Transcript 2.2 circular flows

CHAPTER CHECKLIST
When you have completed your study of this
chapter, you will be able to
1
Describe what, how, and for whom goods and
services are produced in the United States.
2
Use the circular flow model to provide a picture of
how households, firms, and governments interact.
3
Describe the macroeconomic performance—
standard of living, cost of living, and economic
fluctuations—of the United States and other
economies.
2.1 WHAT, HOW, AND FOR WHOM?
 What Do We Produce?
We divide the vast array of goods and services
produced into:
•
•
•
•
Consumption goods and services
Investment goods
Government goods and services
Exports of goods and services
2.1 WHAT, HOW, AND FOR WHOM?
Consumption goods and services
Goods and services that are bought by individuals and
used to provide personal enjoyment and contribute to a
person’s standard of living. For example, movies and
Laundromat services.
Investment goods
Goods that are bought by businesses to increase their
productive resources. For example, cranes and trucks.
2.1 WHAT, HOW, AND FOR WHOM?
Government goods and services
Goods and services that are bought by governments.
For example, missiles and bridges.
Exports goods
Goods and services produced in the United States and
sold in other countries. For example, computers and
banking services.
2.1 WHAT, HOW, AND FOR WHOM?
Figure 2.1(a) shows
the relative
magnitudes of the
different types of
goods and services
in 2002:
Consumption 61%
Investment 13%
Exports 9%
Government 17%
2.1 WHAT, HOW, AND FOR WHOM?
Figure 2.1(b)
shows the largest
five items of
services
produced.
And the largest
five items of
goods produced.
2.1 WHAT, HOW, AND FOR WHOM?
How Do We Produce?
Factors of production
The productive resources used to produce goods and
services.
Factors of production are grouped into four categories:
•
•
•
•
Land
Labor
Capital
Entrepreneurship
2.1 WHAT, HOW, AND FOR WHOM?
Land
Land
All the “gifts of nature” that we use to produce goods
and services. All the things we call natural resources.
Land includes minerals, water, air, wild plants,
animals,birds, and fish as well as farmland and forests.
2.1 WHAT, HOW, AND FOR WHOM?
Labor
Labor
The work time and work effort that people devote to
producing goods and services.
Human capital
The knowledge and skill that people obtain from
education, on-the-job training, and work experience.
2.1 WHAT, HOW, AND FOR WHOM?
Figure 2.2
shows
measures
of human
capital and
how they
have
changed
since 1910.
2.1 WHAT, HOW, AND FOR WHOM?
Capital
Capital
Tools, instruments, machines, buildings, and other
constructions that have been produced in the past and
that businesses now use to produce goods and
services.
Capital includes semifinished goods, office buildings,
and computers. Capital does not include money,
stocks, and bonds. They are financial resources.
2.1 WHAT, HOW, AND FOR WHOM?
Entrepreneurship
Entrepreneurship
The human resource that organizes labor, land, and
capital.
Entrepreneurs come up with new ideas about what and
how to produce, make business decisions, and bear the
risks that arise from these decisions.
2.1 WHAT, HOW, AND FOR WHOM?
 For Whom Do We Produce?
Factors of production are paid incomes:
Rent
Income paid for the use of land.
Wages
Income paid for the services of labor.
Interest
Income paid for the use of capital.
2.1 WHAT, HOW, AND FOR WHOM?
Profit (or loss)
Income earned by an entrepreneur for running a
business.
Functional distribution of income
The percentage distribution of income among the
factors of production.
Personal distribution of income
The percentage distribution of income among individual
persons.
2.1 WHAT, HOW, AND FOR WHOM?
Figure 2.3(a) shows the
functional distribution of
income:
Labor income 72%
Proprietors’ income 9%
Personal rental income 2%
Corporate income 9 %
Net interest income 8%
2.1 WHAT, HOW, AND FOR WHOM?
Figure 2.2(b) shows the
personal distribution of
income:
The richest 20% earned
47% of total income.
The poorest 20% earned
only 5% of total income.
2.2 CIRCULAR FLOWS
Circular flow model
A model of the economy that shows:
The circular flow of expenditures and incomes that
result from decision makers’ choices and the way those
choices interact in markets to determine what, how, and
for whom goods and services are produced.
2.2 CIRCULAR FLOWS
Households and Firms
Households
Individuals or people living together as decision-making
units.
Firms
Institutions that organize production of goods and
services.
2.2 CIRCULAR FLOWS
Markets
A market is any arrangement that brings buyers and
sellers together and enables them to get information
and do business with each other.
Factor markets are markets in which factors of
production are bought and sold.
Goods markets are markets in which goods and
services are bought and sold.
2.2 CIRCULAR FLOWS
Real Flows and Money Flows
In factor markets:
• Households supply
factors of production
• Firms hire factors of
production.
In goods markets:
• Firms supply goods and
services produced.
• Households buy goods
and services.
2.2 CIRCULAR FLOWS
Real Flows and Money Flows
These are the real flows
in the economy
Money flows run in
the opposite direction
to the real flows.
2.2 CIRCULAR FLOWS
Real Flows and Money Flows
• Firms pay households
incomes for the services
of factors of production.
• Households pay firms for
the goods and services
they buy.
• These are the money flows.
• The blue flows are incomes.
• The red flows are
expenditures.
2.2 CIRCULAR FLOWS
Governments
We divide governments into two broad levels:
• Federal government
• State and local government
Federal Government
The federal government’s major expenditures are to
provide:
1.Goods and services
2.Social security and welfare benefits
3.Transfers to state and local governments
2.2 CIRCULAR FLOWS
The federal government finances its expenditures by
collecting taxes.
The main taxes are:
1. Personal income taxes
2. Corporate (business) taxes
3. Social security taxes
During the early 2000s, the federal government is
spending and collecting in taxes more than $2 trillion a
year—about 20 cents in every dollar earned.
2.2 CIRCULAR FLOWS
State and Local Governments
State and local governments expenditures provide:
1. Goods and services
2. Welfare benefits
State and local governments finance these
expenditures by collecting taxes.
The main taxes levied are:
1. Sales taxes
2. Property taxes
3. State income taxes
2.4 CIRCULAR FLOWS
Government in
the Circular Flow
Households and firms pay
taxes and receive
transfers.
Governments buy goods
and services from firms.
2.2 CIRCULAR FLOWS
Federal
Government
Expenditures
Figure 2.6(a) shows
federal government
expenditures.
2.2 CIRCULAR FLOWS
Federal Government Revenue
Figure 2.6(b) shows
federal government
revenue.
2.2 CIRCULAR FLOWS
Federal Government Expenditures and
Revenue
National debt
The total amount that the government has borrowed to
make expenditures that exceed tax revenue—to run a
government budget deficit.
During the early 2000s, the federal government’s
budget is in deficit and the national debt is increasing.
2.2 CIRCULAR FLOWS
State and Local Government Expenditures
and Revenue
The largest part of the state and local governments
expenditures are on:
• Education
• Highways
• Public welfare benefits
2.2 CIRCULAR FLOWS
State and Local Government Expenditures
Figure 2.7(a) shows
state and local
government expenditures.
2.2 CIRCULAR FLOWS
State and Local Government Revenue
Figure 2.7(b)
shows state and
local government
revenue.
2.3 MACROECONOMIC PERFORMANCE
Standard of Living
Standard of living depends on:
• Quantities of goods and services produced
• Number of people who share those goods and
services
The greater the value of production per person, the
higher is the standard of living.
2.3 MACROECONOMIC PERFORMANCE
World Population
U.S. population: 287,991,639 (September 8, 2002)
World population: 6,248,847,500
2.3 MACROECONOMIC PERFORMANCE
Classification of Countries
Advanced Economies
The highest living standards, 28 countries
Developing Economies
Not yet achieved a high standard of living, 128
countries
Transition Economies
Transition from state-ownership of capital to free
enterprise, 28 countries.
2.3 MACROECONOMIC PERFORMANCE
Figure 2.8 shows the
standard of living
around the world.
Average income per
person ranges from
$100 a day in the
United States to $5 a
day in Africa.
2.3 MACROECONOMIC PERFORMANCE
Unemployment and Living Standards
Unemployment influences the standard of living.
The harder it is to find a job, the longer is the
period of unemployment.
The average unemployment rate in the United
States in the past 20 years has been 6 percent
and it takes about 15 weeks to find a suitable job.
2.3 MACROECONOMIC PERFORMANCE
Figure 2.9
shows average
unemployment
rates around the
world.
The unemployment
rate is much higher
in Spain than in
most advanced
economies.
The U.S. unemployment rate is among
the lowest.
2.3 MACROECONOMIC PERFORMANCE
Cost of Living
The amount of money it takers to buy the goods and
services that a typical family consumes.
Inflation
The rising cost of living.
Most countries experience inflation, but its rate varies
enormously.
2.3 MACROECONOMIC PERFORMANCE
Figure 2.10
shows
inflation
rates around
the world.
Transition
economies
and Central
and South
America have
high average
inflation rates.
2.3 MACROECONOMIC PERFORMANCE
Figure 2.10
shows
inflation
rates around
the world.
The least
severe
inflation is in:
• Japan
• United
States
2.3 MACROECONOMIC PERFORMANCE
Economic Fluctuations
Economies expand at an uneven pace and sometimes
shrink for a while.
These ebbs and flow are the business cycle.
2.3 MACROECONOMIC PERFORMANCE
The most
recent U.S.
recessions
occurred in
1991 and
2001.
Between
these
recessions,
the U.S.
economy
expanded
rapidly.
2.3 MACROECONOMIC PERFORMANCE
The transition
economies
slumped
during the
1990s.
Japan
stagnated.
A recession
occurred in
Asia in 1998.