151,000, and was led by retail, food services, health
care, and production, while employments in education, transportation, warehousing and mining
decreased. Overall, employment figures show no change. Employment has seen a steady increase
of 1.5 percent for the last three years, and remains constant (N.A., 2015 Economic Statistics and
Indicators, 2016).
Unemployment:
The unemployment rate is the measure of the percentage of the working age population
(ages 16 to 65), who are willing and able to work, but are unable to secure employment. The
unemployment rate does not take into account for under-employment (people working a position
below their qualifications or education level) or discouraged workers (people who have stopped
seeking employment after a prolonged period (Jefferson-Moore, 2016).
Equation: The number of unemployed/The total labor force
The current rate of unemployment in the U.S. is 5.95%, and is 1.3% higher than the
global average of 4.62%. This figure does not take into account for the underemployed or the
discouraged worker, therefore the actual figures are higher than stated. Unemployment is
expected to remain constant. For 2014, the U.S. ranked 62nd globally for unemployment (N.A.,
2015 Economic Statistics and Indicators, 2016).
Interest rates:
As of December 15, 2015, the interest rate was 0.50%, meaning banks paid one half a
percent on invested funds. As of February 19, 2016, mortgage rates range from: 2.72% for a oneyear fixed rate, 2.8% for a fifteen-year fixed rate, 3.67% for a thirty-year fixed rate, 4.09% for a
Jumbo thirty-year fixed rate, 3.42% for a thirty-year FHA, 3.30% for a 5/1 adjustable rate
mortgage, and 3.9% for a 5/1 Jumbo adjustable rate mortgage. Interest rates on T-Bills, Notes
and Bonds is zero (0), meaning no interest. CD rates are 1.35% for a thirteen-month CD, and
1.4% for a twenty three-month CD (N.A., Today's Interest Rates, 2016).
Inflation:
The current inflation rate in the U.S. is 2.126%, places the U.S. in 118th place in global
ranking, and indicates the average consumer price change. Over the last three years the U.S.
inflation rate has seen small increases from 1.46 percent in 2013, to 1.976% in 2014 to the
current rate. On the international scale, the U.S. falls 2.29 percent below the international
average of 4.27 percent, and remains constant (N.A., 2015 Economic Statistics and Indicators,
2016).
South Korea macroeconomic conditions:
South Korea (The Republic of Korea), constitutes the southern portion of the divided
nations (North and South Korea). The border between the two is highly contested, and is the
most militarily fortified in the world. Conditions between the two have put the South Korean
Military of full non-wartime alert status, making dealings with the north currently impossible
(N.A., Country Profile South-Korea , 2012).
Currently, South Korea is the third largest Asian economy, and is the 15th largest
economic global power. Their economic contributors include international trade, which
constitutes 100% of their GDP, finance, and constitutes strong exports and stimulus plan during
slow financial periods. Because South Korea heavily depends on international trade, their
economy is highly vulnerable to international events. To provide economic stabilization and
protection, their government applies tax incentive programs and monetary policy, and the Central
Bank of South Korea helps by pursuing and accommodating economic balance of both price
stabilization and economic stimuli (N.A., Country Profile South-Korea , 2012).
Their current economic success is driven by the Free Trade Agreement of 2007 with the
U.S., and the Free Trade Agreement of 2011 with Europe, which dismissed 98% of import duties
on agricultural products, services and manufactured goods between Europe and South Korea,
both of which drive huge increases in consumer purchases, and brings 19.1 billion Euros to the
South Korean economy. Both trade agreements have facilitated major changes in the automotive,
textile and consumer electronics industries. The result, South Korea has experienced immense
foreign investment from Japan, U.S.A. and Holland, who are attracted by their immense
economic growth and development, and strong economic framework (N.A., Country Profile
South-Korea , 2012).
South Korea’s primary industrial sectors include: Agriculture, including rice, soybeans,
corn, wheat, barley and sorghum; textiles; automotive production; ship building and consumer
electronics; and they are the world largest manufacturer of semiconductors. Their primary
manufacturers include Samsung, Hyundai and Kia, which are major contributors to their
economy. South Korea enjoys a positive trade balance, meaning their exports far exceed their
imports, and their poorly performing (Won) currency helps maintain high exports, but also has
some negative side effects. Their primary global trade partners include: China, U.S.A., Japan and
the EU (European Union) (N.A., Country Profile South-Korea , 2012).
The South Korean labor force is 35 percent production based, and 60 percent service
based, is highly skilled, and excels in technologies and Research and Development. Their highly
regulatory government makes labor costs and real estate prices high. To offset high costs, and
provide foreign investment protection, the government applies tax deductions and identical
treatment to internal firms for their business operations (N.A., Country Profile South-Korea ,
2012).
GDP:
South Korea’s GDP is calculated on Purchasing Power Parity. For the year 2015, fourth
quarter figures were $1,895.15 billion, representing a 5.89% increase over 2014. In 2014, their
GDP of $1,789.76 billion placed them 13th in global ranking. In 2013, the GDP was $1,697
billion. All indications show a steady increase in GDP of approximately 5.5%, and this figure is
heavily dependent on trade agreements with their Eastern and Western trade partners, and
continued expected trade surpluses (N.A., 2015 Economic Statistics and Indicators, 2016).
Employment:
There are currently 24,963,000 million employed in South Korea, contributing to the
GNP and the overall economy, and they take 6th place for global employment. Currently their
unemployment rate shows a continuous steady reduction, with temporary employment increasing
(N.A., 2015 Economic Statistics and Indicators, 2016).
Unemployment:
The current unemployment rate in South Korea is 3.125%, which is 1.5% lower than the
global average of 4.62%, and places them 96th in global unemployment. Their unemployment
rate is expected to remain steady for 2016 (N.A., 2015 Economic Statistics and Indicators, 2016).
Interest rates:
As of June 11, 2015, the interest rate was 1.5%, meaning bank were paying one and one
half percent interest on invested funds. The Central Bank of Korea is intentionally holding the
interest rate at 1.5% to offset their poorly performing currency (Won), and to maintain their edge
against globally unstable markets. Currently, the Won is Asia’s poorest performing currency, and
has lost 3.4% to the U.S. dollar. Their poorly performing currency is costing them global
funding, as investors are cashing in their stock and bonds, and waiting for the economy to
stabilize. Their GDP lost 18.8% due to reduced demand for products, and the risks and tensions
with North Korea may potentially hinder the situation (Jabri, 2016)
Inflation:
The current inflation rate in South Korea is 2.4%, and indicates the average consumer
price change. For 2014, the inflation rate was 1.57%, ranking South Korea 131st in global
ranking, and for 2013 the inflation rate was 1.3%. Inflation is expected to rise marginally, and
have little effect on the economy (N.A., 2015 Economic Statistics and Indicators, 2016).
REFERENCES
Jabri, P. (2016, February 16). South Korea holds interest rate at record low . Retrieved from
BUSINESS RECORDER: www.brecorder.com/world/global-business-aeconomy/278888-south-korea-holds-interest-rate-at-record-low.html
Jefferson-Moore, K. (2016, February 17). Retrieved from ECON 616 Unit 1, Live Chat 2:
www.ctuonline.edu/econ616-1601B-02/unit1/livechat2
N.A. (2012, March 28). Country Profile South-Korea . Retrieved from GLOBALTRADE.NET:
www.globaltrade.net/f/business/text/South-Korea/Business...
N.A. (2016). 2015 Economic Statistics and Indicators. Retrieved from ECONOMY WATCH:
Follow the Money: www.economywatch.com/economic-statistics/year/2015
N.A. (2016, February 19). Today's Interest Rates. Retrieved from Market Watch:
www.marketwatch.com/tools/pftools
N.A. (2016). U.S. Economy at a Glance: Perspective from the BEA Accounts. Retrieved from
Bureau of Economic Analysis: bea.gov/newsreleases/glance.htm