Contribution of the financial sector to the general GDP of the economy
Introduction
The selected industry is finance and insurance, and the study specialized in commercial banking. The sector consists of commercial banks and the branches of banks from foreign countries that are operating in the country. This type of bank accepts deposits from customers who want to save money for the future use as through a fixed account or save money to be used by the customer at any convenient time through the current account. It also provides lending services to the customer through offering loans, giving out cash credit, discounting bills, and the overdraft. Business organizations that control a larger market share among commercial banks include Bank of America Corporation, JPMorgan Chase, and Wells Fargo.
Finance and insurance are among the leading industries that contribute to the growth of the general economy and the per capita level in the country. In the last quarter of the 2019 financial year, the GDP in the finance and insurance industries increased by 5.1%. Factors that lead to an increase in the percentage of GDP in the finance and insurance sector is an investment made by the individuals and government in the economy through growth in government expenditure and the increase in the level of private investment in various businesses. An increase in investment leads to a rise in demand for money, and financial institutions being the main actor in the supply of money in the economy benefited from the increased demand when the market is high the interest rate on loan increases which enable the banks and other financial institution to maximize their profit.
A quarterly distribution of the finance and insurance industry’s contribution to the country’s overall GDP. In the year 2018, the industry increases the percentage of its contribution to the overall GDP by -1.9%. It means that the contribution reduced as compared to 2017 by 1.9% (Thomas, 2018). The difference indicates a financial depression that affected the sector during 2018 as compared to other industries. In the year 2019, the contribution increased by 3.3%, which indicates that the industry is performing well as compared to others. Through the analysis of the increase in GDP of the financial and insurance sector, it is evident that it is among the major contributors to the overall GDP of the country. The quarterly contribution of the industry to the overall economy of the country is given by -3.6%, 0.4%, 4.6%, and -10.4 for the year 2018. The data indicates that from the first quarter of the year, the percentage of contributions were increasing up to the last quarter of the year, where there was a huge reduction in the percentage form. When the industry is not performing, it needs an intervention from the government that provides regulation and improvement of the public goods to facilitate the business. If the performance is reducing because of unfair competition, the government needs to provide regulation to control it. In 2019 the quarterly contribution was 20.9%, 2.0%, -5.3%, and 5.1%.
In the commercial banking sector, interest earned per asset has been increasing since 2017 but has declined by the end of 2019. During the year 2017, the interest rate was at 3.78%; in 2018, it was 3.95, and in 2019 it reduced to 3.82%. The reduction is associated with the severe economic condition that forced the government to intervene by increasing the tax, which forced the financial institutions to increase the interest rate. The demand for money reduced, and the revenue of financial institutions decreased. The net interest income for the industry in the year 2017 was $1081, it increased the following year to $2640, but by 2019 it reduced to $ 1559 (Fang, Wang, & Yang, 2020).
The role played by the industry in reducing the unemployment rate.
The unemployment rate is the percentage of employees who are willing to work, but they cannot get the job. It is the main economic concern for many countries. To achieve economic growth, many countries use different strategies to ensure that the rate of unemployment is reduced. The unemployment rate for the United States has been reducing from 2016 to 2019. For 2016, 2017, 2018 and 2019 the rate was 4.87%, 4.36%, 3.93%, and 3.87% respectively (Catalini, & Gans, 2016). Reduction in the rate of unemployment is a result of more commercial banks and foreign banks branch being established in the country, which employs more personnel. The reduction in the unemployment rate has contributed to an increase in the GDP rate for the country from 2016 to 2019. The percentage change in GDP is 2%, 3.6%, 4.8%, 4.1% respectively (Catalini, & Gans, 2016).
Graph showing change in GDP
Conclusion
The finance and insurance industry is essential in the economic growth of the United States. The GDP of the country has been increasing since 2016 up to 2019, and one of the factors is the increase in the industry’s financial performance. The sector plays a vital role in the reduction of the unemployment rate experienced in the country.
References
Catalini, C., & Gans, J. S. (2016). Some simple economics of the blockchain (No. w22952). National Bureau of Economic Research.
Fang, H., Wang, L., & Yang, Y. (2020). Human mobility restrictions and the spread of the novel coronavirus (2019-Nov) in China (No. w26906). National Bureau of Economic Research.
Thomas, C. (2018). Afghanistan: Background and US Policy. Congressional Research Service, 10.