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Nations Have Different Economic Outcomes

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Presentation on theme: "Nations Have Different Economic Outcomes"— Presentation transcript:


2 Nations Have Different Economic Outcomes
Every country must answer the three basic questions: WHAT to produce? HOW to produce? FOR WHOM to produce it? Since each country has vastly different production possibilities, each must confront very different output choices. Some use central (government) planning, while others rely on the market mechanism. We will focus on the United States in this chapter. It might be useful to identify some countries that are strongly central planning and some that are strongly market mechanism.

3 Learning Objectives 02-01. Know the relative size of the U.S. economy.
Know how the U.S. output mix has changed over time. Know how America is able to produce so much output. Know how incomes are distributed in the United States and elsewhere. Here you can organize the discussion of the chapter.

4 What Is Produced? The United States is the largest producer of goods and services in the world. It is also the largest consumer of goods in the world. The United States specializes in producing what it can produce at a lower opportunity cost than other countries can. The United States purchases from other countries goods and services they can produce at a lower opportunity cost than the United States. All the manufacturing jobs have been shipped overseas, right? No. The United States is still the world’s largest manufacturer!

5 What America Produces Gross domestic product (GDP): the total market value of all final goods and services produced within a nation’s borders in a given time period. GDP is a measure of an economy’s size. U.S. GDP accounts for about one-fourth of the world’s GDP. U.S. GDP is nearly twice as big as that of the country (China) with the second-largest GDP. It might be useful at this early stage to take some time to develop the GDP definition. Final goods and services? Market value? Produced by whom within the nation’s borders? The facts on GDP might surprise some of your students.

6 Living Standards If we divide GDP by population, we get an indication of a country’s living standards. Per capita GDP: GDP divided by the population. If GDP grows faster than population grows, standard of living rises. If GDP grows slower than population grows, standard of living falls. Standard of living, as used in economics, is incredibly materialistic. It might be a good idea to talk about other nonmaterialistic aspects of life that contribute to a high standard of living (peace, quiet, clean environment, family, friends, …).

7 GDP Growth Economic growth: an increase in output; an expansion of production possibilities. U.S. output has grown roughly 3 percent per year, while population has grown about 1 percent per year, raising per capita GDP. Comparing GDP growth with population growth is vital. In some countries, such as Japan and Italy, population growth is zero or negative. What will that do for the economy? In some countries, GDP growth is zero or negative and population growth is large. What will that do for the economy?

8 U.S. Output and Population Growth
The growth of output (GDP) in the United States has greatly exceeded its population growth. You could talk a bit about the index on the left. In 2000 the index was 20 times as big as it was in Ask students what that means. From 1970 to 2000 the index jumped from 1,000 to 2, that is, it doubled. Ask what that means. 8

9 Rich Nations and Poor Nations
GDP per capita figures are very different in rich and poor nations. In rich nations, populations grow slowly, so GDP per capita increases, improving the standard of living. In poor nations, population increases rapidly, making it difficult to raise living standards. Many students are concerned about the divergence between rich nations and poor nations. You could use this concept to show one reason why that divergence is occurring. You could get a discussion going about what can be done.

10 The Changing Mix of Output
In the past 100 years, the United States transformed from an agricultural society to an industry-based society, and then to a services-based society. Eighty percent of U.S. output consists of services, not goods. Even so, the United States remains one of the world’s largest manufacturers of goods. What happens when an economy changes its mix of outputs? When we switched from the farm to the factory, how did that affect population in various parts of the country? Has it happened again during the switch from the factory to the info society?

11 The Changing Mix of Output
Half the workers in the country in agriculture in 1900, producing to feed themselves and the other half of us. Now fewer than 2 percent of our workers are in agriculture, feeding the other 98 percent of us and a lot of the rest of the world. This might make a good discussion of how this happened. 11

12 The Changing Mix of Output
The transformation of the United States into a service economy reflects our increasing incomes. In poorer countries, resources must be devoted to producing food and goods, not services. Maslow’s hierarchy of needs can be used here. In poorer countries, one is most concerned about survival and safety. In richer countries, higher-order needs can be addressed because survival and safety are for the most part assured.

13 How to Produce? How a country produces depends on what resource inputs are available. Key among the resource inputs is capital. Human capital: the knowledge and skills possessed by the workforce. Physical capital: the facilities, tools, equipment , and infrastructure available to the workforce. One of the basic questions. Resources must exist to be input into a production process.

14 Investment in Capital The United States invests heavily in human capital. The United States has accumulated a massive amount of physical capital. The high productivity of the U.S. economy results from using highly educated workers with high-tech equipment in capital-intensive production processes. American households are able to consume so much because American workers produce so much. High-tech versus low-tech. Labor-intensive versus capital-intensive. Low earning versus high earning. All three pairs correlate with each other. Build a road in a developing country: lots of low-cost labor, very little high-cost capital. In an industrialized country: very little high-cost labor, lots of relatively low-cost capital.

15 Capital? Or Labor? Richer countries tend to be capital-intensive, while poorer countries tend to be labor-intensive. Capital-intensive: Capital is abundant and relatively low-cost. Labor is costly. Labor-intensive: Capital is unavailable or very expensive. Labor is cheap. The mix of resource inputs depends on how much they cost and how productive they are. Producers will choose the lower-cost mix.

16 Other Factors Technological advancement:
Finding new and better ways to produce products. When technology advances, an economy can produce more output with existing resources. Its production possibilities curve shifts outward. Most of the economic growth over the past half century has been due to technological advancement. Discovering new resources is much less significant. 16

17 Other Factors Factor mobility: Outsourcing and trade:
Rapidly reallocating resources from declining industries to expanding industries. Outsourcing and trade: Taking advantage of low opportunity cost around the world. Exploiting technological advancements to use resources from around the world. The transition from agriculture to industry saw a migration of workers from farm states to industrial cities. Why outsource? We can move the job to where low-cost labor is, or we can move the low-cost labor to where the job is. The latter option is immigration (legal or illegal). This could be a good student discussion item: which one to do?

18 Outsourcing U.S. workers have a comparative advantage in high-skill, capital-intensive jobs. Workers in other countries have a comparative advantage in lower-skill, labor-intensive jobs. Outsourcing flows both ways – some jobs leaving the United States and other jobs coming to the United States. Nobody pays attention to insourcing into the United States. This is huge in the high-tech telecomm and information industries. Also in assembly jobs. Witness the auto assembly plants in the United States making foreign-named cars. It might be interesting to ask your students if insourcing is awful, just like outsourcing.

19 Role of Government Market-reliant economies grow faster than government-dominated economies. When entrepreneurs can freely pursue opportunities in the market, they will innovate and create new products. This leads to faster economic growth. When government owns the factors of production, imposes high taxes, or tightly regulates output, there is little incentive to design new products or pursue new technology. You might want to dig out a few facts on economic growth for the two categories on the slide. It might be worth having a discussion on whether or not government’s involvement stifles incentives to create or improve technology.

20 Roles of Government Providing a legal framework.
Property rights. Rule of law (contracts, fraud). Protecting the environment. Negative externalities. Eliminate third-party harm. Property rights are fundamental. If government can confiscate any accumulation of wealth, no matter how small, the incentive to accumulate wealth disappears. If the framework is law-based rather than person-based (edict), people can reliably make plans. A good discussion might center around this question: What if there were no property rights? What if laws were whatever the leader says they are? 20

21 Roles of Government Protecting consumers Protecting labor
Fostering competition. Product safety. Protecting labor Workplace safety. Child labor laws. Compulsory schooling. Minimum wage law. Overtime provisions. Government as protector is a fundamental role. You could stimulate discussion by asking what it would be like if there were no food and drug laws.

22 For Whom America Produces?
Allocating the products to the users can be done by government or by the market mechanism. … or by a mixture of the two. In the United States, about one-fourth of GDP is allocated via government and three-fourths via the market mechanism. The ¾ - ¼ split is an estimate based on government’s spending of about ¼ of GDP. Think about auto production. Who makes the decisions on HOW to produce an auto?

23 U.S. Income Distribution
Income has an unequal distribution in the United States (and in every other country). The higher the income, the greater the ability to buy goods and services. We can sort out U.S. income earners by quintile. Quintile: one-fifth of the population; rank-ordered by income. The top quintile gets half of all U.S. income. The bottom quintile gets less than 4 percent. We tend to forget that income is unevenly distributed everywhere, not just in the United States. You might want to mention that in some countries, the ruling elite and their friends have almost all of the income, while the vast majority of the people have little or none. North Korea comes to mind.

24 World View: Distribution of Income
Income disparities are greater in other countries, especially in the poorer countries. Poor people (bottom quintile) in the United States receive far more goods and services than the average household in most low-income countries. A discussion could be generated on a practical definition of “poor.” Does poor mean the same in every country? How much income do you need to make to escape being poor? Is that the same in every country? Is income the best measure of poverty?

25 What Is the U.S. Economy Like?
WHAT goods and services does the United States produce? It produces goods desired by its consumers. If it has lower opportunity costs, it produces goods in the country; if not, it buys goods from other countries. The United States has become a heavily service-based economy. This slide reflects the strong domination of the market mechanism in determining what the United States produces.

26 What Is the U.S. Economy Like?
HOW is that output produced? United States firms are in business to be profitable. To succeed, they must satisfy their customers and comply with government regulations. Each firm will select the low-cost mixture of inputs necessary to produce a good acceptable to its customers. Many students have a jaundiced view of business: It is greedy and evil. Should we, as econ instructors, disabuse students of the idea that corporations are evil? They produce the goods we want to satisfy our wants and needs. They provide employment for people all over the world. They seek to better themselves (make a profit), just as each student seeks to better him/herself.

27 What Is the U.S. Economy Like?
FOR WHOM is the output produced? In the market economy, those with larger incomes satisfy more of their wants than those with less. Income is unequally distributed in the United States (and elsewhere in the world). You might mention that another way to answer this question is for the government to allocate goods. Discuss how this might be done fairly. That could lead into a discussion about how to define “fair.”

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