AP Economics

1. AP Economics Chapter 3

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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?

21. 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?

22. 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

23. 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)

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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)

30. 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