Lesson 54 – Components of the US Economy, Part II

Topic Progress:

In our last lesson we began a discussion on the different components that make up the US Economy and how these relate to trading with a look at the Natural Resources and Labor Force components. In today’s lesson we continue this discussion with a look at the Private Sector and Government components and how each of these relates to trading.

While having lots of natural resources and a large well educated labor force to produce goods and services from those natural resources is a great thing, without a way to organize these first two components of the economy, not much would get done. This is where the small, medium, and large businesses which make up the private sector come in. In addition to organizing the labor force to produce goods and services, the private sector is also responsible for raising the capital necessary to bring all these things together which they do through private investors, loans from commercial banks, the bond market, and/or the equities market.

While many people think that the US Economy is dominated by the large corporations, it may come as a surprise the large role that the small business play’s in the US Economy. According to the US Department of State:

“Of the nearly 26 million firms in the United States, most are very small—97.5 percent … have fewer than 20 employees,” the U.S. Small Business Administration says. “Yet cumulatively, these firms account for half of our nonfarm real gross domestic product, and they have generated 60 to 80 percent of the net new jobs over the past decade.”

While we will go into more details about the private sector and how this all relates to trading in later lessons, it should be obvious at this point the large effect that the private sector has on all markets as they are the ones who: 1. Raise capital through bonds and stocks that we then trade, 2. produce the goods and services which drive demand for the commodities we trade and 3. Affect the foreign Exchange markets by playing a role in what goods and services are produced domestically, which we import from overseas, as well as cross boarder mergers and acquisitions.

The fourth component that I am going to discuss here is the role that government plays in the US Economy. There are several important roles that the government plays in the economy which can drastically affect the markets one of the more prominent of which is that of Regulator. There are many parts of the US Economy that the government regulates with some of the more prominent areas being:

Anti-Trust Laws: These laws are in place to protect the consumer from businesses that grow so large that there are no other businesses that can compete with them, basically allowing those businesses to set unfair prices due to the lack of free market competition.

Environmental Laws: These laws are in place to protect the environment by establishing maximum levels of pollution that businesses are allowed to produce and then checking to make sure that these levels are not breached through agencies such as the Environmental Protection Agency.

Securities Regulators: The government is in charge of monitoring and regulating many parts of the financial system through agencies such as the Securities Exchange Commission and the Commodities Futures Trading Commission.

The primary way in which the role that government plays in the regulation of the economy affects us as traders is through how increases in regulation and decreases in regulation are taken by the market. In general anything that makes it easier to do business which normally means less regulation is going to be seen as positive for the market and anything that makes it harder to do business which is normally associated with more regulation is going to be seen as negative for the economy.

That concludes our lesson. In the next lesson we are going to continue our discussion on the role that government plays in the economy and how this relates to trading with a discussion on Fiscal Policy or how government spending and taxes affect the markets so I hope to see you in that lesson.