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    US Trade Deficit Scenarios

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    You are the Economic Advisor to the President of the United States. Your task is to develop a framework for economic policy and issues. During one of your briefing sessions in the White House, the President asks you the following questions:

    Please answer 4 out of 6 questions.

    1.The business cycle is the economist's metric for describing the current state of the economy: Ranging from economic boom to recession. How would you describe the U.S. economy's current position in the business cycle? What does some of the data suggest? Please give a detailed answer.

    2.The United States has run a trade deficit over the past two decades. Has this deficit been good or bad for the economy? Be sure to discuss several different aspects of this issue.

    3.Corporate Social Responsibility is a growing issue for US and multinational companies. How does this fit in with the business motivation of maximizing profit? Isn't there a contradiction?
    4.Pollution is a severe problem for the United States and the rest of the world. What are some economic mechanisms that would allow pollution to be reduces successfully? What kind of economic policies could you suggest?
    5.Suppose you are the majority shareholder of a major corporation. What suggestions would you make regarding the compensation plans for top management? Please base your answer on economic principles.

    6.Industry A is made up of only 4 firms. Each firm has a 25% market share. Industry B is made up of 10 firms. One firm has a 70% market share and the other 9 firms evenly share the rest of the market. In which industry is monopoly power or market concentration likely to be greater? Please explain.

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    Solution Preview

    The four questions that I will address here are 1, 2, 4, and 6.

    1. The US economy is in a recession right now. Most people think that we might be at the bottom of the recession that began in December 2007, making it the longest recession since the Great Depression. The best way to judge the status of the business cycle is to look at the national output every period. The BEA comes out with economic data about the country, and the latest figures they have corresponds to the second quarter of 2009. We can get the data from


    This data shows that the first quarter when GDP fell during the current recession was the first quarter of 2008. Though the GDP went up by a small amount in the second quarter of 2008, it again fell by more than 2% in the third, more than 5% in the fourth, and again by more than 6% in the first quarter of 2009. The last period for which data is available is the second quarter of 2009 and the GDP fell by about 1% in this quarter. Many people ascribe this to the increased government spending taking effect, and the tax breaks working.

    House prices again started rising last month, and the equity markets are up 50% in the last 5 months showing confidence slowly coming back in the market. Accompanied by rising GDP in most other major economies in the second quarter it will be safe to think that the US recession has bottomed out and the only way now is way up. Though what will actually happen is anyone's ...

    Solution Summary

    US trade deficit is one of the focal areas.