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Chapter 2 The Economy: Myth and Reality E pluribus unum (Out of many, one) MOTTO ON U.S. CURRENCY American Economy: A Thumbnail Sketch • U.S. economy – Biggest national economy – Population: 300 million • Working population: 150 million – Very rich country – High efficiency • Productivity – $45,000 per person – $90,000 per worker 2 American Economy: A Thumbnail Sketch • Inputs / factors of production – Labor – Machinery – Buildings – Natural resources – Used to make outputs • Outputs – Goods and services – Consumers & others want to acquire 3 American Economy: A Thumbnail Sketch • • • • • Free markets Private enterprise “Land of opportunity” Most “privatized” economy Most “marketized” economy 4 American Economy: A Thumbnail Sketch • Gross domestic product (GDP) – Measure size of economy – Total amount it produces – In a year • Real GDP – Adjusted GDP • For changes in purchasing power • For inflation 5 Figure 1 Share of U.S. gross domestic product (GDP) exported and imported, 1959–2007 6 American Economy: A Thumbnail Sketch • U.S. economy – Relatively closed – 14% of GDP: exports & imports – 17% of GDP: imports • Relatively open economy – Exports & imports – large share of GDP • Relatively closed economy – Exports & imports – small share of GDP 7 Table 1 Openness of various national economies, 2007 Openness Netherlands Germany China Canada Mexico Russia United Kingdom United States Japan 67% 41 37 35 35 25 20 14 12 8 American Economy: A Thumbnail Sketch • U.S. economy – Growing – 2007 GDP = $14 trillion – 2007 GDP per capita • 2.8 times > than in 1959 9 Figure 2 Real gross domestic product (GDP) since 1959 10 American Economy: A Thumbnail Sketch • Economic fluctuations – Business cycles • Recession – period of time – Total output falls • Unemployment rate – Varies 11 Figure 3 The growth rate of real gross domestic product (GDP) in the United States since 1959 12 Figure 4 The unemployment rate in United States since 1929 13 The Inputs: Labor and Capital • American workforce – composition – 150 million – 54% men – 46% women – 4% teenagers (6 million) – Expanding role of women 14 Figure 5 Composition of employment by sex, 1950 and 2007 15 Figure 6 Working women as a percentage of the labor force, 1960 versus 2005 16 Figure 7 Teenage employment as a percentage of total employment, 1950–2006 17 The Inputs: Labor and Capital • American workforce – production – Mostly services – Government – Only 16% - goods • Shift to services – Information age – Education – Experience 18 Figure 8 Civilian non-farm payroll employment by sector, 2007 19 Figure 9 Growing share of service sector jobs, 1967 vs. 2005 20 The Inputs: Labor and Capital • American workforce – earnings – Wages: 70% of income – Average hourly wage: $17 – Average weekly paycheck: $600 • Capital – $30 trillion – Average rate of return: 10% 21 Figure 10 Average hourly compensation rates in manufacturing, 2006 22 Outputs: What Does America Produce? • Consumer spending – 70% of GDP • Households – 60% of budget – on services – 40% of budget – on goods – $140 billion – phone bill • Non-consumption uses – 30% of GDP 23 The Central Role of Business Firms • 25 million business firms – 80,000 fail / year • Multinational corporations • Competition – Key to industrial efficiency 24 Government • Markets – Goods & services: bought & sold • Firms – Sell goods & services • Outputs markets • Receive receipts – Use resources • Inputs markets • Pay for resources 25 Government • Consumers – Buy goods and services • Outputs markets • Expenditures – Sell resources • Inputs markets • Receive income 26 Figure 11 The circular flow of goods and money 27 Government • Role of government – Making & enforcing laws • Rule maker • Referee • Arbitrator – Regulating business • Antitrust laws • Promote social objectives 28 Government • Role of government – Providing certain goods & services • Fiscal year 2008: $2.9 trillion – Pensions & income security programs – National defense – Health care – Education – Transportation – Agriculture – Housing – Foreign aid 29 Figure 12 The allocation of government expenditures 30 Government • Role of government – Levying taxes • Pay for these goods and services • Income & payroll taxes • Sales taxes • Property taxes • Gasoline taxes • Liquor taxes • Telephone taxes 31 Figure 13 The tax burden in selected countries, 2006 32 Government • Role of government – Redistributing income • Reduce income inequality • Taxes • Transfer payments • Progressive taxation • Antipoverty programs 33 Government • Transfer payments – Sums of money • Received by certain individuals – Outright grants from government – Not payments for services • Progressive taxation – Ratio: taxes to income • Rises as income rises 34 Conclusion: It’s a Mixed Economy • Mixed economy – Some public influence • Over free markets – Some public ownership – And private property 35