Transcript Chapter 1 WHAT IS ECONOMICS?

2
The Economy:
Myth and Reality
E pluribus unum (Out of many, one)
Motto on U.S. currency
Contents
♦ The American Economy: A Thumbnail Sketch
♦ The Inputs: Labor and Capital
♦ The Outputs: What Does America Produce?
♦ The Central Role of Business Firms
♦ What’s Missing from the Picture? Government
♦ Conclusion: It’s a Mixed Economy
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The American Economy: A
Thumbnail Sketch
● A Private Enterprise Economy
♦ Most production completed by private
enterprises in free markets
♦ Gross Domestic Product (GDP): standard
measure of the economy’s output
♦ Government spending accounts for about 18
percent of GDP.
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The American Economy: A
Thumbnail Sketch
● A Relatively “Closed” Economy
♦ Open versus closed economy
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The American Economy: A
Thumbnail Sketch
●A Growing Economy…
♦ U.S. GDP 4.4 times larger in 2004 versus 1959
♦ U.S. GDP per capita is 2.7 times larger
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2:
Real GDP Since 1959
FIGURE
12000
10000
8000
6000
4000
2000
0 a share of GDP (%)
as
Billions
per1989Year
1959 1964of
1969Dollars
1974 1979 1984
1994 1999 2004
Average of Exports and Imports,
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The American Economy: A
Thumbnail Sketch
● But with Bumps along the Growth Path
♦ Growth is irregular from year to year
■Periods of boom and bust (recession) known as
business cycles or economic fluctuations.
■Unemployment rises during recessions and declines
during booms.
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4: Unemployment Rate
in the U.S., 1929-2004
FIGURE
30
Percentage of Civilian Workers
Who are Unemployed
Great
Depression
25
20
1980-83
recessions
15
10
1973-75
recession
World
War II
1980s
boom
1960s
boom
Who are Unemployed
Percentage of Civilian Workers
1990s
boom
5
0
1929
1939
1949
1959
1969
1979
1989
1999 2004
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The Inputs: Labor and
Capital
● The American Workforce: Who is in it?
♦ 140 million Americans hold jobs
■Increased participation of women since 1950
■Teenage workforce participation has declined since
mid-1970s
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The Inputs: Labor and
Capital
● The American Workforce: What does it do?
♦ Majority of workers produce services, not
goods
■Similar to other industrialized countries
■Labor-saving innovations in manufacturing has
reduced the share of workers in goods-producing
industries.
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9:
Share of Service Sector Jobs
FIGURE
90
1967
2003
80
70
62.9
63.6
73
65.6
75.2
58.7
50
42.8
78.3
75.2
66.6
60
40 38.3
74.7
45.1
58.9
48.8
44.8
50.8
36.2
30
20
of the Total Labor Force
Service Sector Jobs as a Percent
10
0
Italy
Spain Germany
Japan
France
Canada Sweden United
United
Kingdom States
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The Inputs: Labor and
Capital
● The American Workforce: What it earns?
♦ Wages account for 70 percent of income
■Average hourly wage $16 plus benefits
■Similar to wages in industrialized countries
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The Inputs: Labor and
Capital
● Capital and Earnings
♦ Capital: machines and buildings
♦ Payments to capital account for the remainder
of national income
■Owners of capital receive profit and interest
■Profit accounts for about 9 percent of the price of a
typical product
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The Outputs: What does
America Produce?
● Consumption versus nonconsumption uses
♦ Consumption: consumer spending on goods
and services
■Accounts for 70 percent of GDP
♦ Nonconsumption uses include government
services, business purchases, and consumer
purchases of new homes.
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The Central Role of
Business Firms
● Private business
♦ Turn inputs into output
■ 25 million business firms (one for every 12 people)
■ 80,000 businesses fail each year
● Nationality of a business
♦ Difficult to determine
■ Multinational corporations - Businesses that operate
factories in several different countries, sell output globally,
and have stockholders in many different countries.
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What’s Missing from the
Picture? Government
● The Government as a Referee
♦ Enforce laws and act as an arbitrator
● The Government as Business Regulator
♦ Government activity designed to improve
market activity
■Antitrust laws
■Environmental regulation
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What’s Missing from the
Picture? Government
● Government Expenditures
♦ Government spending on
■Pensions and income security programs (Social
Security and unemployment compensation
■Health-care expenditures (Medicare and Medicaid)
■National defense
■Interest on national debt
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12: Allocation of
Government Expenditures
FIGURE
Federal
Local
All other
15%
Interest
7%
Pensions &
Income
Security
37%
All other
43%
Education
35%
National
Defense
19%
Health
22%
Health
and Public
Welfare
16%
Highways
7%
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What’s Missing from the
Picture? Government
● Taxes in America
♦ By international standards, Americans pay a
small share of income to taxes
● The Government as a Redistributor
♦ Socialist idea – equal distribution of income
overrides the decision of the market
♦ Liberal idea – use progressive taxes and
transfer payments to reduce income inequality
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Conclusion: It’s a Mixed
Economy
● Mixed economy
♦ U.S. economy blends private and public
ownership, state and market sectors
● What does the market do well, and what
does it do poorly?
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