Download THE U.S. ECONOMY: A GLOBAL VIEW INTRODUCTION WHAT

INTRODUCTION
Each nation has very different production
possibilities and uses different mechanisms for
deciding WHAT, HOW, and FOR WHOM to
produce.
 The objective of this chapter is to assess how
the U.S. economy stacks up.

Chapter 2
THE U.S. ECONOMY:
A GLOBAL VIEW
2
WHAT AMERICA PRODUCES
COMPARATIVE OUTPUT
The U.S. has less than 5 percent of the world’s
population.
 It has 10 percent of the world’s arable land.
 Yet
Y t it produces
d
more than
th 20 percentt off the
th
world’s output.
 The market value of output (GDP) is a basic
measure of an economy’s size.

In 2000, the U.S. economy produced about $10
trillion worth of output. Most recent data has
output at $14.6 trillion in 2008
 The second largest economy,
economy China,
China produced
only half that much. In 2008, China produced
$4.33 trillion.

 Gross
Domestic Product (GDP) is the market value
of all final goods and services produced within a
nation’s borders in a given time period.
3
4
PER CAPITA GDP
COMPARATIVE OUTPUT

9.8
Gross domestic product
(in U.S. $ trillion)


4.9
3.3
Per Capita GDP is the dollar value of GDP divided
by total population.
2.1
It indicates how much output the average person would
get if all output were divided up evenly among the
population.
Americans have access to far more goods and
services than people in other nations.
GDP per capita in the U.S. is over $34,000 per year
(when the text went to print. In 2009 it was
estimated at $46,381.)
 Per capita incomes in Ethiopia and Haiti, are less
than $1,200 per year – less than $4 per day.

1.4
0.86
United China
States
0.22
0.04
0.01
Japan GermanyBritain Mexico Saudi Ethiopia Haiti
Arabia
5
6
GDP GROWTH
GDP PER CAPITA AROUND THE WORLD
Economic growth is the increase in output (real
GDP)–an expansion of production possibilities.
 On average, U.S. output has grown by roughly 3
percent per year.
year
 U.S. population growth has been about 1
percent per year, causing GDP per capita to
grow tremendously.

35,000
34,260
30,000
26,460
24,470
25,000
20,000
17,340
15,000
11,050
8810
10,000
7350
4040
5,000
3940
2390
1400
1150
660
0
8
POOR NATIONS
U.S. OUTPUT AND POPULATION GROWTH SINCE 1900
The populations of rich countries are growing
slowly so that gains in per capita GDP are easily
achieved.
 The populations of the poorest countries are
still growing rapidly, making it difficult to raise
living standards.

INDEX OF REAL O
OUTPUT
AND POPULATION (1
1900 = 100)
1,800
1,600
1,400
1 200
1,200
Real GDP
1,000
Increasing GDP
per capita
800
600
400
200
1900
Population
1920
1940
1960
YEAR
1980
2000
10
9
THE MIX OF OUTPUT
THE MIX OF OUTPUT
A century ago, about two-thirds of U.S. output
consisted of goods while one-third of output
consisted of services.
 Since then,
then over 25 million people have left
farms and sought jobs in other sectors.
 Today, nearly 75 percent of U.S. output consists
of services, not goods.
 Over 98 percent of future job growth will be in
service producing industries.


11
The relative decline in goods production does
not mean the U.S. is producing fewer goods
than before.
G
G
Manufacturing and farm output has increased
tremendously.
The mix of output is simply different.
12
DEVELOPMENT PATTERNS
THE CHANGING MIX OF OUTPUT
The transformation of the U.S. into a service
economy is a reflection of our high incomes.
 Poor people don’t have enough income to buy
many services
services, so the mix of output in poor
countries is weighted toward goods, not
services.
 We can develop a clearer picture of our answer
to the WHAT question by examining the uses to
which our output is put.

Percent of emp
ployment
100
Services
80
60
40
Agriculture
Manufacturing,
mining and
construction
20
0
1800
1840
1880
1920
1960
1993
14
13
WHAT AMERICA PRODUCES
THE FOUR MAJOR USES OF TOTAL OUTPUT ARE:
Consumption
 Investment
 Government services
 Net exports

Net exports -1%
Investment
15%
Government
Purchases
Consumer Goods
67%
Federal
7%
State and
local
12%
15
16
CONSUMER GOODS AND SERVICES
INVESTMENT GOODS AND SERVICES
Consumer goods and services (C) include items
like breakfast cereals, movie rentals, and
college education.
 This category of production accounts for over
two-thirds of total output.


Investment (I) includes expenditures on
(production of) new plant, equipment, and
structures (capital) in a given time period, plus
changes in business inventories.
 The U.S. devotes 15 percent of output to
investment.
 Investment goods:
G
G
17
Maintain our production possibilities by
replacing worn out equipment and factories.
Expand our production possibilities by
increasing and improving our stock of capital.
18
INVESTMENT GOODS AND SERVICES

Poor countries desperately need capital
investment, but cannot afford to cut back on
consumer goods.
I
Most of them depend on foreign aid and
other capital inflows to finance investment
or risk continuing stagnation or even
decline of living standards.
GOVERNMENT SERVICES (G)
Only that part of federal spending used to
acquire resources and produce services is
counted in GDP.
 At present,
present the production of government
services absorbs roughly one-fifth of U.S. total
output.

19
20
GOVERNMENT SERVICES
NET EXPORTS
Income transfers are payments to individuals
for which no current goods or services are
exchanged: e.g., Social Security, welfare,
unemployment benefits.
 Much of federal government spending is in the
form of income transfers.
 The output of all state and local government
accounts for roughly 12 percent of total GDP.

Exports (X) are goods and services sold to
foreign buyers.
 Imports (M) are goods and services purchased
from foreign sources.
sources
 Net Exports (X-M) are the value of exports
minus the value of imports.

21
U.S. EXPORTS AND IMPORTS
Exports of goods (in billions)
COMPARATIVE ADVANTAGE
The motivation for international trade originates
in our quest for more output.
 Our decision to import is not based on our
inability to produce items,
items but on the efficiency
of importing the items.
 Comparative advantage is the ability of a
country to produce a specific good at a lower
opportunity cost than its trading partners.

Imports of goods (in billions)
$393
$236
$220
$229
$179
$165
$147
$112
$134
$100
$65
$16
To
Japan
To
To
To
To
To
EU Canada Mexico China rest of
the world
Total $773 billion
Percent of world exports 18%
22
From From From From From From
Japan EU Canada Mexico China rest of
the world
Total $1223 billion
Percent of world imports 19%
23
24
HOW AMERICA PRODUCES
CAPITAL STOCK
All goods and service included in GDP are
produced within the borders of the United
States.
 Productivity is output per unit of input such as
output per labor hour.


A capital-intensive production process is one
that use a high ratio of capital to labor inputs.
 American

production tends to be capital-intensive.
Human capital is the knowledge and skills
possessed by the workforce.
 The
knowledge and skills workers possess can be
accumulated.

25
The high productivity of the American economy
is explained in part by the quality of its labor
resources.
26
FACTOR MOBILITY
THE EDUCATION GAP BETWEEN RICH AND POOR NATIONS
Our continuing ability to produce the goods and
services that consumers demand depends on
our ability in reallocating resources from one
industry to another.
 Whenever technology advances, an economy
can produce more output with existing
resources.
 A positive relationship has been documented
between the degree of economic freedom in a
country and its economic growth.

Enrollment in secondary school
96%
96%
High-income
countries
United
States
71%
51%
Poor
countries
Middleincome
countries
28
PROVIDING A LEGAL FRAMEWORK
ECONOMIC FREEDOM AND PER CAPITA GDP

$25,000
Government establishes\enforces the rules.
 Externalities
are the costs (or benefits) of a market
activity borne by a third party.
2002 Level of Economic Freedom
$23,325
 To
reduce the external costs of p
production,, the
government limits air, water, and noise pollution and
regulates environmental use.
$20,000
$11,549
$15,000
 Prevents
individual business firms from becoming
too powerful through regulation of monopolies.
$10,000
$5,000
Free
Mostly Free
$3,238
$3,829
Mostly Unfree
Repressed
29
30
PROTECTING LABOR

STRIKING A BALANCE
The government regulates how labor resources
are used in the production process.
 Child
labor laws and compulsory schooling prevent
minor children from being exploited.
 Government regulations set standards for work
place safety, minimum wages, fringe benefits, and
overtime provisions.
There is no guarantee that government
regulation of HOW goods are produce always
make us better off.
 Government failure might replace market
failure, leaving us no better off – possibly
worse off.

31
FOR WHOM AMERICA PRODUCES
32
THE U.S. DISTRIBUTION OF INCOME
How many goods and services you get largely
depends on your income.
 An income quintile is one-fifth of the
population rank-ordered
population,
rank ordered by income (for
example, top fifth).

Income Quintile
 The
top 20 percent (quintile) of U.S. households
gets nearly half of all U.S. income.
 The poorest 20 percent (quintile) get less than 4
percent of all income.
2000 Income
(dollars)
Average Income Share of Total Income
(percent)
(dollars)
L
Lowest
fif
fifthh
0 – 18,000
18 000
10 300
10,300
36
3.6
Second fifth
18,000 – 33,000
25,400
8.9
Third fifth
33,000 – 52,300
42,500
14.9
Fourth fifth
52,300 – 82,000
65,600
23.0
above 82,000
141,100
49.6
Highest fifth
33
34
TOTAL NET WORTH (SOURCE: UCSC.EDU)
INCOME SHARE OF THE RICH
Year
1983
1989
1992
1995
1998
2001
2004
2007
Third fifth
Second fifth
Fourth fifth
Poorest fifth
Richest fifth
of population
35
Top 1
percent
33.8%
37.4%
37.2%
38.5%
38 1%
38.1%
33.4%
34.3%
34.6%
Next 19
percent
47.5%
46.2%
46.6%
45.4%
45 3%
45.3%
51.0%
50.3%
50.5%
Bottom 80 percent
18.7%
16.5%
16.2%
16.1%
16 6%
16.6%
15.6%
15.3%
15.0%
There has been an "astounding" 36.1% drop in the wealth
(marketable assets) of the median household since the peak of
the housing bubble in 2007. By contrast, the wealth of the top 1%
of households dropped by far less: just 11.1%. So as of April
2010, it looks like the wealth distribution is even more unequal
36
than it was in 2007.
GLOBAL INEQUALITY

INCOME STAGNATION?
Poor people in the United States receive more
goods and services than the average
household in most low-income countries.
One central concern for the economy tomorrow
is how fast incomes will grow.
 Future growth depends on the willingness to
allocate scarce resources to investment in
human and physical capital.
 If we aren’t satisfied with the market’s
response, we might also try to increase
investment and growth with government
intervention.

37
38
ENVIRONMENT DESTRUCTION?
WIDENING INEQUALITY?
In the quest for faster income growth, we must
also pay heed to HOW we produce.
 Advancing technology and rising incomes have
made environmental protection both possible
and desirable for those nations who can afford
it.

The challenge is to develop a set of government
regulations, incentives, and prohibitions that
will balance environmental concerns with the
continuing quest for material advancement.
 How much inequality will we accept in the
economy tomorrow?

39
40
MARKET SIGNALS
The recent surge in inequality is largely due to
changing demand for labor.
 Market-driven inequalities are both a reward to
productive achievement and an incentive to
produce more.
 The government may have to intervene
because the market alone may not reduce
inequalities quickly or adequately.

41
End of Chapter 2
THE U.S. ECONOMY:
A GLOBAL VIEW