Download Productivity

Macroeconomics
Unit 2
The U.S. Economy: A Global View
Top Five Concepts
©2007, 2005 by E.H. McKay III
Some images ©2004, 2003 www.clipart.com
Concept 1: Gross Domestic Product (GDP)
The Gross Domestic Product (GDP) is the total market
value of all final goods and services produced within a
nation’s borders in a given time period. The GDP is
stated as a dollar value ($).
United States has the world’s largest annual GDP (over
$12.5 trillion in 2005). China is the next largest economy
in terms of GDP (over $8.6 trillion in 2005).
Did you know that most of the output (GDP) produced in
the U.S. is for the service sector? It’s true – almost 75%
of the total output consists of services!
Concept 2: Per Capita GDP
Per capita GDP is the dollar
value of GDP divided by the
total population of the country
being measured.
It indicates how much output
the average person would get
if all output was divided evenly
among the population.
GDP Comparisons
The U.S. has the largest per capita GDP ($41,950) China had
the second largest dollar amount of GDP, but on a per capita
basis, China was one of the lowest (6,600).
Canada’s per capita GDP position and high levels of GDP are
second only to the United States (see page 28 in the textbook).
Any country with a small population and higher GDP will have a
higher per capita GDP.
GDP Growth
U.S. GDP growth has averaged 3% a year.
U.S. population growth has averaged 1% a year.
High population growth rates can adversely affect GDP per
capita growth. For example, a country with a population growth
rate of 5% or more that also has a GDP growth rate of 3% will
have declining per capita GDP numbers. The growth in GDP is
not keeping up with the population growth.
Mix of Output
Within the U.S. almost 75% of all output (GDP) consists of
services, not goods. About 70% of all output in the U.S. is
produced for consumers.
This trend is expected to continue into the future as the service
sector of the economy grows faster than the other sectors
(agriculture; manufacturing, mining, and construction).
Future job growth will occur mostly in the service sector
(education, health care, engineering, accounting, financial
services, etc.).
Major Uses of Output
Total output (GDP) is divided into four
categories:
• Consumption – Goods and services
produced for consumer consumption.
70% of total output.
• Investment – Plant, machinery,
equipment, and structures produced
for the business sector. 17% of total
output.
Major Uses of Output
• Government Services – Federal, state, and local
purchases. 19% of total output. Federal purchases account
for 7% while state and local account for 12%. Does not
include income transfers.
• Net Exports – Defined as the value of all exports minus the
value of all imports. - 6% of total output. The negative value
indicates that we are importing more goods and services
than we are exporting.
Concept 3: Comparative Advantage
Comparative advantage is defined as the ability of a country to
produce a specific good at a lower opportunity cost than its
trading partner.
Simply put, a country will purchase a good or service from
another country if the amount of resources necessary to
produce the good are too high domestically.
Countries seek to import goods with high opportunity costs and
export goods with low opportunity costs.
Concept 3: Comparative Advantage
For example, very little coffee is grown in the U.S.
because of our climate and cost of labor. Hawaii
is the largest producer of coffee in the U.S.
However the opportunity cost of growing more
coffee is too high (tourism, vacation resorts,
environmental issues) to grow more coffee in
Hawaii.
Smaller countries can compete in the world
market by specializing in a good or service.
Concept 4: Productivity
Productivity is defined as the output per unit
of input. It is frequently measured using labor
or technological benchmarks.
Higher productivity can be obtained by
improving worker skills, improving technology,
additional management training, efficient
distribution systems.
Productivity is positively impacted by capitalintensive processes.
Concept 4: Productivity
A capital-intensive process is a production process that uses
a high ratio of capital to labor inputs. For example the U.S.
auto industry is a capital intensive industry.
Industries where significant capital investments have made an
impact include agriculture and computer manufacturing.
Productivity can also be improved by investing in human
capital.
Productivity
And what is human capital? It is the knowledge and skills
possessed by the work force. This includes the amount of
education, training, and experience the workforce contains.
Higher productivity is derived from using highly educated
workers in capital-intensive production processes. Increasing
the number and quality of high school and college graduates
improves human capital and the productivity of the work force.
Concept 4: Productivity
An important concern with our economy is the ability to shift
resources from one industry to another. This ability is called
factor mobility.
Factor mobility is the ability to reallocate resources from one
industry to another and the ease at which workers and other
resources can move from one industry to another.
Workers who have received more education and training in
many areas have a greater opportunity to move into faster
growing parts of our economy.
Productivity
Other methods to achieve economic growth includes the use of
technological advances to increase output by using existing
resources.
The government has a role in ensuring that market freedom
continues to exist; when producers are subject to less
regulation and taxation, greater economic growth can occur.
Government regulation should provide the framework for
business to operate and protect the workers, consumers and
environment.
Concept 5: Externalities
Externalities are costs or benefits of a
market activity paid for or allocated to a
third party.
For example a company that produces
paper may pollute a nearby river and
destroy fishing and other recreational
activity. Recreational activities in the
area no longer exist because of the
externality of pollution. This is a
negative externality.
Concept 5: Externalities
An example of a positive
externality is sharing some of the
knowledge you obtained from this
economics course with a friend or
spouse. The additional knowledge
they receive did not “cost” them
anything.
Another example is getting a flu
shot to prevent the flu and then
being able to work while others are
sick.
U.S. Income Distribution
Inequitable distribution of income exists in the U.S. and all
countries using a form of capitalism. In the U.S. and many
capitalistic countries, resources are distributed to society
based upon incomes.
The determination of income is based upon the economic
value of the work performed. A dentist performs a service
which is deemed to have a higher value than a trash collector,
therefore the dentist receives a higher level of income.
Income Inequality
Income inequality also occurs because different jobs require
different skills and abilities.
Many economists argue having income inequality is desirable
because it gives people incentives to work harder and obtain a
higher level of knowledge and skills.
Without income inequality, why would many people want
greater work skills and responsibility if they did not receive any
additional financial incentives?
Summary
The five major concepts from this unit were:
• GDP and its components
• Per Capita GDP
• Comparative Advantage
• Productivity
• Externalities