CHAPTER 2 – THE U.S. ECONOMY: A GLOBAL VIEW

WHAT AMERICA PRODUCES

GDP – The total market value of all final goods and services produced within a nation’s borders in a given time period. (World View, Page 27)

• GDP is a basic measure of an economy’s size.

• The U.S. is the largest economy in the world.

• In 2000, US GDP = $10 trillion, China $5 trillion and Japan 3.3 trillion.

• GDP is a statistic computed every 3 months by the Bureau of Economic Analysis, a part of the U.S. Dept. of Commerce

PER CAPITA GDP - The dollar value of GDP divided by total population; average GDP.

GDP (YEAR)/POPULATION (World View, Page 28)

• GDP per capita is an indicator of how much output the average person would get if all output were divided up evenly among the population.

• In the U.S. in 2000, GDP per capita was $34,000 (5x the average of the rest of the world).

• Although China has the world’s 2nd largest GDP, it also has 1/5 of the world’s population so it has a low per capita GDP.

• Half of the people on earth subsist on incomes of less than $2/day.

• PER CAPITA GDP provides a MEASURE OF AVERAGE LIVING STANDARDS.

GDP GROWTH (Figure 2.1, Page 29)

• The gap between the U.S. and poor nations keeps growing– U.S. has 5% world’s population, 12% of arable land and produces 25% of world’s output.

• Economic growth – U.S. output grows 3% year, 3x faster than population growth which means that both total output and per capita output are increasing.

Poor Nations (except China and India)

• Often have declining output and increasing population growth.

THE MIX OF OUTPUT

Our output consists of goods (cars, TVs, stereos, potatoes) and services (doctors, economics class, professional baseball game).

100 years ago the 2/3 of U.S. production included: farm goods (37%), manufactured goods (22%) and mining (9%). (Figure 2.2, Page 30)

Now 75% of our output consists of SERVICES (health care, engineering, education, social services, accounting, etc.). 98% of future job growth is estimated to be in service sectors.

Farm and manufacturing output have increased even though their share of total output has declined. The fact that we are a service-oriented economy is a reflection of the U.S.’s high incomes. In contrast, in Ethiopia over 50% of their output comes from farming.

TODAY’S MIX OF OUTPUT(Figure 2.3, Page 31)
There are four major uses of total output:
Consumption, Investment, Government Services, Net Exports

CONSUMPTION (2/3 OF OUTPUT/GDP)

INVESTMENT (15% OF OUTPUT/GDP)
Includes expenditures on (production of) new plant, machinery, equipment, structures (capital) in a given time period, plus changes in business inventories.

• The opportunity cost of investment is consumer goods.

• Investment allows us to produce MORE in the future.

• Poorer nations need capital and investment desperately but can’t afford to cut back on consumer goods.

GOVERNMENT SERVICES (11% OF GDP)

• Only includes government expenditures used to acquire resources and produce services in GDP - police, education, lawmakers, Caltrans.

• Does NOT include transfer payments (Social Security, welfare, etc.)

• Federal services (6% OF GDP)

• State/Local (11% OF GDP)

NET EXPORTS (11% OF GDP) (Figure 2.4, Page 33)

• Exports – imports = net exports

HOW AMERICA PRODUCES

FACTORS OF PRODUCTION

• GDP includes all American and foreign-owned land, labor, capital used to produce goods or services in the U.S.

• GDP has geographical boundaries, not ownership of resources.

PRODUCTIVITY – Output per unit of input.

• Productivity of workers is at least as important as # of available workers and how much they are paid.

• Output per unit of input such as output per labor hour.

• The U.S. has a high level of labor productivity due to: highly educated workers using capital-intensive production processes.
  Example: farming is highly mechanized with computerized irrigation systems, etc.

CAPITAL STOCK in the U.S. is also very high due to an abundance of capital ($10 trillion worth of machinery, factories, buildings).

• CAPITAL-INTENSIVE production uses a high ratio of capital to labor inputs.
  Example: A US farmer uses computers, automated irrigation systems, etc.

• LABOR INTENSIVE production uses a high ratio of labor to capital inputs.
  For example, a Chinese farmer works with hands and crude implements.

HUMAN CAPITAL is the knowledge and skills workers possess.

• In 1940 – 1/20 people graduated from college; now 30% of the population graduates from college.

• H.S. graduation is around 85% today compared to 38% in 1940.

• The UN estimates that 1 billion people worldwide are unable to read or write.

FACTOR MOBILITY

• In the U.S. we have a relatively high level of factor mobility. We can move our resources to different industries in expansion/contraction periods (VCRs to DVDs).

TECHNOLOGICAL ADVANCE

• Shifts resources from one industry to another

• Fax machines, cell phones, and personal computers mean an economy can produce more with existing resources.

MARKET FREEDOM

• In the U.S., the government plays very little role in economy.

• There is a documented positive relationship between degree of economic freedom and economic growth

The ROLE OF GOVERNMENT establishes a framework in which businesses can operate

• It provides a legal framework – “rules of the game” (gives legitimacy to contracts/ownership rights).

• It protects the environment.

• It protects consumers from market power/monopoly.

• It protects labor with child labor laws, compulsory schooling, OSHA, minimum wage, overtime, etc.

GOVERNMENT FAILURE occurs when government intervention worsens economic outcomes.

FOR WHOM AMERICA PRODUCES

Income is how much we get of this GDP or our share of the pie!! The market mechanism is how goods/services are distributed.

(Figure 2.6, Page 38)

We can measure the distribution of income by dividing it into quintiles. An income quintile is 1/5 of the population, rank ordered by income.

• The top 20% of income earners get 50% of the income.

• The bottom 20% of income earners get less than 4% of total income.

• ***44% of nation believes country is divided into haves and have-nots.

THE ECONOMY TOMORROW

WHAT TO PRODUCE?
To a large extent ECONOMIC GROWTH depends on a nation’s willingness to invest in:

• HUMAN CAPITAL (EDUCATION/TRAINING)

• PHYSICAL CAPITAL (NEW MACHINERY)

• TECHNOLOGY (VIA RESEARCH AND DEVELOPMENT)
  **which means devoting a smaller share of total output to consumption and more resources to INVESTMENT ACTIVITIES.

GOVERNMENT DIRECTIVES – may help increase savings rates and investment:

• Tax breaks – 401(K) and IRA savings plans

• Tax breaks and student loans – education

• Tax credits and deductions – R&D, investment in physical capital

HOW WE PRODUCE?

• Environmental protection is both possible and desirable in the U.S. and it’s a luxury.

• Rising prices for scarce resources create market incentives for conservation, recycling and new development.

FOR WHOM WE PRODUCE?

INCOME INEQUALITY

• Over the years the U.S. has experienced changing demands for labor; fastest-growing sectors require more highly educated workers, especially those with advanced technical skills.

• Income inequality does exist. Just compare the salaries of entrepreneurs, sports figures, doctors, entrepreneurs and average workers. Who has the highest income?

**Market-driven inequalities are both a reward to productive achievement and an incentive to produce more.

The role of the government is to:

• break down discriminatory barriers that block access to schools/jobs.

• Offer government training and subsidies to help the poor, and

• Use tax and transfer policies to address issues of income inequality.

IT’S HARD TO PREDICT THE FUTURE!!!