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AP Economics. Chapter 3. Chapter 3: U.S. Economy in Perspective. Chapter 3 Assignment Use margin questions to check understanding (no need to write them out now) Questions for Thought and Review # 1-5, 9-13 Problems and Exercises # 2, 4, 5. Chapter 3: U.S. Economy in Perspective.

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Ap economics

AP Economics

Chapter 3


Chapter 3 u s economy in perspective

Chapter 3: U.S. Economy in Perspective

  • Chapter 3 Assignment

    • Use margin questions to check understanding (no need to write them out now)

    • Questions for Thought and Review # 1-5, 9-13

    • Problems and Exercises # 2, 4, 5


Chapter 3 u s economy in perspective1

Chapter 3: U.S. Economy in Perspective

  • The U.S. Economy, Historical Perspective

    • U.S. strength is in its people and other resources

    • U.S. economy is a market economy – based upon private property and the market in which principal individuals decide the three questions


Chapter 3 u s economy in perspective2

Chapter 3: U.S. Economy in Perspective

  • The U.S. Economy, Historical Perspective

    • Under a market economy:

      • Individuals encouraged to follow their own self-interest, market forces will coordinate

      • Distribution of goods is to each according to his or her ability, effort, or inherited property

      • Markets require private property rights

      • Government allocates and defends private property rights


Chapter 3 u s economy in perspective3

Chapter 3: U.S. Economy in Perspective

  • The U.S. Economy, Historical Perspective

    • How markets work:

      • System of rewards and payments

      • Individuals are free to do what they want as long as it’s legal

      • Prices coordinate individuals’ wants

      • Most economists believe the market is a good way to coordinate needs, the debate is about structure and adjustment by gov’t


Chapter 3 u s economy in perspective4

Chapter 3: U.S. Economy in Perspective

  • The U.S. Economy, Historical Perspective

    • Capitalism and Socialism

      • Socialism is, in theory, and economic system based on goodwill towards others, now self-interest

      • Society decides the 3 questions, if individuals don’t consider the general good, the gov’t will force them to

      • Capitalism is and economic system based on the marked in which the ownership of the means of production resides with a small group called capitalists

      • Socialism in practice is often called Soviet-style socialism


Chapter 3 u s economy in perspective5

Chapter 3: U.S. Economy in Perspective

  • The U.S. Economy, Historical Perspective

    • Economic systems have evolved over time

      • Feudalism is an economic system in which traditions rule. Lasted 8th to 15th century

      • Mercantilism was next – gov’t determines 3 questions

      • Industrial Revolution – reduced mercantilist power, led to capitalism


Chapter 3 u s economy in perspective6

Chapter 3: U.S. Economy in Perspective

  • The U.S. Economy, Historical Perspective

    • Gov’ts are beginning to play less of a role in market-based economies


Chapter 3 u s economy in perspective7

Chapter 3: U.S. Economy in Perspective

  • Diagram of the U.S. economy

    • Divided into 3 groups – Business, households, and gov’t (fig. 3-1)

    • Households supply factors of production to business and are paid by business for doing so – factor market

    • Business produces goods and services and sells them to households and gov’t – goods market


Chapter 3 u s economy in perspective8

Chapter 3: U.S. Economy in Perspective

  • Diagram of the U.S. economy

    • Gov’t engages in the following activities

      • Buys goods and services from business, buys labor services from households

      • It provides services to both business and households

      • Gives some of its tax revenues directly back to individuals

      • Oversees interaction of business and households in goods and factor markets

      • Gov’ts are limited internally by voters, and by relationships with other nations


Chapter 3 u s economy in perspective9

Chapter 3: U.S. Economy in Perspective

  • Diagram of the U.S. economy

    • Business is responsible for over 80 percent of U.S. production

    • Entrepreneurship is an important part of business

    • U.S. firms produce goods, and more importantly services

    • Services make up about 50 percent of the U.S. economy


Chapter 3 u s economy in perspective10

Chapter 3: U.S. Economy in Perspective

  • Diagram of the U.S. economy cont’d

    • Businesses are guided by consumer sovereignty – consumer’s wishes rule what is produced

    • 3 major types of businesses – sole proprietorships, partnerships, and corporations (fig 3-2)

    • Finance and Business: Stocks are sold in organized markets such as the NYSE


Chapter 3 u s economy in perspective11

Chapter 3: U.S. Economy in Perspective

  • Diagram of the U.S. economy cont’d

    • Financial accountability must exist for financial markets to work

    • In 2002 accounting standards were abused and the market suffered


Chapter 3 u s economy in perspective12

Chapter 3: U.S. Economy in Perspective

  • Diagram of the U.S. economy cont’d

    • E-commerce - important

      • Includes business selling to business (B2B), business to consumers (B2C), consumers selling to business, and consumers selling to consumers

      • Brings people together at low cost at virtual marketplace – geography doesn’t matter

      • Since the dotcom bubble burst, economists see the importance of the internet in the economy


Chapter 3 u s economy in perspective13

Chapter 3: U.S. Economy in Perspective

  • Diagram of the U.S. economy cont’d

    • Households – single person or group of unrelated persons living together making decisions

    • Control gov’t and business

    • Not active producers of output (always), but passive recipients of income

    • Suppliers of labor


Chapter 3 u s economy in perspective14

Chapter 3: U.S. Economy in Perspective

  • Diagram of the U.S. economy cont’d

    • Largest source of household income is wages and salaries

    • Job trend toward more service related jobs away from manufacturing is continuing

    • Fastest gains in services, fastest declines in manufacturing and agriculture


Chapter 3 u s economy in perspective15

Chapter 3: U.S. Economy in Perspective

  • Diagram of the U.S. economy cont’d

    • Government: Actor (collecting money and spending it one projects) and referee (setting rules)

    • Actor:

      • All levels of gov’t employ about 20% of nation’s output, employ about 21 million people

      • State and local employ about 18 million, spend about $1 trillion a year on administration, education, roads


Chapter 3 u s economy in perspective16

Chapter 3: U.S. Economy in Perspective

  • Diagram of the U.S. economy cont’d

    • Actor:

      • Federal gov’t – income taxes make up 59% of revenue, spend mostly on income maintenance and defense

    • Referee:

      • Controls interaction of households and business

      • Decides whether invisible hand can operate freely


Chapter 3 u s economy in perspective17

Chapter 3: U.S. Economy in Perspective

  • Diagram of the U.S. economy cont’d

    • Referee:

      • Businesses not free to hire and fire whomever they want

      • Many working conditions are regulated

      • Businesses cannot collude


Chapter 3 u s economy in perspective18

Chapter 3: U.S. Economy in Perspective

  • Why transition? In groups, answer the following:

    • From the point of view of a typical consumer

      • What are some characteristics of a market economy that might make it more appealing than a socialist economy?

      • What are some characteristics of a socialist economy that might make it more appealing than a market economy?


Chapter 3 u s economy in perspective19

Chapter 3: U.S. Economy in Perspective

  • Why transition? In groups, answer the following:

    • From the point of view of a typical producer such as a baker

      • What are some characteristics of a market economy that might make it more appealing than a socialist economy?

      • What are some characteristics of a socialist economy that might make it more appealing than a market economy?


Chapter 3 u s economy in perspective20

Chapter 3: U.S. Economy in Perspective

  • U.S. Economy and Globalization

    • International issues must be taken into account for economic decisions

    • Global Corporations – any with substantial operations on production and sales in more than one country – becoming very important

    • Pose a number of problems for governments

    • No single gov’t can regulate it

    • Can leave a nation if they don’t like policies


Chapter 3 u s economy in perspective21

Chapter 3: U.S. Economy in Perspective

  • U.S. Economy and Globalization

    • Markets are becoming global

    • WTO – World Trade Organization – works to create free trade around the world

    • Globalization has two effects on competition

      • Increases the size of the gain for the winner (positive)

      • Much harder to win (negative)


Chapter 3 u s economy in perspective22

Chapter 3: U.S. Economy in Perspective

  • U.S. Economy and Globalization

    • Globalization allows for greater specialization and division of labor

    • Increases growth and improves standard of living for everyone

    • Allows firms to move operation to countries with a comparative advantage, can lower costs

    • Surviving in a global economy is difficult


Chapter 3 u s economy in perspective23

Chapter 3: U.S. Economy in Perspective

  • U.S. Economy and Globalization

    • Firms are breaking down the production process

      • May keep production within the company but parcel out portions of the process to different parts of the world

      • May simply out-source that part of production that can be done more cheaply by firms in other countries

      • Labor is a significant part of these decisions


Chapter 3 u s economy in perspective24

Chapter 3: U.S. Economy in Perspective

  • U.S. Economy and Globalization

    • Global competition helps keep down prices and wages

      • High prices charged by U.S. lawyers make it hard to attack

      • No uniformity in laws

      • Manufacturing is susceptible to foreign competition


Chapter 3 u s economy in perspective25

Chapter 3: U.S. Economy in Perspective

  • U.S. Economy and Globalization

    • Does globalization eliminate jobs?

      • To some degree this is true in the U.S.

      • Technology creates jobs

      • U.S. firms see themselves as global companies


Chapter 3 u s economy in perspective26

Chapter 3: U.S. Economy in Perspective

  • U.S. Economy and Globalization

    • U.S. firms can see a rise in demand for aspects of production that are still U.S. based

    • It helps the demand for U.S. goods and increases the demand for U.S. labor

    • The E.U. has protected European nations from competition

    • E.U. is made of 15 European nations


Chapter 3 u s economy in perspective27

Chapter 3: U.S. Economy in Perspective

  • U.S. Economy and Globalization

    • Dealing with Globalization:

      • Institutions are changing but still cannot control global business

      • The closest thing to a regulator is the U.N.

      • U.N. edicts are often ignored

      • Any meeting of nations to discuss trade is voluntary

      • Other international organizations are the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO)


Chapter 3 u s economy in perspective28

Chapter 3: U.S. Economy in Perspective

  • U.S. Economy and Globalization

    • Dealing with Globalization:

      • There are also informal organizations

        • Group of Five (Japan, Germany, Britain, France, the U.S.) who promote negotiations and coordinate economic relations

        • Group of Eight (G8, the group of 5 plus Canada, Italy, and Russia) which does the same work


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