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1. 2. 3. C H A P T E R C H E C K L I S T. When you have completed your study of this chapter, you will be able to. Describe what, how, and for whom goods and services are produced in the United States.

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C h a p t e r c h e c k l i s t

1

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C H A P T E R C H E C K L I S T

  • When you have completed your study of this chapter, you will be able to

  • Describe what, how, and for whom goods and services are produced in the United States.

Use the circular flow model to provide a picture of how households, firms, and governments interact.

  • Describe the macroeconomic performance—standard of living, cost of living, and economic fluctuations—of the United States and other economies.


2 1 what how and for whom

2.1 WHAT, HOW, AND FOR WHOM?

  • What Do We Produce?

    • In macroeconomics, we divide the vast array of goods and services produced into:

      • Consumption goods and services

      • Investment goods

      • Government goods and services

      • Exports of goods and services


2 1 what how and for whom1

2.1 WHAT, HOW, AND FOR WHOM?

  • Consumption goods and services

  • Goods and servicesthat are bought by individuals and used to provide personal enjoyment and contribute to a person’s standard of living. For example, movies and Laundromat services.

  • Investment goods

  • Goods that are bought by businesses to increase their productive resources. For example, cranes and trucks.


2 1 what how and for whom2

2.1 WHAT, HOW, AND FOR WHOM?

  • Government goods and services

  • Goods and servicesthat are bought by governments. For example, missiles and bridges.

  • Exports goods

  • Goods and services produced in the United States and sold in other countries. For example, computers and banking services.


2 1 what how and for whom3

2.1 WHAT, HOW, AND FOR WHOM?

Figure 2.1 shows the relative magnitudes of the different types of goods and services in 2002:

Consumption 61%

Investment 13%

Exports 9%

Government 17%


2 1 what how and for whom4

2.1 WHAT, HOW, AND FOR WHOM?

  • How Do We Produce?

    • Factors of production

    • The productive resources used to produce goods and services.

    • Factors of production are grouped into four categories:

      • Land

      • Labor

      • Capital

      • Entrepreneurship


2 1 what how and for whom5

2.1 WHAT, HOW, AND FOR WHOM?

  • Land

  • Land

  • All the “gifts of nature” that we use to produce goods and services. All the things we call natural resources.

  • Land includes minerals, water, air, wild plants, animals,birds, and fish as well as farmland and forests.


2 1 what how and for whom6

2.1 WHAT, HOW, AND FOR WHOM?

  • Labor

  • Labor

  • The work time and work effort that people devote to producing goods and services.

  • Human capital

  • The knowledge and skill that people obtain from education, on-the-job training, and work experience.


2 1 what how and for whom7

2.1 WHAT, HOW, AND FOR WHOM?

  • Capital

  • Capital

  • Tools, instruments, machines, buildings, and other constructions that have been produced in the past and that businesses now use to produce goods and services.

  • Capital includes semifinished goods, office buildings, and computers. Capital does not include money, stocks, and bonds. They are financial resources.


2 1 what how and for whom8

2.1 WHAT, HOW, AND FOR WHOM?

  • Entrepreneurship

  • Entrepreneurship

  • The human resource that organizes labor, land, and capital.

  • Entrepreneurscome up with new ideas about what and how to produce, make business decisions, and bear the risks that arise from these decisions.


2 1 what how and for whom9

2.1 WHAT, HOW, AND FOR WHOM?

  • For Whom Do We Produce?

    Factors of production are paid incomes:

    Rent

    Income paid for the use of land.

    Wages

    Income paid for the services of labor.

    Interest

    Income paid for the use of capital.


2 1 what how and for whom10

2.1 WHAT, HOW, AND FOR WHOM?

Profit (or loss)

Income earned by an entrepreneur for running a business.

Functional distribution of income

The percentage distribution of income among the factors of production.

Personal distribution of income

The percentage distribution of income among individual persons.


2 1 what how and for whom11

2.1 WHAT, HOW, AND FOR WHOM?

Figure 2.2 shows the functional distribution of income:

  • Labor income 72%

Proprietors’ income 9%

Personal rental income 2%

Corporate income 9 %

Net interest income 8%


2 1 what how and for whom12

2.1 WHAT, HOW, AND FOR WHOM?

Figure 2.3 shows the personal distribution of income:

The richest 20% earned 47% of total income.

The poorest 20% earned only 5% of total income.


2 2 circular flows

2.2 CIRCULAR FLOWS

  • Circular flow model

  • A model of the economy that shows:

  • The circular flow of expenditures and incomes that

  • result from decision makers’ choices and the way those

  • choices interact in markets to determine what, how, and

  • for whom goods and services are produced.


2 2 circular flows1

2.2 CIRCULAR FLOWS

  • Households and Firms

    • Households

    • Individuals or people living together as decision-making units.

    • Firms

    • Institutions that organize production of goods and services.


2 2 circular flows2

2.2 CIRCULAR FLOWS

  • Markets

    • A market is any arrangement that brings buyers and sellers together and enables them to get information and do business with each other.

    • Factor marketsare markets in which factors of production are bought and sold.

    • Goods marketsare markets in which goods and services are bought and sold.


2 2 circular flows3

2.2 CIRCULAR FLOWS

  • Real Flows and Money Flows

  • In factor markets:

  • Households supply factors of production

  • Firms hire factors of production.

  • In goods markets:

  • Firms supply goods and services produced.

  • Households buy goods and services.


2 2 circular flows4

2.2 CIRCULAR FLOWS

  • Real Flows and Money Flows

  • These are the real flows in the economy

  • Money flows run in the opposite direction to the real flows.


2 2 circular flows5

2.2 CIRCULAR FLOWS

  • Real Flows and Money Flows

  • Firms pay households incomes for the services of factors of production.

  • Households pay firms for the goods and services they buy.

  • These are the money flows.

  • The blue flows are incomes.

  • The red flows are expenditures.


2 2 circular flows6

2.2 CIRCULAR FLOWS

  • Governments

    • We divide governments into two broad levels:

      • Federal government

      • State and local government

    • Federal Government

    • The federal government’s major expenditures are to provide:

      • Goods and services

      • Social security and welfare benefits

      • Transfers to state and local governments


2 2 circular flows7

2.2 CIRCULAR FLOWS

  • The federal government finances its expenditures by collecting taxes.

  • The main taxes are:

    • Personal income taxes

    • Corporate (business) taxes

    • Social security taxes

      During the early 2000s, the federal government is spending and collecting in taxes more than $2 trillion a year—about 20 cents in every dollar earned.


2 2 circular flows8

2.2 CIRCULAR FLOWS

  • State and Local Governments

  • State and local governments expenditures provide:

    • Goods and services

    • Welfare benefits

  • State and local governments finance these expenditures by collecting taxes.

  • The main taxes levied are:

    • Sales taxes

    • Property taxes

    • State income taxes


2 2 circular flows9

2.2 CIRCULAR FLOWS

  • Government in the Circular Flow

Households and firms pay taxes and receive transfers.

Governments buy goods and services from firms.


2 2 circular flows10

2.2 CIRCULAR FLOWS

  • Federal Government Expenditures

Figure 2.6(a) shows federal government expenditures.


2 2 circular flows11

2.2 CIRCULAR FLOWS

  • Federal Government Revenue

Figure 2.6(b) shows federal government revenue.


2 2 circular flows12

2.2 CIRCULAR FLOWS

  • Federal Government Expenditures and Revenue

    • National debt

    • The total amount that the government has borrowed to make expenditures that exceed tax revenue—to run a government budget deficit.

    • During the early 2000s, the federal government’s budget is in deficit and the national debt is increasing.


2 2 circular flows13

2.2 CIRCULAR FLOWS

  • State and Local Government Expenditures and Revenue

    The largest part of the state and local governments expenditures are on:

    • Education

    • Highways

    • Public welfare benefits


2 2 circular flows14

2.2 CIRCULAR FLOWS

  • State and Local Government Expenditures

  • Figure 2.7(a) shows

  • state and local

  • government expenditures.


2 2 circular flows15

2.2 CIRCULAR FLOWS

  • State and Local Government Revenue

Figure 2.7(b)

shows state and

local government

revenue.


2 3 macroeconomic performance

2.3 MACROECONOMIC PERFORMANCE

  • Standard of Living

    Standard of living depends on:

    • Quantities of goods and services produced

    • Number of people who share those goods and services

  • The greater the value of production per person, the higher is the standard of living.


2 3 macroeconomic performance1

2.3 MACROECONOMIC PERFORMANCE

World Population

  • U.S. population: 287,991,639 (September 8, 2002)

  • World population: 6,248,847,500


2 3 macroeconomic performance2

2.3 MACROECONOMIC PERFORMANCE

  • Classification of Countries

    Advanced Economies

    The highest living standards, 28 countries

    Developing Economies

    Not yet achieved a high standard of living, 128 countries

    Transition Economies

    Transition from state-ownership of capital to free enterprise, 28 countries.


C h a p t e r c h e c k l i s t

2.3 MACROECONOMIC PERFORMANCE

Figure 2.8 shows the standard of living around the world.

Average income per person ranges from $100 a day in the United States to $5 a day in Africa.


2 3 macroeconomic performance3

2.3 MACROECONOMIC PERFORMANCE

  • Unemployment and Living Standards

    Unemployment influences the standard of living.

    The harder it is to find a job, the longer is the period of unemployment.

    The average unemployment rate in the United States in the past 20 years has been 6 percent and it takes about 15 weeks to find a suitable job.


C h a p t e r c h e c k l i s t

2.3 MACROECONOMIC PERFORMANCE

Figure 2.9 shows average

unemployment rates around the world.

The unemployment rate is much higher in Spain than in most advanced economies.

The U.S. unemploy-ment rate is among the lowest.


2 3 macroeconomic performance4

2.3 MACROECONOMIC PERFORMANCE

2.3 MACROECONOMIC PERFORMANCE

  • Cost of Living

    • The amount of money it takers to buy the goods and services that a typical family consumes.

    • Inflation

    • The rising cost of living.

    • Most countries experience inflation, but its rate varies enormously.


C h a p t e r c h e c k l i s t

2.3 MACROECONOMIC PERFORMANCE

Figure 2.10 shows inflation rates around the world.

Transition economies and Central and South America have high average inflation rates.


C h a p t e r c h e c k l i s t

2.3 MACROECONOMIC PERFORMANCE

Figure 2.10 shows inflation

rates around the world.

  • The least severe inflation is in:

    • Japan

    • United States


2 3 macroeconomic performance5

2.3 MACROECONOMIC PERFORMANCE

  • Economic Fluctuations

    Economies expand at an uneven pace and sometimes shrink for a while.

    These ebbs and flow are the business cycle.


C h a p t e r c h e c k l i s t

2.3 MACROECONOMIC PERFORMANCE

The most recent U.S. recessions occurred in 1991 and 2001.

Between these recessions, the U.S. economy expanded rapidly.


C h a p t e r c h e c k l i s t

2.3 MACROECONOMIC PERFORMANCE

The transition economies slumped during the 1990s.

Japan stagnated.

A recession occurred in Asia in 1998.


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