McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved The U.S. Economy: A Global View Chapter 2

2 What America Produces With less than 5 percent of the world’s population.. and 12 percent of the world’s arable land.. the U.S. produces more than 20 percent of the world’s output. LO1

3 GDP Comparisons Gross Domestic Product (GDP) is the total market value of all final goods and services produced within a nation’s borders in a given time period. It is the basic measure of an economy’s size. LO1

4 Comparative Output

5 Per Capita GDP Per Capita GDP is the dollar value of GDP divided by total population; average GDP. It indicates how much output the average person would get if all output were divided up evenly among the population. LO1

6 GDP Per Capita Around the World LO1

7 GDP Growth Economic growth is the increase in output (real GDP) – an expansion of production possibilities.

8 GDP Growth U.S. output grows by roughly 3 percent per year. U.S. population grows by 1 percent per year.

9 U.S. Output and Population Growth Since ,000 1,200 1,400 1,600 1,800 INDEX OF REAL OUTPUT AND POPULATION (1900 = 100) YEAR Increasing GDP per capita Real GDP Population

10 Poor Nations The populations of rich countries are growing slowly so that gains in per capita GDP are easily achieved. The populations of the poorest countries are still growing rapidly, making it difficult to raise living standards.

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12 The Mix of Output A century ago, about two-thirds of U.S. output consisted of goods while one-third of output consisted of services. Today, nearly 75 percent of U.S. output consists of services, not goods. LO1

13 The Mix of Output The relative decline in goods production does not mean the U.S. is producing fewer goods than before. Manufacturing and farm output has increased tremendously. The mix of output is simply different. LO1

14 The Changing Mix of Output 1800 Services Agriculture Manufacturing, mining and construction Percent of employment LO1

15 Development Patterns The transformation of the U.S. into a service economy is a reflection of our high incomes. LO1

16 Today’s Mix of Output America is primarily a service economy and will become increasingly so in the future. LO1

17 Today’s Mix of Output The four major uses of total output are: Consumption Investment Government services Net exports LO1

18 WHAT America Produces Consumer Goods 70% Investment 17% State and local 12% Net exports -6% Federal 7% Government Purchases LO1

19 Consumer Goods and Services Consumer goods and services include items like breakfast cereals, movie rentals, and college education. This category of production accounts for over two-thirds of total output. LO1

20 Investment Goods and Services Investment includes expenditures on (production of) new plant, equipment, and structures (capital) in a given time period, plus changes in business inventories. The U.S. devotes 17 percent of output to investment. LO1

21 Investment Goods and Services Investment goods: Maintain our production possibilities by replacing worn out equipment and factories. Expand our production possibilities by increasing and improving our stock of capital. LO1

22 Government Services Only that part of federal spending used to acquire resources and produce services is counted in GDP. Income transfers are payments to individuals for which no current goods or services are exchanged. LO1

23 Net Exports Exports are goods and services sold to foreign buyers. Imports are goods and services purchased from foreign sources. Net exports are the value of exports minus the value of imports. LO1

24 U.S. Exports and Imports Total $773 billion Percent of world exports 18% Exports of goods (in billions) To Japan $65 $236 $16 $165 $179 $112 To EU To Canada To Mexico To China To rest of the world Total $1223 billion Percent of world imports 19% Imports of goods (in billions) $100 $147 $393 $220 $229 $134 From China From Japan From EU From Canada From Mexico From rest of the world LO1

25 Comparative Advantage International trade allows countries to produce and export goods what they do best and import goods they don’t produce as efficiently.

26 How America Produces Although all nations use the same factors of production, their quantity and quality varies greatly. LO2

27 Factors of Production Factors of production are the resource inputs used to produce goods and services, such as land, labor, capital, entrepreneurship. LO2

28 Human Capital Human capital is the knowledge and skills possessed by the workforce. The high productivity of the U.S economy results from using highly educated workers in capital-intensive production processes. LO2

29 Capital Stock American production tends to be capital-intensive. A capital-intensive production process is one that use a high ratio of capital to labor inputs. LO2

30 High Productivity American households are able to consume so much because American workers produce so much. Productivity is output per unit of input such as output per labor hour. LO2

31 High Productivity The high productivity of the U.S. economy results from highly educated workers using capital- intensive production processes. LO2

32 The Education Gap Between Rich and Poor Nations 46% Poor countries 75% Middle- income countries 91% High-income countries 95% United States Enrollment in secondary school LO2

33 Factor Mobility Our continuing ability to produce the goods and services that consumers demand depends on our ability in reallocating resources from one industry to another. LO2

34 Technological Advance Whenever technology advances, an economy can produce more output with existing resources. LO2

35 Outsourcing and Trade Technology facilitates global resource use. Outsourcing allows U.S. workers to pursue their comparative advantage in high-skill, capital-intensive jobs. LO2

36 Role of Government Government plays a critical role in establishing a framework in which private business can operate. LO2

37 Providing a Legal Framework One of the most basic functions of government is to establish and enforce the rules of the game. LO2

38 Protecting the Environment Externalities are the costs (or benefits) of a market activity borne by a third party. To reduce the external costs of production, the government limits air, water, and noise pollution and regulates environmental use. LO2

39 Protecting Consumers The government protects consumers by preventing individual business firms from becoming too powerful. A monopoly is a firm that produces the entire market supply of a particular good or service. LO2

40 Protecting Consumers Government regulates the safety of many products. LO2

41 Protecting Labor The government regulates how labor resources are use in the production process. LO2

42 Striking a Balance Government interventions are designed to change the way in which resources are used. Government failure might replace market failure, leaving us no better off – possibly worse off. LO2

43 For Whom America Produces How many goods and services you get largely depends on your income. LO3

44 U.S. Income Distribution An income quintile is one-fifth of the population, rank-ordered by income (for example, top fifth). The top 20 percent (quintile) of U.S. households gets half of all U.S. income. The poorest 20 percent (quintile) get less than 4 percent of all income. LO3

45 U.S. Distribution of Income LO3

46 U.S. Distribution of Income LO3 Richest fifth of population Second fifth Third fifth Fourth fifth Poorest fifth

47 Global Inequality Income disparities are greater in many other countries. Poor people in the United States receive more goods and services than the average household in most low-income countries. LO3

48 Income Share of the Rich LO3

McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved The U.S. Economy: A Global View End of Chapter 2