chapter 2 the economy: myth and reality e pluribus unum (out of many, one) motto on u.s. currency
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Chapter 2
The Economy:
Myth and Reality
E pluribus unum (Out of many, one)MOTTO ON U.S. CURRENCY
American Economy: A Thumbnail Sketch
• U.S. economy– Biggest national economy
– Population: 300 million• Working population: 150 million
– Very rich country
– High efficiency • Productivity
– $45,000 per person– $90,000 per worker
2
American Economy: A Thumbnail Sketch
• Inputs / factors of production– Labor
– Machinery
– Buildings
– Natural resources
– Used to make outputs
• Outputs– Goods and services
– Consumers & others want to acquire3
American Economy: A Thumbnail Sketch
• Free markets• Private enterprise• “Land of opportunity”• Most “privatized” economy• Most “marketized” economy
4
American Economy: A Thumbnail Sketch
• Gross domestic product (GDP)– Measure size of economy
– Total amount it produces
– In a year
• Real GDP– Adjusted GDP
• For changes in purchasing power• For inflation
5
Share of U.S. gross domestic product (GDP) exported and imported, 1959–2007
Figure 1
6
American Economy: A Thumbnail Sketch
• U.S. economy– Relatively closed
– 14% of GDP: exports & imports
– 17% of GDP: imports
• Relatively open economy– Exports & imports – large share of GDP
• Relatively closed economy– Exports & imports – small share of GDP
7
Openness of various national economies, 2007
Table 1
8
Openness
NetherlandsGermanyChina Canada Mexico Russia United Kingdom United States Japan
67%4137353525201412
American Economy: A Thumbnail Sketch
• U.S. economy– Growing
– 2007 GDP = $14 trillion
– 2007 GDP per capita• 2.8 times > than in 1959
9
Real gross domestic product (GDP) since 1959
Figure 2
10
American Economy: A Thumbnail Sketch
• Economic fluctuations– Business cycles
• Recession – period of time– Total output falls
• Unemployment rate– Varies
11
The growth rate of real gross domestic product (GDP) in the United States since 1959
Figure 3
12
The unemployment rate in United States since 1929
Figure 4
13
The Inputs: Labor and Capital
• American workforce – composition – 150 million
– 54% men
– 46% women
– 4% teenagers (6 million)
– Expanding role of women
14
Composition of employment by sex, 1950 and 2007
Figure 5
15
Working women as a percentage of the labor force, 1960 versus 2005
Figure 6
16
Teenage employment as a percentage of total employment, 1950–2006
Figure 7
17
The Inputs: Labor and Capital
• American workforce – production – Mostly services
– Government
– Only 16% - goods
• Shift to services– Information age
– Education
– Experience
18
Civilian non-farm payroll employment by sector, 2007
Figure 8
19
Growing share of service sector jobs, 1967 vs. 2005
Figure 9
20
The Inputs: Labor and Capital
• American workforce – earnings– Wages: 70% of income
– Average hourly wage: $17
– Average weekly paycheck: $600
• Capital– $30 trillion
– Average rate of return: 10%
21
Average hourly compensation rates in manufacturing, 2006
Figure 10
22
Outputs: What Does America Produce?
• Consumer spending – 70% of GDP• Households
– 60% of budget – on services
– 40% of budget – on goods
– $140 billion – phone bill
• Non-consumption uses – 30% of GDP
23
The Central Role of Business Firms
• 25 million business firms– 80,000 fail / year
• Multinational corporations• Competition
– Key to industrial efficiency
24
Government
• Markets– Goods & services: bought & sold
• Firms– Sell goods & services
• Outputs markets• Receive receipts
– Use resources• Inputs markets• Pay for resources
25
Government
• Consumers– Buy goods and services
• Outputs markets• Expenditures
– Sell resources• Inputs markets• Receive income
26
The circular flow of goods and money
Figure 11
27
Government
• Role of government– Making & enforcing laws
• Rule maker• Referee• Arbitrator
– Regulating business• Antitrust laws• Promote social objectives
28
Government
• Role of government– Providing certain goods & services
• Fiscal year 2008: $2.9 trillion– Pensions & income security programs– National defense– Health care– Education– Transportation– Agriculture– Housing– Foreign aid
29
The allocation of government expenditures
Figure 12
30
Government
• Role of government– Levying taxes
• Pay for these goods and services• Income & payroll taxes• Sales taxes• Property taxes• Gasoline taxes• Liquor taxes• Telephone taxes
31
The tax burden in selected countries, 2006
Figure 13
32
Government
• Role of government– Redistributing income
• Reduce income inequality• Taxes• Transfer payments• Progressive taxation• Antipoverty programs
33
Government
• Transfer payments– Sums of money
• Received by certain individuals
– Outright grants from government
– Not payments for services
• Progressive taxation – Ratio: taxes to income
• Rises as income rises
34
Conclusion: It’s a Mixed Economy
• Mixed economy– Some public influence
• Over free markets
– Some public ownership
– And private property
35
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