The United States is the world’s largest economy, recording a national output of $21.526 trillion. Businesses are at the forefront of global innovation as private companies continue to produce goods and services the entire planet enjoys daily. From the Apple iPhone to a McDonald’s Big Mac, the American economy has had a major impact on the global marketplace while lifting the standard of living for millions of people worldwide. But what is the U.S. economy, and how does it function?
A Mixed Economy
It is a commonly mistaken belief that the United States is a full-blown free-market capitalist society. While there is a focus on capital and the marketplace, the U.S. leans more toward a mixed economy. Over the years, the U.S. has adopted the characteristics of both capitalism and socialism.
Today, the U.S. system emphasizes the freedom of wealth creation and consumption, and the protection of private property rights. At the same time, all three levels of government can intervene in the private economy to accomplish social objectives, shield the public from fraud or harm, or achieve an electoral promise.
The nation still adheres (mostly) to the laws of basic economics.
Basic Economic Laws
The law of supply and demand is the primary force that drives the U.S. economy, as it regulates prices in our everyday lives. In microeconomics (the behavior of individuals and businesses), this principle revolves around the amount of a good or service available (supply) and the number of buyers for it (demand).
Inflation and deflation are also integral to the success of the country. Price inflation is when prices go up, caused by a myriad of factors (demand exceeds supply, higher production costs, and expansionary money policy). Price deflation is when the cost of goods and services go down, which, too, is caused by multiple elements (a decline in the supply of money, technological progress, and a large supply of goods).
Although only private companies can create economic growth, how much the government spends can also impact the economy. Today, the federal government’s budget is more than $4 trillion, and nearly all of Washington’s revenues are created from taxes. The government’s fiscal policy can hurt, stimulate, or guide an economy.
Trade policy can raise or reduce the cost of imports (things we bring into the country) and exports (things we sell to other countries). Trade agreements, foreign exchange rates, and tariffs can increase the price of products you buy, from soybeans at the supermarket to a tablet on Amazon.
Monetary policy plays a huge role in the American economy. The Federal Reserve System controls the nation’s money supply with its monetary policy and artificially adjusts interest rates. This is in addition to its primary purposes of regulating banks, managing inflation, maximizing employment, and maintaining stability in financial markets to avert crises.
The Entrepreneurial Spirit
Despite criticisms lodged against the American system, the U.S. maintains the richest and most technologically powerful economy in the world. The nation holds a per capita GDP of just under $60,000 (output divided by population), an unemployment rate of only 3.5%, and it is a hub of invention and innovation. Entrepreneurs, corporations, and individuals may be hindered by government regulations, but the American people still find ways to cope, adapt, and thrive.