Chapter 2 The Economy: Myth and Reality E pluribus unum (Out of many, one) MOTTO ON U.S. CURRENCY

American Economy: A Thumbnail Sketch U.S. economy –Biggest national economy –Population: 300 million Working population: 150 million –Very rich country –High efficiency Productivity –$45,000 per person –$90,000 per worker 2

American Economy: A Thumbnail Sketch Inputs / factors of production –Labor –Machinery –Buildings –Natural resources –Used to make outputs Outputs –Goods and services –Consumers & others want to acquire 3

American Economy: A Thumbnail Sketch Free markets Private enterprise “Land of opportunity” Most “privatized” economy Most “marketized” economy 4

American Economy: A Thumbnail Sketch Gross domestic product (GDP) –Measure size of economy –Total amount it produces –In a year Real GDP –Adjusted GDP For changes in purchasing power For inflation 5

Share of U.S. gross domestic product (GDP) exported and imported, 1959–2007 Figure 1 6

American Economy: A Thumbnail Sketch U.S. economy –Relatively closed –14% of GDP: exports & imports –17% of GDP: imports Relatively open economy –Exports & imports – large share of GDP Relatively closed economy –Exports & imports – small share of GDP 7

Openness of various national economies, 2007 Table 1 8 Openness Netherlands Germany China Canada Mexico Russia United Kingdom United States Japan 67%

American Economy: A Thumbnail Sketch U.S. economy –Growing –2007 GDP = $14 trillion –2007 GDP per capita 2.8 times > than in

Real gross domestic product (GDP) since 1959 Figure 2 10

American Economy: A Thumbnail Sketch Economic fluctuations –Business cycles Recession – period of time –Total output falls Unemployment rate –Varies 11

The growth rate of real gross domestic product (GDP) in the United States since 1959 Figure 3 12

The unemployment rate in United States since 1929 Figure 4 13

The Inputs: Labor and Capital American workforce – composition –150 million –54% men –46% women –4% teenagers (6 million) –Expanding role of women 14

Composition of employment by sex, 1950 and 2007 Figure 5 15

Working women as a percentage of the labor force, 1960 versus 2005 Figure 6 16

Teenage employment as a percentage of total employment, 1950–2006 Figure 7 17

The Inputs: Labor and Capital American workforce – production –Mostly services –Government –Only 16% - goods Shift to services –Information age –Education –Experience 18

Civilian non-farm payroll employment by sector, 2007 Figure 8 19

Growing share of service sector jobs, 1967 vs Figure 9 20

The Inputs: Labor and Capital American workforce – earnings –Wages: 70% of income –Average hourly wage: $17 –Average weekly paycheck: $600 Capital –$30 trillion –Average rate of return: 10% 21

Average hourly compensation rates in manufacturing, 2006 Figure 10 22

Outputs: What Does America Produce? Consumer spending – 70% of GDP Households –60% of budget – on services –40% of budget – on goods –$140 billion – phone bill Non-consumption uses – 30% of GDP 23

The Central Role of Business Firms 25 million business firms –80,000 fail / year Multinational corporations Competition –Key to industrial efficiency 24

Government Markets –Goods & services: bought & sold Firms –Sell goods & services Outputs markets Receive receipts –Use resources Inputs markets Pay for resources 25

Government Consumers –Buy goods and services Outputs markets Expenditures –Sell resources Inputs markets Receive income 26

The circular flow of goods and money Figure 11 27

Government Role of government –Making & enforcing laws Rule maker Referee Arbitrator –Regulating business Antitrust laws Promote social objectives 28

Government Role of government –Providing certain goods & services Fiscal year 2008: $2.9 trillion –Pensions & income security programs –National defense –Health care –Education –Transportation –Agriculture –Housing –Foreign aid 29

The allocation of government expenditures Figure 12 30

Government Role of government –Levying taxes Pay for these goods and services Income & payroll taxes Sales taxes Property taxes Gasoline taxes Liquor taxes Telephone taxes 31

The tax burden in selected countries, 2006 Figure 13 32

Government Role of government –Redistributing income Reduce income inequality Taxes Transfer payments Progressive taxation Antipoverty programs 33

Government Transfer payments –Sums of money Received by certain individuals –Outright grants from government –Not payments for services Progressive taxation –Ratio: taxes to income Rises as income rises 34

Conclusion: It’s a Mixed Economy Mixed economy –Some public influence Over free markets –Some public ownership –And private property 35