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CHAPTER 3
THE EVOLVING U.S. ECONOMY IN
PERSPECTIVE

LAUGHER CURVE
Frank: According to this economist, Ernie, it’s all very simple. In an endogenous business cycle
where variable-span diffusion indices are neither rising nor falling and the capital-tooutput ratio is low, then the interplay of liquidity preferences and reserve ratios escalates
and interest rates rise, causing the yield ratio to drop on common stocks.
Ernie: I get it! In other words, when the economy goes higgledy-piggledy, the Dow goes blooey!
Thaves
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CHAPTER OVERVIEW: What’s It All About?
This chapter is in three parts. The first deals with the differences between capitalism and
socialism. This includes a definition of a market economy, a description of how households,
businesses, and government interact in a market economy, and a brief summary of the advantages
and disadvantagae of various types of businesses.
The second part examines government’s role in the economy first as an actor and then as a
referee.
The last deals with the problems and opportinities of increasing globalization.
CHAPTER OBJECTIVES: Students Should Be Able To …
1. Define a market economy. A market economy is an economic system based on private
property and the market in which, in principle, individuals decide how, what, and for whom to
produce.
2. Compare and contrast socialism with capitalism. To a large extent under socialism, the tools
of production are in the hands of the state, while under capitalism they are largely in private
hands.
3. Describe how businesses, households, and government interact in a market economy. The
circular flow diagram shown in Figure 3-1 demonstrates the relationship among households,
business, and goverenment.
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Chapter 3: The Evolving U.S. Economy In Perspective
4. Summarize briefly the advantages and disadvantages of various types of business. These
include sole proprietorships, partnerships, and corporations.
5. Explain why, even though households have the ultimate power, much of the economic decision
making is done by business and government. This has to do with profit-seeking on the part of
businesses (the invisible hand), and power-seeking on the part of government.
6. Distinguish the government’s role as an actor from its role as a referee. It’s a referee and
also an actor. Both roles are controversial, especially the latter.
7. Explain how globalization has changed competition. Globalizatiion has created world-wide
competitors. It has also allowed greated specialization, which has lowered costs.
WHAT’S NEW? Revisions to This Edition
This chapter combines material from 4th edition Chapters 2 and 3. It begins by placing the U.S.
market system in historical perspective by comparing it with socialism. The discussion of
economic systems focuses on a market economy (instead of capitalism). The chapter continues
with a summary of the U.S. economy and concludes with a discussion of how globalization has
affected the U.S. economy. The description of international trade patterns and how international
trade differs from intranational trade has been moved to Chapter 21 (Chapter 17 in
Macroeconomics).
 Updated discussion of how e-commerce affects competition (location doesn’t matter, reduces
overhead costs, outsourcing is made easier, increases information).
 Discussion of globalization and international trade revised to focus more on global
corporations and global markets.
 Dropped key term, “welfare capitalism” and added “laissez-faire” and “e-commerce.” This
chapter combines Third Edition Chapters 5 and 6. It is now more descriptive than analytical
and leaves the analysis for the micro and macro core chapters. By combining these chapters,
the introductory section of the book is shorter.
DISCUSSION STARTERS: Get Your Class Rolling
1. To what extent do you think consumers and investors are sovereign as opposed to being
manipulated by sophisticated business marketing campaigns? What are some examples?
2. How ethically and socially responsible are American businesses?
3. How well can competition be judged by looking at the number of, or the size of, firms in an
industry or market?
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Chapter 3: The Evolving U.S. Economy in Perspective
4. What effect do you think the increasing globalization of markets will have on American
business, labor, and government? Why do you think so many businesses today have found it
necessary to compete on a global scale?
5. Who usually argues for government protectionist policies?
6. What is likely to happen to wage rates of unskilled and semi-skilled workers in the U.S. if
developing countries continue to compete for global corporations with the offer of low wages
and governmental policies eager to give these global corporations whatever they want?
TIPS FOR TEACHING LARGE SECTIONS
Economic Systems – Why Transition?
Chapter 3 provides explanation of how economic systems and our ways of defining economic
systems have evolved over the past few decades. The following is an exercise that is useful in
helping students discover for themselves why economies typically combine market and socialist
elements. In a large class, have students work together to answer these questions in groups of
three or four. To keep students on task, you might tell them you will have them submit their
individual answers for credit, you will ask a short quiz question after the groups discuss their
answers, or you will call on students to share the fruits of their discussion with the class.
Over the past couple of decades, many economies that were once considered to be predominantly
socialist economies have incorporated more elements of a market economy. Yet at the same time,
economies that are very market-oriented also have a significant level of government intervention in
determining answers to the economic questions of what to produce, how to produce, and for whom
to produce.
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?
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?
You will find that many student arguments relate to issues of equity and fairness while some
discussion will revolve around issues related to efficiency. This is an excellent time to connect
the ideas of equity and efficiency to the concepts of normative and positive economics presented
in chapter 1.
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ON THE WEB: Integrating New Media into the Classroom
http://www.imf.org is the Web site of the International Monetary Fund, which is offered in
English, Spanish, and French. There are links entitled: “about the IMF, news releases,
publications, country information, fund rates, standards and codes, site index, site map, and
comments.” Politics: bureaucratic, self aggrandizing.
http://www.imfsite.org is the Web site of the Hoover Institution on the Stanford University
campus in California, which deals with issues surrounding the IMF. Links include: “origins
[history of the IMF], operations, financing programs, conditionality, recent financing initiatives,
mission creep, reform proposals, and abolish the IMF?” Politics: scholarly, mildly conservative.
http://www.wto.org is the very elaborate Web site for the World Trade Organization. It is
available in English, Spanish, and French. Links to Trade Topics include: “goods, services,
intellectual property, environment, regionalism, dispute settlement, and ecommerce.” Links to
Resources include: “statistics, international trade, technical cooperation, trade policy courses,
legal texts, and documents on-line.” Politics: bureaucratic, self congratulatory.
http://www.worldbank.org is the Web site of the World Bank Group, whose motto is “Our
Dream is a World Free of Poverty.” It is available in English, Spanish, and French. There are six
links under earch of the following headings: “Bank at work, Resources, and Partners.” Politics:
bureaucratic, self congratulatory.
http://www.dnb.com is the Web site of Dun & Bradstreet, the credit reporting service. Most
information is accessible by subscription only. There are extended lists of services they offer.
Politics: none.
STUDENT STUMBLING BLOCKS: Common Areas of Difficulty
Opportunity Cost and How to Make Sense of the Millions Being Made by Athletes
It is hard for students to relate to the fortunes being made by athletes on basketball courts, in ball
parks, and in football stadiums. The following, taken from the Internet, might help them.
MICHAEL JORDAN VERSUS NERDS
Michael Jordan made over $300,000 per game before he retired. That equals $10,000 per
minute, at an average of 30 minutes playing time per game.
With some $40 million in endorsements, he made $178,000 per day, working or not.
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If he sleeps 7 hours a night, he makes $52,000 every night.
If he goes to see a movie it will cost him $9.50, but he will make $18,550 while he is there.
If he decides to have a five-minute egg, he will make $618 while boiling it.
He makes $7,415/hour more than minimum wage.
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He makes $3,710 while watching each episode of X Files.
If he wanted to save for a new Acura SLX (about $90,000) it would take him a whole 12
hours.
He would probably pay $200 for a nice round of golf, but would be reimbursed around
$30,000 during that round.
He would make about $19.60 while watching the 100 meter dash in the Olympics.
He would make about $15,600 during the Boston Marathon.
In his last year, he made more than twice as much as all U.S. past presidents for all their
terms combined.
BUT WAIT!
If Michael Jordan saves 100 percent of his income for the next 200 years, he would still have
less than Bill Gates has today.
GAME OVER! NERD WINS!
TIES TO THE TOOLS: Bringing the Boxes into the Classroom
Applying the Tools: Tradition and Today’s Economy
Colander makes a connection between a tradition-based economy such as feudalism and today’s
economy. Some Western traditions are so deep seated, they are just taken for granted: man is the
husbander of nature’s resources; numbers are precise while speech is not; men are stronger than
women; Friday is the day to eat fish; etc. Traditions play a large role in any economy.
Beyond the Tools: The Rise of Markets in Perspective
This vignette elaborates on the rise, and finally, the triumph of markets. Modern markets work in
this way: “I’ll give you money and you give me a good or service in return.” There is another
view of markets from economic anthropology not mentioned by Colander — reciprocity.
Reciprocity does not work the way markets work. Reciprocity, a nonprice making market, is a
symmetrical system of kinship groups (“I’ll give you something tangible because I feel kinship or
love toward you, and you give me honor or respect or love in return.”). An example is the
potlatch ceremony of the Pacific Northwest Aleuts. On special occasions, kinship groups would
meet and gifts were exchanged. Some were so overcome with the ceremony they would literally
give away all their possessions in order to gain respect and honor. The consequences were so
socially disasterous, the Canadian government outlawed potlatch. To get a sense of how the
potlatch felt, think of this: how do you feel when you find the perfect gift for someone you love
and present it at Christmas, to their delight. Or as Chief Maquinna of the Nootka once put it:
“Once I was in Victoria, and I saw a very large house. They told me it was a bank and that white
men place their money there to be taken care of and that by and by they got it back with interest.
We are Indians and we have no such bank; but when we have plenty of money or blankets, we
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give them away to other chiefs and people, and by and by they return them with interest, and our
hearts feel good. Our way of giving is our bank.”
See Karl Polanyi, Trade and Market in the Early Empires (Glencoe, IL: The Free Press, 1957),
and Paul Bohannan and George Dalron (eds.), Markets in Africa (Garden City, NY: Doubleday
Anchor, 1965).
Knowing the Tools: The Stock Market
An important point to stress is that there are two markets for stocks, a primary market and a
secondary market. In a primary market, the issuing corporation sells the stock directly to the
public in an Initial Public Offering (an IPO). After paying the underwriters their commission
(typically 2-3 percent), the issuing corporation gets to keep the money. In a secondary market,
the corporation does not get the money. Joe Blatz of Boston sells his hundred shares of Yahoo!
through his stockbroker or through the Internet, and at exactly the same instant, Judy Stumbles of
Santa Fe buys 100 shares of Yahoo! through her stock broker or through the Internet. Yahoo!
does not see any money, only Joe and Judy do. They are just trading stocks on the secondary
market.
Applying the Tools: A World Economic Geography Quiz
This could serve as an in-class exercise. Put the countries, A through T, on the overhead and
then ask each of the twenty questions. Closed books, of course.
Applying the Tools: Made in China?
Although other nations were mentioned in producing the Barbie doll, final assembly was done in
China. Is there a downside to this “Made in China” syndrome? So much of the world’s
manufacturing is now dependent on China as an industrial lifeline that if it is disrupted by war,
terrorism, social unrest, or a natural disaster the upheavals would be felt world wide. We should
hasten to add that the U.S. still maintains segments of commerce that have the greatest value –
knowledge and marketing.
LECTURE OUTLINE: A Map of the Chapter
I. The U.S. economy: While ultimately the U.S. economy’s strength is its people and its other
resources, U.S. economy is far from perfect.
II. The U.S. economy in historical perspective.
A. The U.S. economy is a market economy, that is, it is an economic system based upon
private property and the market in which, in principle, individuals decide how, what, and
for whom to produce (Chapter Objective 1).
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1. Under a market economy:
a. Individuals are encouraged to follow their own self-interest, while market forces
of supply and demand are relied upon to coordinate those individual pursuits.
b. Distribution of goods is to each according to his or her ability, effort, or
inherited property.
c. Markets require private property rights – the control a private individual or
firm has over an asset or a right.
d. Government allocates and defends property rights.
2. How markets work.
a. Markets work through a system of rewards and payments.
b. Individuals are free to do whatever they want as long as it is legal.
c. Prices coordinate individuals’ wants. If there’s not enough of something, its
price goes up. If there’s too much, price goes down.
3. Most economists believe the market is a good way to coordinate individuals’ needs.
The primary debate among economists is about how markets should be structured,
and whether they should be modified and adjusted by government regulation.
B. Capitalism and socialism.
1. Socialism is, in theory, an economic system based on individuals’ goodwill toward
others, not on their own self-interest.
2. In principle, with socialism, society decides what, how, and for whom to produce
(Chapter Objective 2). It tries to organize society the way families are organized. If
individuals’ inherent goodness will not make them consider the general good,
government will force them.
3. Capitalism is defined as an economic system based on the market in which the
ownership of the means of production resides with a small group of individuals
called capitalists.
4. Socialism in practice is often called Soviet-style socialism — an economic system
that embodies both political and economic systems, uses administrative control or
central planning to solve the coordination problems of what, how, and for whom.
History has shown that economic systems based upon people’s goodwill have tended
to break down.
C. Economic systems have evolved over time.
1. Feudalism is an economic system in which traditions rule. It dominated the western
world from about the 8th to the 15th century.
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2. Feudalism gave way to mercantilism, an economic system in which government
determines the what, how, and for whom decisions by doling out the rights to
undertake certain economic decisions.
3. The Industrial Revolution — a time when technology and machines rapidly
modernized industrial production and mass-produced goods – reduced the power of
mechantilists and paved the way for capitalism.
D. Governments are beginning to play less of a role in managing market-based economies.
It is unknown if this trend of liberalization will continue.
III. Diagram of the U.S. economy. The U.S. economy is divided into three groups: business,
households, and government. See Figure 3-1 (Chapter Objective 3).
A. Households supply factors of production to business and are paid by business for doing
so. The place where this occurs is called the factor market.
B. Business produces goods and services and sells them to households and government. The
place where this occurs is called the goods market.
C. Government engages in the following activities:
1. It buys goods and services from business and buys labor services from households.
2. It provides services to both business and households.
3. It gives some of its tax revenues directly back to individuals (income redistribution).
4. It oversees the interaction of business and households in the goods and factor
markets.
5. Governments are not only limited internally by what voters want, but also by their
relationships with other nations.
D. Business is responsible for over 80 percent of U.S. production. Business is the name
given to private producing units in our society. They decide what to produce, how much
to produce, and for whom to produce it.
1. Entrepreneurship, the ability to organize and get something done, is an important
part of business and an important ingredient of the economy.
2. U.S. firms produce goods, but more importantly, they also produce services.
3. Services make up about 50 percent of the U.S. economy compared with about 30
percent in 1947.
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4. Consumer sovereignty and business: Although businesses decide what to produce,
they are guided by consumer sovereignty: the consumer’s wishes rule what is
produced.
5. There are three major types of businesses: sole proprietorships, partnerships, and
corporations. See Figure 3-2. The advantages and disadvantages of the three forms
are listed in the text (Chapter Objective 4).
6. Finance and business: Stocks, or ownership certificates in corporations, are sold in
organized markets such as the New York Stock Exchange. Bonds, or certificates of
debt, are also sold in these markets.
7. For financial markets to function efficiently, corporate accounting statements must
reflect reality. When accounting standards are abused, as they were in 2002,
financial markets suffer.
8. It is difficult to overemphasize the importance of e-commerce and the digital
economy.
a. E-commerce includes business selling to business (B2B), business selling to
consumers (B2C), consumers selling to business (C2B) and consumers selling to
consumers C2C).
b. E-commerce brings people together at a low cost at a virtual marketplace where
geographic locations does not matter.
c. Since the dotcom bubble burst, economists lately havve been much more open to
arguments about the importance of the Internet on the economy.
E. Households are a single person or groups of related or unrelated persons living together
and making decisions. They ultimately control the other two economic institutions -government and business.
1. In many spheres of the economy, households are not active producers of output but
merely passive recipients of income, especially wages (Chapter Objective 5).
2. Households as suppliers of labor.
a. The largest source of household income is wages and salaries. Households
supply the labor with which businesses produce and government governs.
b. The job trend toward more service-related jobs away from manufacturing is
continuing. The fastest gains are in services while the fastest declining are in
manufacturing and agriculture.
F. Government: Two general roles of government are as an actor (collecting money in taxes
and spending that money on its own projects, such as defense and education) and as a
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referee (setting the rules that determine relations between businesses and households)
(Chapter Objective 6).
1. Government as an actor.
a. All levels of government consume about 20 percent of the nation’s total output
and employ about 21 million persons.
b. State and local government: State and local government employ 18 million
workers and spend about $1 trillion per year. They spend their tax revenues on
administration, education, and roads. See Figure 3-3.
c. Federal government: Individual and corporate income taxes make up 59 percent
of the federal government’s revenue, while payroll taxes make up about 33
percent. The two largest categories of spending are income maintenance and
defense. See Figure 3-4.
2. Government as a referee: Government controls the interaction of households and
business. It sets the rules of interaction and acts as a referee, changing the rules
when it sees fit. It also decides whether the invisible hand will be allowed to operate
freely. For example:
a. Businesses are not free to hire and fire whomever they want.
b. Many working conditions are subject to government regulation.
c. Businesses cannot collude.
IV. The U.S. economy and globalization. International issues must now be taken into account in
just about any economic decision a country or a firm faces.
A. Global corporations -- those with substantial operations on both the production and
sales sides in more than one country -- are becoming increasingly important.
1. Global corporations offer great benefits for nations. They create jobs, bring new
ideas and new technologies to a country, and provide competition for domestic
companies, keeping them on their toes.
2. Global corporations also pose a number of problems for governments. Since a global
corporation exists in a number of nations, no single government regulates or controls
it. If they don’t like the policies of the host nation, they can simply leave, taking
their jobs with them.
B. Markets have become more global in many ways. One reason is the work of the WTO.
The World Trade Organization is a United Nations unit committed to getting nations to
agree not to impose new tariffs or other trade restrictions except under certain limited
circumstances.
1. Globalization has two effects on the competitive process.
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a. It increases the size of the gain for the winner. The rewards for winning globally
are much larger than the rewards for winning domestically. This is a positive
effect.
b. It makes it much harder to win – globalization increases competition in an
economy. This is a negative effect.
2. Globalization increases competition by allowing greater specialization and division
of labor, which, in turn, increases growth and improves the standard of living for
everyone.
3. It allows firms to move operations to countries with a comparative advantage in that
process and can lower costs.
4. Surviving in a global economy is difficult (Chapter Objective 7).
a. Firms are breaking down the production process.
(1) Firms may keep production within the company, but parcel out portions of
the production process to different parts of the world.
(2) Or they may simply out-source that part of production that can be done
more cheaply by firms in other companies. Labor is a significant part of
these decisions. See Table 14-2.
b. Global competition helps to keep down their relative prices and wages.
(1) The high prices U.S. lawyers charge are hard to attack in a global market
since there is virtually no uniformity in the laws nations have.
(2) On the other hand, manufacturing is quite susceptible to foreign
competition.
5. Does globalization eliminate jobs?
a. To some degree this is true in the U.S. But technology also creates jobs.
b. U.S. firms, even small ones, see themselves as global companies and are
structuring themselves to compete in the global market thus putting them in a
better position to sell their products.
(1) This in turn increases demand for those aspects of production that are still
U.S. based.
(2) This has helped keep demand high for U.S. goods, and hence has increased
the demand for U.S. labor.
c. The EU has to some extent protected European nations from competition. The
European Union is a free-trade association of 15 Western European nations.
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6. Dealing with globalization. Global institutions are changing but they have as yet not
reached the point where they can control international business.
a. The closest thing to a regulator is the United Nations, but their edicts are often
ignored by member nations.
b. There is no international counterpart to the U.S. federal government. Thus, any
meeting of a group of nations to discuss trade policy is voluntary. There is no
international body that has powers of compulsion.
c. Governmental international organizations include the United Nations (UN), the
World Bank (a multinational, international financial institution that works with
developing countries to secure low-interest loans), and the International
Monetary Fund (IMF) (a multinational, international financial institution
concerned primarily with monetary issues).
d. There are also informal organizations such as the Group of Five (Japan,
Germany, Britain, France, and the U.S.) which meets to promote negotiations
and coordinate economic relations among nations, and the Group of Eight,
which includes the Group of Five plus Canada, Italy, and Russia, and does much
the same work as the Group of Five
CHAPTER SUPPLEMENTS: Other Classroom Aids to Use
 Classic Readings in Economics: "Petition of the Candlemakers," pp. 198-200. Frederic
Bastiat’s scathing piece concerns the candlemakers’ petition to the Chamber of Deputies
regarding a charge of unfair competition coming from the sun, and its effect on the lighting
industry of 1845, such as candle snuffers, tallow producers, and whale-oil suppliers.
 Classic Readings in Economics: "Can Capitalism Survive?" pp. 27-30. This selection,
taken from Joseph Schumpeter’s, Capitalism, Socialism, and Democracy (1950), argues that
capitalism, by its very success, will undermine that which gives it life – entrepreneurship.
 Classic Readings in Economics: "Individualism and Collectivism," pp. 24-26. This
selection, taken from Nobel Laureate F.A. Hayek’s famous, Road to Serfdom, emphasizes
that markets, bolstered by law and tradition, are absolutely essential to keep the political
power of the state from becoming too powerful.
 Classic Readings in Economics: "The Chief Features of the Industrial Revolution," pp. 3135. This selection, taken from Arnold Toynbee’s, Lectures on the Industrial Revolution
(1884), argues that the agrarian revolution played as large a role in the Industrial Revolution
as did the manufacturing revolution.
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POP QUIZ
NAME:__________________________________
COURSE: ________________________________
1. In a capitalist system
a. goods are distributeed based on people’s needs.
b. the factors of production are owned by the state.
c. political, social, and historical forces play no role in the coordination of economic activity.
d. businesspeople decide how to produce efficiently, guided by their desire to make a profit.
2. A socialist system, in practice,
a. is based on private property, which is central to the ability of the market to coordinate
activity.
b. cannot coordinate human wants and needs.
c. is strictly an economic system.
d. is based upon individuals’ goodwill toward others.
3. Which of the following statements correctly distinguishes capitalism from socialism?
a. In capitalism, “what to produce” is determined by consumer demand; in socialism, by free
market forces.
b. In capitalism, “how to produce” is determined by businesspeople’s desire to minimize cost
and maximize profits; in socialism, it is determined to a much greater degree by
government.
c. There is more freedom of enterprise in socialism than in capitalism.
d. Capitalism still exists while socialism does not exist in any form anymore.
4. In the diagrammatic representation of a market economy,
a. the U.S. economy is commonly divided into three groups: households, businesses, and
international.
b. households are suppliers in the factor (resource) market and demanders in the goods
(product) market.
c. businesses supply in both the factor and goods market.
d. households supply in both the factor and goods market.
5. Consumer sovereignty means:
a. that business people have virtually total control over what gets produced.
b. consumers have voting rights which can be exercised to control the regulatory environment
of business.
c. consumers do not really care what businesses produce.
d. consumers’ wishes ultimately control what gets produced.
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6. Corporations:
a. are businesses with two or more owners, with each owner liable for every other owner’s
actions.
b. account for the largest number of real world businesses.
c. account for the largest share of revenues (sales receipts) relative to other types of
businesses.
d. have the advantage of not having their income taxed twice.
7. Sole proprietorships:
a. have the advantage of limited liability.
b. have the advantage of unlimited liability to raise funds.
c. have the advantage of direct control by their owners.
d. have the disadvantage of double taxation.
8. The major advantage of the corporations is:
a. limited liability.
b. relatively easy to form.
c. direct control by owners, that is, the stockholders.
d. monitoring problems.
9. In e-commerce when firms advertise specifications for needed parts, this is known as:
a. B2C.
b. C2B.
c. C2C.
d. B2B.
10. International economic institutions include:
a. the World Bank, which is an organization committed to getting nations to agree not to
impose new tariffs or other trade restrictions except under limited conditions.
b. the World Trade Organization, which is a multinational, international financial institution
that works with developing countries to secure low-interest loans.
c. the Group of Five, which includes Japan, Germany, Britain, France, and the U.S., which
works to promote negotiations and to coordinate their economic relations.
d. the Group of Eight, which includes the Group of Five plus Brazil, Canada, and Russia, also
works to promote negotiations and to coordinate their economic relations.
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ANSWERS TO POP QUIZ
1. d 2. d 3. b 4. b 5. d 6. c 7. c 8. a 9. d 10. c
IN-CLASS EXERCISE: Learning Concepts through Practice
The following can be done as an extra-credit exercise, with students reporting to the rest of the
class on what they have unearthed.
Directions: Study a country of your choice. You should make sure that your report
addresses the following questions:
1. Where is your country?
2. What form of government does it have (e.g., monarchy, dictatorship, democracy), and how
long has this form of government existed? If your country was previously a colony or
occupied territory, whose and when?
3. Briefly describe your country’s basic resources: labor force, natural resources, and capital.
Has your country been investing in its private, public and human capital? What percentage of
gross domestic product is accounted for by government spending and taxes?
4. What does your country import and export? What are the probable goods and services for
which your country has a comparative advantage? What has been the effect of international
transactions on its economy?
5. What is your country’s real per capita GDP? How does the growth rate of GDP compare to
the population growth? Provide three recent statistics (post-1995) to give someone a fair idea
of its standard of living. You may want to say something about income distribution, infant
mortality, longevity, or adult literacy. Remember to cite sources.
6. What has been the inflation and unemployment picture in your country over the past ten
years?
7. Finally, and most important, what are two major economic challenges confronting your
country? What economic policy do you recommend to resolve this problem?
8. Final note: Photocopy (no originals accepted) two post-1995 magazine or newspaper articles
significantly involving your country’s economy. Make sure the sources show clearly and
hand in these articles with your paper. Sources should not include encyclopedias or almanacs
except as background information.
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Chapter 3: The Evolving U.S. Economy In Perspective
CASE STUDIES: Real-World Cases of Textbook Concepts
Case Study 3-1: Selections from "Manifesto of the Communist
Party," Karl Marx and Friedrich Engels, p. 22.
This polemic, which represents a call to arms to the working people of the world (the proletariat),
were the seeds of the communist revolutions that occurred in the 20th century, revolutions that
have largely been discredited. Marx and Engels predicted that the revolution would begin "in the
most advanced countries." How ironic that they began in largely feudal countries such as Russia,
China, and Korea!
"These measures will of course be different in different countries. Nevertheless in the most
advanced countries the following will be pretty generally applicable:
Abolition of property in land and application of all rents of land to public purposes.
A heavy progress or graduated income tax.
Abolition of all right of inheritance.
Confiscation of all property of all emigrants and rebels.
Centralization of credit in the hands of the state, by means of a national bank with state capital
and an exclusive monopoly.
Centralization of the means of communication and transport in the hands of the state.
Extension of factories and instruments of production owned by the state; the bringing into
cultivation of waste lands, and the improvement of the soil generally in accordance with a
common plan.
Equal liability of all to labor. Establishment of industrial unions, especially for agriculture.
Combination of agriculture with manufacturing industries; gradual abolition of the distinction
between town and country by an equitable distribution of the population over the country.
Free education for all children in public schools. Abolition of children’s factory labor in its
present form. Combination of education with industrial production, and so forth."
Questions:
1. In time, what do you think would happen if there were an “abolition of all right of
inheritance?”
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Chapter 3: The Evolving U.S. Economy in Perspective
2. While Marx and Engels advocated the “establishment of industrial unions, especially for
agriculture,” unions of any kind were absolutely forbidden in the USSR. They are also
forbidden in China and Cuba today. Why?
3. Marx and Engels advocate many changes in the economy. Could what they advocate be done
without the use of force? Why?
4. If farmers are working on land they do not own, will they attempt to specialize or not?
5. Under such a system, what do you think the production possibilities curve will look like?
Case Study 3-2: Taking Stock in America: Human and
Technological Wealth

The U.S. leads all other nations with a quarter of the population college-educated in 2000,
up from just 6.2 percent in 1950.

Knowledge isn’t just formal education. It’s also experience. The median age climbed to
35 in 2000, the highest ever.

Knowledge isn’t just the province of humans in today’s world, it’s embedded in the
machines we use. The signature invention of our times, the microchip, spawned
important technology spillovers. The 1970s introduced the personal computer industry.
The 1980s brought “smart” products as companies incorporated chips into cell phones,
VCRs, microwave ovens, remote controls, and other devices. The 1990s brought the
Internet, e-commerce, and e-entertainment.

America controls nearly two-thirds of the world’s computing power. The stock of
business equipment and software is 20 times higher than in 1950. It represents a store of
“canned” knowledge that simplifies operations, saves time, enhances reliability, reduces
human error, and works day in and day out.

In the business world, bar-code scanners and robotic devices lower costs and speed
distribution. Important systems, such as communications, can operate with less human
intervention, a factor that allows them to continue functioning in times of stress.

The Internet, which became a staple of businesses and homes in the 1990s, is
revolutionizing our lives. Citizens are better informed than ever. Consumers have a 24hour global marketplace at their fingertips. Companies can interact with suppliers and
customers to better manage their inventories. By linking sales to inventories and
suppliers, modern technology is reducing unanticipated accumulation of unsold goods.

With the Internet’s power to communicate, employees are increasingly freed from the
commute to the workplace. The number of U.S. telecommuters reached 28.8 milliion in
2001, an eightfold increase in 10 years’ time.
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Chapter 3: The Evolving U.S. Economy In Perspective

When a shock jolts the economy that leads to layoffs, the unemployed can turn to more
than 300 online job-search engines, a service that did not even exit in 1990.
Source: “Taking Stock in America: Resiliency, Redundancy, and Recovery in the U.S.
Economy,” Federal Reserve Bank of Dallas, May 16, 2001. See httb://www.dallasfed.org.
Questions:
1. Could any of have happened without a market economy?
2. Is this an example of how businesses, households, and government interact in an economy?
3. Is this article written from the standpoint of households or of businesses?
4. Could any of points mentioned be considered institutions?
5. In the face of the 2002 recession and stock market collapse, do you think these productivity
gains will continue?
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Chapter 3: The Evolving U.S. Economy in Perspective