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Chapter 2

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  1. Chapter 2 The Economy: Myth and Reality E pluribus unum (Out of many, one) MOTTO ON U.S. CURRENCY

  2. 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

  3. 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 acquire

  4. American Economy: A Thumbnail Sketch • Free markets • Private enterprise • “Land of opportunity” • Most “privatized” economy • Most “marketized” economy

  5. 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

  6. Figure 1 Share of U.S. gross domestic product (GDP) exported and imported, 1959–2007

  7. 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

  8. Table 1 Openness of various national economies, 2007

  9. American Economy: A Thumbnail Sketch • U.S. economy • Growing • 2007 GDP = $14 trillion • 2007 GDP per capita • 2.8 times > than in 1959

  10. Figure 2 Real gross domestic product (GDP) since 1959

  11. American Economy: A Thumbnail Sketch • Economic fluctuations • Business cycles • Recession – period of time • Total output falls • Unemployment rate • Varies

  12. Figure 3 The growth rate of real gross domestic product (GDP) in the United States since 1959

  13. Figure 4 The unemployment rate in United States since 1929

  14. The Inputs: Labor and Capital • American workforce – composition • 150 million • 54% men • 46% women • 4% teenagers (6 million) • Expanding role of women

  15. Figure 5 Composition of employment by sex, 1950 and 2007

  16. Figure 6 Working women as a percentage of the labor force, 1960 versus 2005

  17. Figure 7 Teenage employment as a percentage of total employment, 1950–2006

  18. The Inputs: Labor and Capital • American workforce – production • Mostly services • Government • Only 16% - goods • Shift to services • Information age • Education • Experience

  19. Figure 8 Civilian non-farm payroll employment by sector, 2007

  20. Figure 9 Growing share of service sector jobs, 1967 vs. 2005

  21. 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%

  22. Figure 10 Average hourly compensation rates in manufacturing, 2006

  23. 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

  24. The Central Role of Business Firms • 25 million business firms • 80,000 fail / year • Multinational corporations • Competition • Key to industrial efficiency

  25. Government • Markets • Goods & services: bought & sold • Firms • Sell goods & services • Outputs markets • Receive receipts • Use resources • Inputs markets • Pay for resources

  26. Government • Consumers • Buy goods and services • Outputs markets • Expenditures • Sell resources • Inputs markets • Receive income

  27. Figure 11 The circular flow of goods and money

  28. Government • Role of government • Making & enforcing laws • Rule maker • Referee • Arbitrator • Regulating business • Antitrust laws • Promote social objectives

  29. 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

  30. Figure 12 The allocation of government expenditures

  31. 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

  32. Figure 13 The tax burden in selected countries, 2006

  33. Government • Role of government • Redistributing income • Reduce income inequality • Taxes • Transfer payments • Progressive taxation • Antipoverty programs

  34. 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

  35. Conclusion: It’s a Mixed Economy • Mixed economy • Some public influence • Over free markets • Some public ownership • And private property