2 2 The Economy: Myth and Reality E pluribus unum (Out of many, one) Motto on U.S. currency The Economy: Myth and Reality E pluribus unum (Out of many, one) Motto on U.S. currency

♦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 ♦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 Contents Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

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. ●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.

Copyright© 2006 South-Western/Thomson Learning. All rights reserved. The American Economy: A Thumbnail Sketch ●A Relatively “Closed” Economy ♦Open versus closed economy ●A Relatively “Closed” Economy ♦Open versus closed economy

Copyright© 2006 South-Western/Thomson Learning. All rights reserved. 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 ●A Growing Economy… ♦U.S. GDP 4.4 times larger in 2004 versus 1959 ♦U.S. GDP per capita is 2.7 times larger

Copyright© 2006 South-Western/Thomson Learning. All rights reserved. FIGURE 2: Real GDP Since 1959 Average of Exports and Imports, as a share of GDP (%) Billions of Dollars per Year

Copyright© 2006 South-Western/Thomson Learning. All rights reserved. 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. ●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.

Copyright© 2006 South-Western/Thomson Learning. All rights reserved. FIGURE 4: Unemployment Rate in the U.S., Copyright© 2006 South-Western/Thomson Learning. All rights reserved Percentage of Civilian Workers Who are Unemployed Great Depression World War II 1960s boom recession recessions 1980s boom 1990s boom Percentage of Civilian Workers Who are Unemployed

Copyright© 2006 South-Western/Thomson Learning. All rights reserved. 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 ●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

Copyright© 2006 South-Western/Thomson Learning. All rights reserved. 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. ●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.

Copyright© 2006 South-Western/Thomson Learning. All rights reserved. FIGURE 9: Share of Service Sector Jobs 10 0 Italy SpainGermanyJapanFranceCanadaSwedenUnited Kingdom United States Service Sector Jobs as a Percent of the Total Labor Force

Copyright© 2006 South-Western/Thomson Learning. All rights reserved. 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 ●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

Copyright© 2006 South-Western/Thomson Learning. All rights reserved. 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 ●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

Copyright© 2006 South-Western/Thomson Learning. All rights reserved. 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. ●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.

Copyright© 2006 South-Western/Thomson Learning. All rights reserved. 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. ●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.

Copyright© 2006 South-Western/Thomson Learning. All rights reserved. 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 ●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

Copyright© 2006 South-Western/Thomson Learning. All rights reserved. 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 ●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

Copyright© 2006 South-Western/Thomson Learning. All rights reserved. FIGURE 12: Allocation of Government Expenditures Pensions & Income Security 37% All other 15% Interest 7% National Defense 19% Health 22% Education 35% Health and Public Welfare 16% Highways 7% All other 43% LocalFederal

Copyright© 2006 South-Western/Thomson Learning. All rights reserved. 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 ●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

Copyright© 2006 South-Western/Thomson Learning. All rights reserved. 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? ●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?