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The U.S. Economy: A Global View

The U.S. Economy: A Global View. Chapter 2. Introduction. All nations confront the central economic questions of WHAT to produce, HOW to produce, and FOR WHOM to produce it. Introduction.

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The U.S. Economy: A Global View

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  1. The U.S. Economy: A Global View Chapter 2

  2. Introduction • All nations confront the central economic questions of WHAT to produce, HOW to produce, and FOR WHOM to produce it.

  3. Introduction • Each nation has very different production possibilities and uses different mechanisms for deciding WHAT, HOW, and FOR WHOM to produce.

  4. Introduction • The objective of this chapter is to assess how the U.S. economy stacks up.

  5. Specifically, • WHAT goods and services does the United States produce? • HOW is that output produced? • FOR WHOM is the output produced?

  6. What America Produces • The U.S. has less than 5 percent of the world’s population. • It has 10 percent of the world’s arable land. • Yet it produces more than 20 percent of the world’s output.

  7. GDP Comparisons • The market value of output (GDP) is a basic measure of an economy’s size. • Gross Domestic Product (GDP) is the market value of all final goods and services produced within a nation’s borders in a given time period.

  8. Comparative Output • In 2000, the U.S. economy produced about $10 trillion worth of output. • The second largest economy, China, produced only half that much.

  9. 9.8 4.9 3.3 2.1 1.4 0.86 0.22 0.04 0.01 United Saudi China Japan Germany Britain Mexico Ethiopia Haiti States Arabia Comparative Output Gross domestic product (in U.S. $ trillion)

  10. Per Capita GDP • Per Capita GDP is the dollar value of GDP divided by total population. • It indicates how much output the average person would get if all output were divided up evenly among the population.

  11. Per Capita GDP • Americans have access to far more goods and services than people in other nations. • GDP per capita in the U.S. is over $34,000 per year. • Per capita incomes in Ethiopia and Haiti, are less than $1,200 per year – less than $4 per day.

  12. 34,260 35,000 30,000 26,460 24,470 25,000 20,000 17,340 15,000 11,050 8810 10,000 7350 4040 3940 5,000 2390 1400 1150 660 0 U.S. South Korea Saudi Arabia Cuba Haiti India China Japan Jordan France World Average Mexico Ethiopia GDP Per Capita Around the World

  13. GDP Growth • Economic growth is the increase in output (real GDP)–an expansion of production possibilities.

  14. GDP Growth • On average, U.S. output has grown by roughly 3 percent per year. • U.S. population growth has been about 1 percent per year, causing GDP per capita to grow tremendously.

  15. 1,800 1,600 1,400 Real GDP 1,200 AND POPULATION (1900 = 100) INDEX OF REAL OUTPUT 1,000 Increasing GDP per capita 800 600 400 Population 200 1900 1920 1940 1960 1980 2000 YEAR U.S. Output and Population Growth Since 1900

  16. Poor Nations • The populations of rich countries are growing slowly so that gains in per capita GDP are easily achieved. • The populations of the poorest countries are still growing rapidly, making it difficult to raise living standards.

  17. The Mix of Output • A century ago, about two-thirds of U.S. output consisted of goods while one-third of output consisted of services. • Since then, over 25 million people have left farms and sought jobs in other sectors.

  18. The Mix of Output • Today, nearly 75 percent of U.S. output consists of services, not goods. • Over 98 percent of future job growth will be in service producing industries.

  19. The Mix of Output • The relative decline in goods production does not mean the U.S. is producing fewer goods than before. • Manufacturing and farm output has increased tremendously. • The mix of output is simply different.

  20. 100 Services 80 60 Percent of employment 40 Agriculture Manufacturing, mining and construction 20 0 1800 1840 1880 1920 1960 1993 The Changing Mix of Output

  21. Development Patterns • The transformation of the U.S. into a service economy is a reflection of our high incomes.

  22. Development Patterns • Poor people don’t have enough income to buy many services, so the mix of output in poor countries is weighted toward goods, not services.

  23. Today’s Mix of Output • America is primarily a service economy and will become increasingly so in the future.

  24. Today’s Mix of Output • We can develop a clearer picture of our answer to the WHAT question by examining the uses to which our output is put.

  25. The four major uses of total output are: • Consumption • Investment • Government services • Net exports

  26. Net exports -1% Consumer Goods Investment 67% 15% Federal 7% Government Purchases State and local 12% WHAT America Produces

  27. Consumer Goods and Services • Consumer good and services include items like breakfast cereals, movie rentals, and college education. • This category of production accounts for over two-thirds of total output.

  28. Investment Goods and Services • Investment includes expenditures on (production of) new plant, equipment, and structures (capital) in a given time period, plus changes in business inventories. • The U.S. devotes 15 percent of output to investment.

  29. Investment Goods and Services • Investment goods: • Maintain our production possibilities by replacing worn out equipment and factories. • Expand our production possibilities by increasing and improving our stock of capital.

  30. Investment Goods and Services • The opportunity cost of building more plant and equipment is the extra consumer goods we could have produced instead. • The payoff is more goods and services can be produced in the future.

  31. Investment Goods and Services • Poor countries desperately need capital investment, but cannot afford to cut back on consumer goods. • Most of them depend on foreign aid and other capital inflows to finance investment or risk continuing stagnation or even decline of living standards.

  32. Government Services • Only that part of federal spending used to acquire resources and produce services is counted in GDP.

  33. Government Services • At present, the production of government services absorbs roughly one-fifth of U.S. total output. • Much of federal government spending is in the form of income transfers.

  34. Government Services • Income transfers are payments to individuals for which no current goods or services are exchanged: e.g., Social Security, welfare, unemployment benefits.

  35. Government Services • The output of all state and local government accounts for roughly 12 percent of total GDP.

  36. Net Exports • Exports are goods and services sold to foreign buyers. • Imports are goods and services purchased from foreign sources. • Net Exports are the value of exports minus the value of imports.

  37. Imports of goods (in billions) Exports of goods (in billions) $393 $236 $229 $220 $179 $165 $147 $134 $112 $100 $65 $16 To Japan To EU To Canada To Mexico To China To rest of the world From Japan From EU From Canada From Mexico From China From rest of the world U.S. Exports and Imports Total $773 billion Percent of world exports 18% Total $1223 billion Percent of world imports 19%

  38. Comparative Advantage • The motivation for international trade originates in our quest for more output. • Our decision to import is not based on our inability to produce items, but on the efficiency of importing the items.

  39. Comparative Advantage • International trade allows a nation to produce goods in which it has a cost advantage, then trade them for imported goods in which it has a cost disadvantage.

  40. Comparative Advantage • Comparative advantage is the ability of a country to produce a specific good at a lower opportunity cost than its trading partners.

  41. Comparative Advantage • Small nations are most in need of specialization because they lack the ability to produce the whole array of goods and services consumers want.

  42. How America Produces • All goods and service included in GDP are produced within the borders of the United States.

  43. Factors of Production • Factors of production are the resource inputs used to produce goods and services, e.g., land, labor, capital, entrepreneurship.

  44. Productivity • Productivity is output per unit of input such as output per labor hour. • The productivity of workers is more important than sheer numbers.

  45. Factors of Production • The high productivity of the U.S. economy results from highly educated workers using capital-intensive production processes.

  46. Capital Stock • A capital-intensive production process is one that use a high ratio of capital to labor inputs. • American production tends to be capital-intensive.

  47. Human Capital • Human capital is the knowledge and skills possessed by the workforce. • The knowledge and skills workers possess can be accumulated.

  48. The Education Gap Between Rich and Poor Nations • The high productivity of the American economy is explained in part by the quality of its labor resources.

  49. The Education Gap Between Rich and Poor Nations • Workers in poorer, less developed countries get much less education or training.

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