3 C H A P T E R C H E C K L I S TWhen you have completed your study of this chapter, you will be able toDescribe what, how, and for whom goods and services are produced in the United States.1Use the circular flow model to provide a picture of how households, firms, and governments interact.2Describe what, how, and for whom goods and services are produced in the global economy.3
4 What Do We Produce? 2.1 WHAT, HOW, AND FOR WHOM? We divide the vast array of goods and services produced into:Consumption goods and servicesCapital goodsGovernment goods and servicesExport goods and servicesGet the students to think about what goods and services have helped raise the standard of living of Americans and people around the world.Give them a few minutes in class to compose a list. (No right list of course.)The notes page of the next slide provides some possibilities.
5 Consumption goods and services 2.1 WHAT, HOW, AND FOR WHOM?Consumption goods and servicesGoods 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.Capital goodsGoods that are bought by businesses to increase their productive resources. For example, cranes and trucks.a. Electricityb. Automobilec. Airplaned. Radioe. Televisionf. Telephoneg. Air conditioningh. Computeri. Highwaysj. Spacecraftk. Internetl. Refrigerationm. Laser and fiber opticsn. Nuclear power
6 Government goods and services 2.1 WHAT, HOW, AND FOR WHOM?Government goods and servicesGoods and services that are bought by governments. For example, missiles, bridges and police protection.Export goods and servicesGoods and services produced in one country and sold in other countries. For example, airplanes produced by Boeing and Citicorp banking services sold to China.Discus the students’ list.Note that an increase in the standard of living depends on the quantities of goods and services produced and the number of people among whom those goods and services are shared.Get them to talk about quality changes too.Automobiles, computers, personal music machines are three items about which the students will be well informed on quality change.
7 2.1 WHAT, HOW, AND FOR WHOM?Figure 2.1(a) shows the relative magnitudes of the goods and services produced in 2005:Consumption 60%Capital goods 15%Export goods 9%Government 16%
11 How Do We Produce? 2.1 WHAT, HOW, AND FOR WHOM? Factors of production The productive resources used to produce goods and services.Factors of production are grouped into four categories:LandLaborCapitalEntrepreneurship
12 2.1 WHAT, HOW, AND FOR WHOM? 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.
13 2.1 WHAT, HOW, AND FOR WHOM? Labor Human capital The work time and work effort that people devote to producing goods and services.The quality of labor depends on how skilled people are—what economists call human capital.Human capitalThe knowledge and skill that people obtain from education, on-the-job training, and work experience.
14 2.1 WHAT, HOW, AND FOR WHOM?Figure 2.2 shows measures of human capital and how they have changed since 1910.
16 2.1 WHAT, HOW, AND FOR WHOM? Capital Tools, instruments, machines, buildings, and other items 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.
17 2.1 WHAT, HOW, AND FOR WHOM? 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.
18 Rent Income paid for the use of land. 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.Profit (or loss) Income earned by an entrepreneur for running a business.
19 2.1 WHAT, HOW, AND FOR WHOM? Functional distribution of income The percentage distribution of income among the factors of production.Personal distribution of incomeThe percentage distribution of income among individual persons.
20 Figure 2.3(a) shows the functional distribution of income: 2.1 WHAT, HOW, AND FOR WHOM?Figure 2.3(a) shows the functional distribution of income:Wages 64%Rent, interest, and profit 36%
24 2.2 THE 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 andthe way those choices interact in markets to determine what, how, and for whom goods and services are produced.
25 Households and Firms 2.2 THE CIRCULAR FLOWS Households Individuals or people living together as decision-making units.FirmsInstitutions that organize production of goods and services.
26 Markets 2.2 THE CIRCULAR FLOWS 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.
27 Real Flows and Money Flows 2.2 THE CIRCULAR FLOWSReal Flows and Money FlowsIn factor markets:Households supply factors of productionFirms hire factors of production.In goods markets:Firms supply goods and services produced.Households buy goods and services.
29 Real Flows and Money Flows 2.2 THE CIRCULAR FLOWSReal Flows and Money FlowsThese are the real flows in the economy.Money flows run in the opposite direction to the real flows.
30 Real Flows and Money Flows 2.2 THE CIRCULAR FLOWSReal Flows and Money FlowsFirms 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.
32 Governments 2.2 THE CIRCULAR FLOWS We divide governments into two broad levels:Federal governmentState and local governmentFederal GovernmentThe federal government’s major expenditures are to provide:Goods and servicesSocial security and welfare benefitsTransfers to state and local governments
33 2.2 THE CIRCULAR FLOWSThe federal government finances its expenditures by collecting taxes.The main taxes are:Personal income taxesCorporate (business) taxesSocial security taxesDuring the 2005, the federal government spent $2.5 trillion—about 20 cents in every dollar earned in the year. The federal government collected less than $2.5 trillion in taxes and so it had a deficit.
34 2.2 THE CIRCULAR FLOWS State and Local Governments State and local governments expenditures provide:Goods and servicesWelfare benefitsState and local governments finance these expenditures by collecting taxes.The main taxes levied are:Sales taxesProperty taxesState income taxes
35 Government in the Circular Flow 2.2 THE CIRCULAR FLOWSGovernment in the Circular FlowHouseholds and firms pay taxes and receive transfers.Governments buy goods and services from firms.
41 Federal Government Expenditures and Revenue 2.2 THE CIRCULAR FLOWSFederal Government Expenditures and RevenueNational debtThe 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.
42 State and Local Government Expenditures and Revenue 2.2 THE CIRCULAR FLOWSState and Local Government Expenditures and RevenueThe largest part of the state and local governments expenditures are on:EducationHighwaysPublic welfare benefits
43 State and Local Government Expenditures 2.2 THE CIRCULAR FLOWSState and Local Government ExpendituresFigure 2.7(a) showsstate and localgovernment expenditures.
47 2.3 THE GLOBAL ECONOMY The People U.S. population: 295,649,027 (March 13, 2005)World population: 6,424,033,498
48 Countries 2.3 THE GLOBAL ECONOMY Advanced Economies The richest 29 countries (or areas).Almost 1 billion people (15 percent of the world’s population) live in advanced economies.
49 2.3 THE GLOBAL ECONOMY Emerging Market and Developing Economies Emerging market economies are the 28 countries of Central and Eastern European and Asia that were until the 1990s part of the Soviet Union.Almost 500 million people live in these countries.Developing economies are the 118 countries in Africa, Asia, the Middle East, Europe, and Central and South America that have not yet achieved high average incomes for their people.More than 5 billion people live in these countries.
50 What in the Global Economy In 2005, global economy produced $60 trillion of goods and services.Figure 2.8 shows the shares of global production.
52 2.3 THE GLOBAL ECONOMY Energy The location of oil, natural gas, and coal determines the sources of the world’s energy.Figure 2.9(a) shows the distribution of oil.
53 2.3 THE GLOBAL ECONOMY Energy The location of oil, natural gas, and coal determines the sources of the world’s energy.Figure 2.9(b) shows the distribution of natural gas.
54 2.3 THE GLOBAL ECONOMY Energy The location of oil, natural gas, and coal determines the sources of the world’s energy.Figure 2.9(c) shows the distribution of coal.
55 2.3 THE GLOBAL ECONOMYYou can now see why the United States takes a strong interest in the Middle East. It has 65 percent of the world’s oil and 41 percent of the world’s natural gas.
56 2.3 THE GLOBAL ECONOMYYou can now see why the United States takes a strong interest in the Middle East. It has 65 percent of the world’s oil and 41 percent of the world’s natural gas.
57 2.3 THE GLOBAL ECONOMY Food Agriculture in the United States is about 1.4 percent of total U.S. production.Agriculture in developing countries averages 14 percent of their total production.Advanced economies accounts for 2/3 of world agricultural production. Why?Farms are large and highly productive and U.S. and E.U. farmers receives subsidies, which encourages more production.
58 2.3 THE GLOBAL ECONOMY Other Goods and Services The advanced economies produce similar goods and services: agriculture is small; manufacturing is small; and services are the major and fast growing.In the developing countries, agriculture is big but shrinking; manufacture is large and growing; services are important but remain small.Emerging economies stand between the developing economies and the advanced economies.
59 How in the Global Economy? Human Capital DifferencesThe quality of labor depends on human capital.The differences in human capital between the advanced economies and the developing economies is enormous and it arises from:Education, on-the-job training, and experiencePhysical ability and state of health.
60 2.3 THE GLOBAL ECONOMY Physical Capital Differences The physical capital available for producing goods and services differentiates an advanced economy from a developing economy:Transportation system—advanced economies more developedTechnologies used on farms and in factories—advanced economies use more capital-intensive technologies.
61 For Whom in the Global Economy 2.3 MACROECONOMIC PERFORMANCE2.3 THE GLOBAL ECONOMYFor Whom in the Global EconomyWho gets the world’s goods and services depends on the incomes that people earn.Figure 2.10 (on the next slide) shows the distribution of incomes around the world.
62 2.3 THE GLOBAL ECONOMY In 2005, U.S. average income was $108 per day. In advanced economies, it was about $75 a dayYou can generate some discussion by getting the students to think about what life might be like after another 200 years of economic growth. Provide some numbers: In 2002, income per person in the United States was about $100 a day. In 1802 it was about 70¢ a day, and if the past growth rate prevails for another 200 years, in 2202 it will be $14,000 a day. Emphasize the magic of compound growth. If they think that $14,000 a day is a big income, get them to do a ballpark estimate of the daily income of Bill Gates (about $14 million!) Encourage a discussion of why scarcity is still present even at these large incomes.In Africa, it was only $6 a day.
64 The U.S. and Global Economies in YOUR Life How can you use the facts and trends about what, how, and for whom goods and services are produced in the U.S. and global economies?As you think about your future career, you know that a job in manufacturing is likely to be tough. A job in services is more likely to lead to success. What sort of job will you take?As you think about the stand you will take on the political question of protecting U.S. jobs, you are better informed. But how will you vote? Chapter 3 will help you decide.