Transcript Slide 1

The U.S. Economy in Historical Perspective
The U.S. economic system is a market economy
based on private property and the markets in
which individuals decide how, what, and for whom
to produce
• Markets work through a system of rewards and payments
• Individuals are free to do whatever they want as long as it
is legal
• Fluctuations in prices play a central role in coordinating
individuals’ wants in a market economy
Most economists believe the market
is a good way to coordinate economic activity
Capitalism and Socialism
• Capitalism is 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)
• Socialism is an economic system based on individuals’
goodwill towards others, not on their own self-interest, and
in which, in principle, society decides what, how, and for
whom to produce
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Evolving Economic Systems
Feudalism is an economic system based on tradition and
dominated the Western world from the 8th to the 15th century
Mercantilism is an economic system in which the government
controls economic activity by doling out the rights to
undertake economic activities and was dominant until the 18th
century
During the Industrial Revolution, technology and
machines rapidly modernized industrial production
Capitalism
1. Adam Smith’s The Wealth of Nations
(new theory) The best way to increase the wealth of a country
is through individual decision making with minimal government
influence.
Laissez faire
(new) The Invisible Hand – people serve their own interests.
They produce what is in demand and will profitable.
Problems developed
1. Large businesses became monopolies and trusts
2. Living conditions became harsh
- long hours, low wages, slums, child labor
3. Government Response
a. Anti-trust legislation
- FTC, Food and Drug Act, Sherman Anti-Trust
Act
b. Movement away from laissez faire
The Great Depression
a. Problems of the 20’s.
-
production for WWI not needed any longer
tariffs eliminated markets
farmers were overproducing
unemployment rising
inside of the Production Possibilities Curve
b. Creates a need for inputs and a need for markets
b. The government took action
- farmers paid not to grow
- government work projects set up
- Social Security created
- FDIC
- Employment Act of 1946
Government required to take action:
- full employment
- full production
- stable prices
Factor Markets
1. Receiving a paycheck at the
end of each month?
2. Delivering a specially
ordered car to a buyer?
3. Receiving patient car in a hospital?
4. Using a credit card to buy a
meal in a restaurant?
Businesses
Households
5. Earning profit at your summer ice cream stand?
6. Obtaining college credits?
Product Markets
Households
• Households are groups of individuals living together making
joint decisions
• Households supply the factors of production with which
businesses produce and government governs
• The largest source of household income is wages and
salaries
• In the economy, households vote with their dollars to
determine what businesses produce
Source of income
%
Dividends
1.7
Interest
4.9
Proprietor’s Income
8.4
Rental Income
11.1
Social Security
13.4
Transfer Payments
64.7
Wages and Salaries
-4.3
Characteristic
Average Income
All Households
64,406
Headed by married couple
59,346
Headed by female –
44,473
husband gone
Household head
25-34 years old
42,148
Household head
65+
35,744
Household head
HS grad
28,116
Household head
BA degree
23,043
Savings
84
Spending
15.2
Taxes
1.9
Durable Goods
Non-durable Goods
Services
59
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Business
• Businesses are private producing units in our society
• Businesses in the U.S. decide what to produce, how
much to produce, and for whom to produce it
• Businesses produce what they believe will sell and
make a profit
• By channeling the desire to make a profit for the
general good of society, the U.S. economic system
allows the invisible hand to work
• Although businesses decide what to produce, they
are guided by consumer sovereignty
Type
Number Revenue
proprietorship
72.2
partnership
7.7
7.9
corporation
20.1
87.3
4.8
Business: Forms of Business
Advantages
Disadvantages
• Minimum bureaucratic
hassle
• Direct control by owner
• Limited ability to get funds
• Unlimited personal liability
Partnership
• Ability to share work and
risk
• Relatively easy to form
• Limited ability to get funds
• Unlimited personal liability
(even for a partner's
blunder)
Corporation
• No personal liability
• Increasing ability to get
funds
• Ability to avoid personal
income taxes
• Legal hassle to organize
• Possible double taxation of
income
• Monitoring problems
Proprietorship
Government
The government plays two general roles in the
economy:
1. An actor who collects money in taxes and spends that
money on projects, such as defense and education
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Government:
Income of the Federal Government
Individual and
inome tax
44%
Excise taxes and
other
6%
Social Security
taxes and
contributions
36%
Corporate
income taxes
14%
Government:
Expenditures of the Federal Government
Other
11%
National
defense
20%
Interest
11%
Health and
education
27%
Income security
31%
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Government
2. A referee who sets the rules that determine relations
between businesses and households
a. Provide a stable set of institutions and rules.
-Enforce contracts and protect property rights
b. Promote effective and workable competition.
-restrict and regulate monopolies
c. Correct for externalities.
-pollution
d. Ensure economic stability and growth.
-Employment Act of 1946
e. Provide public goods.
-Enforce contracts and protect property rights
f. Adjust for undesirable market results.
-drug busts
Factor Markets
Product Markets
Income
Taxes
Goods and
Services
Payments
Goods and
Services
Payments
and Legal
Businesses
Goods and
Services
Resources
Business
Taxes
Resources
Payments $$
Households
Market Failures and Government
Failures
• Market failures are situations in which the market
does not lead to a desired result
• Government failures are situations in which the
government intervenes and makes things worse
• Policy makers must decide which failure is the least
problematic, a market or government failure
Global Institutions and Corporations
• The U.S. economy makes up 20% of the world output and
consumption, but only 6% of the world’s land mass and
less than 5% of the world’s population
• U.S. economic institutions are integrated with the
world’s economy
• Global corporations are corporations with substantial
operations in both production and sales in more than one
country
• Global corporations create jobs, bring new technologies, and
provide competition for domestic companies
Coordinating Global Issues
No global government to regulate global corporations
- international institutions developed to promote
negotiations and coordinate economic relations among
countries
Some examples of international institutions:
• The United Nations is an organization designed to
achieve international cooperation but it has no ability
to tax or enforce its policies on its members
• The World Bank is a multinational, international
financial institution that works to secure loans for
developing countries
True or False?
1.
Highly-developed economies must make the basic
economic choices, whereas less-developed economies produce
so little that no choices are possible.
2.
Price is the language through which buyers and sellers
communicate their intentions to one another in a pure market
economy.
3.
Households buy goods and services in output markets and
sell factors of production in input markets.
4.
The least-cost method of production is the method that
uses resources most efficiently.
5.
The value judgments of persons running households and
businesses play virtually no role in economic decision making in a
pure market economy.
6.
In a socialist economy, goods and services go only to those
who can pay for them with money earned from resources they
own.
7.
A socialist system favors collective ownership of society's
factors of production.
8. The invisible hand doctrine was Adam Smith's idea that
allowing competing sellers to act in their own best interests
advances the economic interests of all society.
9. The Employment Act of 1946 gave the federal government the
right and responsibility to provide an environment for the
achievement of full employment, full production, and price
stability.
10. Over the years, government's intervention in the economy has
increased, but the increase has not been smooth or continuous.