The U.S. Economy: A Global View

1. The U.S. Economy: A Global View Chapter 2

2. Chapter 2: The US Economy – A Global View 1. What America Produces. 2. How America Produces. 3. For Whom America Produces. LO1

3. 1. What America Produces. LO1

4. What America Produces • The USA: • < 5% of world population, • 12% of the world’s arable land, • produces >20% of world output. LO1

5. What America Produces How do we measure economies so that we can compare them? LO1

6. GDP Comparisons • Gross Domestic Product (GDP): • the total market valueof all final goods and services produced: • within a nation’s borders, • over a given time period. • Usually recorded by spending/sales. • It is the basicmeasure of an economy’s size. LO1

7. Comparative Output 2005 Gross Domestic Product (GDP) (in trillions of U.S. dollars) LO1 16.8 2013 “Composite” 9.3 4.9 3.6

8. Comparative Output LO1

9. Per Capita GDP • Per Capita GDP: • GDP divided by total population; • (GDP per person.) LO1

10. GDP Per Capita Around the World LO1

11. Experiment: Let’s do an experiment!

12. Real v. Nominal GDP • GDP comparisons from one year to another can be distorted by fluctuations in price levels. Prices Prices

13. Real v. Nominal GDP • Nominal GDP: • GDP measured in the prices of that time period (the period of the GDP measure). • Real GDP (and real GDP per capita): • keyed to a base year , • expressed in “constant dollar” values , …which have been… • adjusted for changing price levels.

14. Real v. Nominal GDP • (Pg. 94)

15. GDP Growth & the Standard of Living • Economic growth is: • An increase in output, which is… • An increase in real GDP, which is… • An expansion of production possibilities.

16. GDP Growth & the Standard of Living • U.S. output grows by roughly 3% per year. • U.S. population grows by 1%peryear. U.S. Economy US Population

17. U.S. Output and Population Growth Since 1900 1,800 1,600 1,400 Real GDP 1,200 AND POPULATION (1900 = 100) INDEX OF REAL OUTPUT 1,000 Increasing GDP per capita 800 600 400 Population 200 1900 1920 1940 1960 1980 2000 YEAR • (Figure 2.1, pg. 29)

18. Poor Nations • The populations of rich countriesare growing slowly: • gains in per capita GDPare easily achieved. • The populations of the poorestcountries are generally growing rapidly: • this makes it difficult to raise per capita GDP (living standards).

19. Poor Nations

21. The Mix of Output • U.S. output a century ago: • two-thirds = goods • one-thirds = services. • Today, nearly 75 percent of U.S. output consists of… • services, notgoods. LO1

22. The Changing Mix of Output 100 Services 80 60 Percent of employment 40 Agriculture Manufacturing, mining and construction 20 0 1800 1840 1880 1920 1960 1993 • (Figure 2.2, pg. 30) LO1

23. Development Patterns • The transformation of the U.S. into a service economy is a reflection of our high incomes. • America is primarily a service economy and will become increasingly so in the future. LO1

24. Today’s Mix of Output by“Customer” • The four major USESof total output (GDP) are: • Consumption: • Investment: • Government services: • Net eXports(-M): GDP =C + I + G + (X-M) “You and I” Capital production (capital formation) Roads, schools, police, etc. Goods exported (minus goods imported) LO1

25. WHAT America Produces Net exports -6% Consumer Goods Investment 70% 17% Federal 7% Government Purchases State and local 12% • (Figure 2.3, pg. 31) LO1

26. Consumer Goods and Services • Consumer goods and services: • includes items like breakfast cereals, movie rentals, and college education. • This category of production accounts for over two-thirds of total output -roughly 70%. LO1

27. Investment Goods and Services • Investment: • includes expenditures on (production of): new plant, equipment, and structures (capital), • plus changes in business inventories. • The U.S. devotes 17 percent of output to investment. LO1

28. Investment Goods and Services • Investment goods: • Maintain our production possibilities by replacing worn out equipment and factories. • Expand our production possibilities by increasing and improving our stock of capital. • This is known as capital formation. LO1

29. Government Services • Only that part of federal spending used to acquire resources and produce services is counted in GDP. • Income transfers: • government payments to individuals for which no current goods or services are exchanged. • Income transfers do not register in our calculation of GDP. LO1

30. Net Exports • Net exports: • the value of exports minusthe value of imports. So, …GDP =C + I + G + (X-M) LO1

31. Comparative Advantage • International trade allows countries to: • produce and export goods that they produce efficiently, and… • import goods they don’t produce as efficiently.

32. Comparative Advantage • Comparative advantage: • the ability of a country to produce a good at a lower opportunity cost than its trading partners.

33. 2. How America Produces. LO1

34. How America Produces • Although all nations use the same factors of production, their quantity and quality varies greatly. • Factors of production: land, labor, capital, entrepreneurship. LO2

35. Human Capital • Human capital is the knowledge and skills possessed by the workforce. • The high productivity of the U.S economy results from: • using highly educated workers… • in capital-intensive production processes. LO2

36. Capital Stock • American production tends to be capital-intensive: • We use a high ratio of capital to labor inputs. LO2

37. High Productivity • American households are able to consume so much because American workers produce so much. • Productivity: • output per unit of input. • for example, output per labor hour. LO2

38. The Education Gap Between Rich and Poor Nations 91% 95% 75% 46% Poor Middle- High-income United States countries income countries countries • (World View, pg. 33) Enrollment in secondary school LO2

39. Factor Mobility • Our continuing ability to produce the goods and services that consumers demand depends on our ability in reallocating resources from one industry to another. LO2

40. Outsourcing and Trade • Technology also facilitates global resource use. • Outsourcing allows U.S. workers to pursue their comparative advantage in high-skill, capital-intensive jobs. LO2

41. Outsourcing and Trade “U.S. computer engineers do less routine programming and more systems design...” “U.S. accountants do less cost tabulation and more cost analysis...” LO2

42. Economic Freedom and Growth • As nations become freer – rely more on markets and less on government – real GDP grows more quickly. LO2

43. Economic Freedom and Growth GDP Growth Rate 1995-2004 (percent per year) Quintiles of Improvement in Economic Freedom (1997-2006) • (Figure 2.4, pg. 35) LO2

44. Role of Government • Government plays a critical role in establishing a framework in which private business can operate. LO2

45. Providing a Legal Framework • One of the most basic functions of government is to establish and enforce the rules of the game. LO2

46. Protecting the Environment • Externalities: • the costs (or benefits) of a market activity borne by a third party. • To reduce the external costs of production, the government limits air, water, and noise pollution and regulates environmental use. LO2

47. Externality

48. Protecting Consumers • The government protects consumers by preventing individual business firms from becoming too powerful. • A monopoly is a firm that produces the entire market supply of a particular good or service. LO2

49. Protecting Consumers • Government regulates the safety of many products. LO2

50. Protecting Labor • The government regulates how labor resources are used in the production process. LO2