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The U.S. Economy: A Global View. Chapter 2. Chapter 2: The US Economy – A Global View. 1. What America Produces. 2. How America Produces. 3. For Whom America Produces. LO1. 1. What America Produces. LO1. What America Produces. The USA: < 5% of world population,

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chapter 2 the us economy a global view
Chapter 2: The US Economy – A Global View

1. What America Produces.

2. How America Produces.

3. For Whom America Produces.

LO1

what america produces
What America Produces
  • The USA:
    • < 5% of world population,
    • 12% of the world’s arable land,
    • produces >20% of world output.

LO1

what america produces1
What America Produces

How do we measure economies so that we can compare them?

LO1

gdp comparisons
GDP Comparisons
  • Gross Domestic Product (GDP):
    • the total market valueof all final goods and services produced:
      • within a nation’s borders,
      • over a given time period.
    • Usually recorded by spending/sales.
  • It is the basicmeasure of an economy’s size.

LO1

comparative output
Comparative Output

2005 Gross Domestic Product (GDP)

(in trillions of U.S. dollars)

LO1

16.8

2013 “Composite”

9.3

4.9

3.6

per capita gdp
Per Capita GDP
  • Per Capita GDP:
    • GDP divided by total population;
    • (GDP per person.)

LO1

experiment
Experiment:

Let’s do an experiment!

real v nominal gdp
Real v. Nominal GDP
  • GDP comparisons from one year to another can be distorted by fluctuations in price levels.

Prices

Prices

real v nominal gdp1
Real v. Nominal GDP
  • Nominal GDP:
    • GDP measured in the prices of that time period (the period of the GDP measure).
  • Real GDP (and real GDP per capita):
    • keyed to a base year ,
    • expressed in “constant dollar” values ,

…which have been…

    • adjusted for changing price levels.
gdp growth the standard of living
GDP Growth & the Standard of Living
  • Economic growth is:
    • An increase in output, which is…
    • An increase in real GDP, which is…
    • An expansion of production possibilities.
gdp growth the standard of living1
GDP Growth & the Standard of Living
  • U.S. output grows by roughly 3% per year.
  • U.S. population grows by 1%peryear.

U.S.

Economy

US Population

u s output and population growth since 1900
U.S. Output and Population Growth Since 1900

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

  • (Figure 2.1, pg. 29)
poor nations
Poor Nations
  • The populations of rich countriesare growing slowly:
    • gains in per capita GDPare easily achieved.
  • The populations of the poorestcountries are generally growing rapidly:
    • this makes it difficult to raise per capita GDP (living standards).
the mix of output
The Mix of Output
  • U.S. output a century ago:
    • two-thirds = goods
    • one-thirds = services.
  • Today, nearly 75 percent of U.S. output consists of…
    • services, notgoods.

LO1

the changing mix of output
The Changing Mix of Output

100

Services

80

60

Percent of employment

40

Agriculture

Manufacturing, mining and construction

20

0

1800

1840

1880

1920

1960

1993

  • (Figure 2.2, pg. 30)

LO1

development patterns
Development Patterns
  • The transformation of the U.S. into a service economy is a reflection of our high incomes.
  • America is primarily a service economy and will become increasingly so in the future.

LO1

today s mix of output by customer
Today’s Mix of Output by“Customer”
  • The four major USESof total output (GDP) are:
  • Consumption:
  • Investment:
  • Government services:
  • Net eXports(-M):

GDP =C + I + G + (X-M)

“You and I”

Capital production (capital formation)

Roads, schools, police, etc.

Goods exported (minus goods imported)

LO1

what america produces2
WHAT America Produces

Net exports -6%

Consumer Goods

Investment

70%

17%

Federal

7%

Government Purchases

State and

local

12%

  • (Figure 2.3, pg. 31)

LO1

consumer goods and services
Consumer Goods and Services
  • Consumer goods and services:
    • includes items like breakfast cereals, movie rentals, and college education.
    • This category of production accounts for over two-thirds of total output -roughly 70%.

LO1

investment goods and services
Investment Goods and Services
  • Investment:
    • includes expenditures on (production of): new plant, equipment, and structures (capital),
    • plus changes in business inventories.
  • The U.S. devotes 17 percent of output to investment.

LO1

investment goods and services1
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.
  • This is known as capital formation.

LO1

government services
Government Services
  • Only that part of federal spending used to acquire resources and produce services is counted in GDP.
  • Income transfers:
    • government payments to individuals for which no current goods or services are exchanged.
    • Income transfers do not register in our calculation of GDP.

LO1

net exports
Net Exports
  • Net exports:
    • the value of exports minusthe value of imports.

So, …GDP =C + I + G + (X-M)

LO1

comparative advantage
Comparative Advantage
  • International trade allows countries to:
    • produce and export goods that they produce efficiently, and…
    • import goods they don’t produce as efficiently.
comparative advantage1
Comparative Advantage
  • Comparative advantage:
    • the ability of a country to produce a good at a lower opportunity cost than its trading partners.
how america produces
How America Produces
  • Although all nations use the same factors of production, their quantity and quality varies greatly.
  • Factors of production: land, labor, capital, entrepreneurship.

LO2

human capital
Human Capital
  • Human capital is the knowledge and skills possessed by the workforce.
  • The high productivity of the U.S economy results from:
    • using highly educated workers…
    • in capital-intensive production processes.

LO2

capital stock
Capital Stock
  • American production tends to be capital-intensive:
    • We use a high ratio of capital to labor inputs.

LO2

high productivity
High Productivity
  • American households are able to consume so much because American workers produce so much.
  • Productivity:
    • output per unit of input.
    • for example, output per labor hour.

LO2

the education gap between rich and poor nations
The Education Gap Between Rich and Poor Nations

91%

95%

75%

46%

Poor

Middle-

High-income

United

States

countries

income

countries

countries

  • (World View, pg. 33)

Enrollment in secondary school

LO2

factor mobility
Factor Mobility
  • Our continuing ability to produce the goods and services that consumers demand depends on our ability in reallocating resources from one industry to another.

LO2

outsourcing and trade
Outsourcing and Trade
  • Technology also facilitates global resource use.
  • Outsourcing allows U.S. workers to pursue their comparative advantage in high-skill, capital-intensive jobs.

LO2

outsourcing and trade1
Outsourcing and Trade

“U.S. computer engineers do less routine programming and more systems design...”

“U.S. accountants do less cost tabulation and more cost analysis...”

LO2

economic freedom and growth
Economic Freedom and Growth
  • As nations become freer – rely more on markets and less on government – real GDP grows more quickly.

LO2

economic freedom and growth1
Economic Freedom and Growth

GDP Growth Rate 1995-2004 (percent per year)

Quintiles of Improvement in Economic Freedom (1997-2006)

  • (Figure 2.4, pg. 35)

LO2

role of government
Role of Government
  • Government plays a critical role in establishing a framework in which private business can operate.

LO2

providing a legal framework
Providing a Legal Framework
  • One of the most basic functions of government is to establish and enforce the rules of the game.

LO2

protecting the environment
Protecting the Environment
  • Externalities:
    • the costs (or benefits) of a market activity borne by a third party.
  • To reduce the external costs of production, the government limits air, water, and noise pollution and regulates environmental use.

LO2

protecting consumers
Protecting Consumers
  • The government protects consumers by preventing individual business firms from becoming too powerful.
  • A monopoly is a firm that produces the entire market supply of a particular good or service.

LO2

protecting consumers1
Protecting Consumers
  • Government regulates the safety of many products.

LO2

protecting labor
Protecting Labor
  • The government regulates how labor resources are used in the production process.

LO2

striking a balance
Striking a Balance
  • Government interventions are designed to change the way in which resources are used.
  • Government failure might replace market failure, leaving us no better off – possibly worse off.

LO2

for whom america produces
For Whom America Produces
  • How many goods and services you get largely depends on your income.

LO3

u s income distribution
U.S. Income Distribution
  • The top 20 percent (quintile) of U.S. households gets half of all U.S. income.
  • The poorest 20 percent (quintile) get less than 4 percent of all income.

LO3

u s distribution of income1
U.S. Distribution of Income
  • (Figure 2.5, pg. 37)

Second fifth

Richest fifth

Third fifth

of population

Fourth fifth

Poorest fifth

LO3

global inequality
Global Inequality
  • Income disparities are greater in many other countries.
  • Poor people in the United States receive more goods and services than the average household in most low-income countries.

LO3

review question 1
Review Question - #1
  • A higher GDP means an increase in the standard of living.
  • WRONG!
  • A high per capital GDP is an imperfect measure of the standard of living. RIGHT!
review question 2
Review Question #2
  • As the United States imports more, consumption rises and therefore so does the GDP.
  • WRONG!
  • Imports replace consumption of goods produced in the United States and lower the GDP. RIGHT!
  • (GDP = consumption + investment + government purchases + exports - imports.)
review question 3
Review Question #3
  • Exported goods are not included in the GDP because Americans do not consume them.
  • WRONG!
  • Exported goods are produced in the United States and therefore are included in the GDP. RIGHT!
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