The U.S. Within the World Economy
What, How, and for Whom to Produce? What to Produce?
•We live in a world of scarcity and tradeoffs.
•If more of a particular item is produced, then less of something else will be produced during the same period, with a given set of resources.
•In the U.S. economy, for the most part, it is the interaction of the demand for and the supply of different goods and services that determines what and how much will be produced.
•This interaction is carried out via the price system.
The Price System
•With a price system, when goods get scarcer, their prices go up.
•When they get less scarce, their prices go down.
•If the highest price that consumers are willing to pay is less than the lowest cost at which a good or service can be produced, output will be zero.
How Should We Produce Our Goods and Services?
•The price system indicates to producers what to produce.
•Because of competition and the desire to make the highest profits possible, producers must use the least-cost combination of inputs.
For Whom Will Output Be Produced—Who Gets What?
•After goods and services are produced, there has to be a determination of who gets what. For instance, who gets to buy all of those millions of new cars produced by General Motors and Ford?
•The answers to questions like this are determined by the distribution of money income.
Determination of Money Income
•The money income is determined mainly by the value of your labor services to the outside world.
•It is given by how well you are able to sell your labor
•It also depends on how well you have invested in the stock market, housing, and the like.
Distribution of Goods
•In the U.S. economic system, the distribution of finished products to consumers is based on different consumers’ ability and willingness to pay the market prices for goods and services.
•There is no central governing body that decides which consumers will get which goods.
Resources
•The U.S. economy produces millions upon millions of goods and services.
•Those goods and services that we produce each year require resources.
•We call such resources factors of production, which are the resources or inputs required for final production of goods and services.
Resource Classification
1.Land—As an economic term, land refers to all natural resources present without human intervention.
2.Labor—Labor is often called the human resource. It includes the services of anyone who works to produce goods and services.
3.Capital—refers to the manufactured goods used to make other goods and services.
Sometimes economists like to distinguish between physical capital (factories and equipment) and human capital—defined as the accumulated education and training of workers. 4.Entrepreneurship—refers to the ability of individuals to start new businesses, to introduce new products and processes, and to improve management techniques.
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Entrepreneurship involves initiative and willingness to take risks in order to reap profits.
Productivity
•Productivity is often measured as output per unit of labor.
•If the labor input required to produce a unit of output falls, we say that productivity has increased.
•Typically, productivity increases because of the increased use of capital, both physical and human.
The U.S. Economy in Perspective
•The economies of most European countries have been around for much longer than the one in the United States.
•In fact, the U.S. was an undeveloped country, by world standards, until the latter part of the 1800s. Since then, it has grown to be a world powerhouse.
•Average living standards—measured by income per person or consumption per person—have increased many times just in the last century.
•Population grew from a few million during the time the Constitution was ratified to close to 300 million today.
The U.S. Economy by Itself
•While there may be 50 states, we typically look at the U.S. economy as one entity.
•A good reason why this is appropriate is that there is unrestricted trade among the states—the Constitution prohibits almost all barriers to interstate trade.
The U.S. Labor Force
•Currently almost 145 million U.S. residents are part of the labor force, defined as the number of those over 16 who are either working or actively looking for work.
•A hundred years ago, the labor force measured a mere 40 million.
•Given that the average percentage of the labor force without a job has stayed about the same over time, this means that the U.S. economy is capable of creating millions of jobs every year.
•Today, the U.S. labor force is well schooled, well trained, and mobile. One in five families move each year, usually for work-related reasons.
The Number and Quality of Goods that We Produce and Consume
•For much of the early years of this country, we were an agrarian society. Over 90 percent of the population was engaged in farminguntil mid 1800s.
•Our incomes were low, and the products that we consumed were precious few and far between.
•Today, the average U.S. resident can choose among dozens of car brands (not all manufactured in the U.S), dozens of brands and types of refrigerators, and millions of books.
•We are a consumer-oriented society.
The Information Age
•Perhaps one of the most startling changes in the U.S. economy has occurred in the area of information and communication.
•One of the reasons that we are such a “wired” society is because the cost of computing power has fallen so significantly.
The Switch to a Service Economy
•When this nation started, almost everybody worked in agriculture.
•Gradually, we became a more manufacturing-oriented economy.
•Today, less than 2 percent of the labor force is involved in agriculture, and about 17 percent is involved in manufacturing and mining.
•The rest of the labor force is involved in services—over 80 percent! Services include the obvious—healthcare, accounting, architecture, legal research, plumbing,electrical repair, and education.
•Services also include banking and finance, accounting, travel and vacation consulting, retailing, insurance, real estate, and providing restaurant meals.
The U.S.’s Place in the World Economy
•With 4.5 percent of the world population, the U.S. generates about 25 percent of total world industrial output.
•The U.S. economy has a total national income of over $11 trillion, compared to $30 trillion for the world economy.
The U.S. Is Closely Intertwined With All Other Countries
•We live in a global economy.
•The information and communication revolution has caused the U.S. to be in closer contact with all other countries.
•With the benefits of increasing global integration also come some costs.
•The more our businesses are dependent on manufacturing in other countries, the more they are susceptible to crises caused by interruptions in their normal global supply routes.
The U.S. Economy Is Huge and Growing
•The U.S. economy is one of the most vibrant, resilient, and flexible economies in the world.
•On average, U.S. residents have experienced increases in their standards of living over most of this country’s relatively short history.
Gross Domestic Product—GDP
•The most frequently used statistic of economic performance is gross domestic product (GDP).
•GDP is the current value of all final goods and services produced in our nation each year. It is usually expressed in trillions of dollars per year.
Per Capita GDP
•To get a better idea of what has been happening to the average person’s standard of living, we typically have to divide GDP by population to come up with per capita GDP.
•However, per capita GDP does not tell us anything about the distribution of income, it just tells us its average level.
Inflation and Real GDP
•Inflation is defined as a sustained rise in the average of all prices.
•When you adjust GDP for inflation, you obtain real GDP.The term real refers to the physical or actual quantities of goods and services produced.
Per Capita Real GDP
•To compare living standards over time, we need to correct GDP for both inflation and population growth.
•The result is called per capita real GDP.
