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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