South-Western College Publishing - Economics  
A DC Story
Subject Economic growth
Topic Aggregate Demand/Aggregate Supply
Key Words Gross Domestic Product, Exports, Imports
News Story

The U.S. economy is composed of many smaller, regional economies. These regions "trade" with other regions in a myriad of ways. Exports from the regions cause money inflows and provide a stimulus to the local economy. Imports are a drain on local resources. While the U.S. economy has grown remarkably over the last several years, not all regions have had the same experience. The Washington D.C. region has had a higher rate of job growth and a lower unemployment rate than the nation as a whole in the past few years. The reason for this performance has to do with the kinds of goods that it trades.

The Washington area's primary industries are tourism, technology and federal contracts. Visitors bring about $6 billion a year into the region. Federal contracts amount to $25 billion in increased economic activity. The infusion of federal dollars, especially in the area of national defense, led to the development of an information technology industry in the area. Sales of this industry's products bring dollars and jobs to the region.

Whether there will be an economic slowdown is both a local and national concern. Tourism in Washington may actually pick up if there is a national slowdown, as families substitute domestic and closer vacations for farther or foreign ones. Another source of continued stimulus is Federal contracts that are projected to increase in the next year. On the other hand, interest rate hikes are causing consumers to cancel or delay purchases. The recent fall in stock prices has also had an impact. Home sales in some parts of the region are below last year's level. Decreased sales result in fewer employment opportunities and this, in turn, reduces income and sales elsewhere. Whether the D.C. area is immune from an economic slowdown depends on the net effect of the money inflows and drains.

(Updated July 1, 2000)

Questions
1. Consider a local economy like the Washington D.C. area. Draw aggregate supply/aggregate demand curves, illustrate this economy initially at full-employment equilibrium.
a. What are the components of the region's aggregate demand? How do they differ from the aggregate demand curve you studied for the national economy?
b. What are the components of the region's aggregate supply curve? How is it different from the nation's?
c. How would you describe macroeconomic equilibrium for the region?
2. Suppose that the federal government were to reduce the dollar value of contracts that are awarded to the D.C. area. What would happen to aggregate demand, aggregate supply and macroeconomic equilibrium?
3. Consider a family visiting Washington, D.C. Show how the family's spending increases the Gross Domestic Product for the region.
Source Peter Behr, "A Region With An Edge," The Washington Post, June 9, 2000.

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