The U.S. Economy: A Global View

1. 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.

3. GDP Comparisons • Gross domestic product (GDP) is a basic measure of an economy’s size. • 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.

4. 2002 Gross Domestic Product (in U.S. $ trillion) 10.1 5.6 3.3 2.1 1.5 0.79 0.86 0.22 0.01 0.05 Haiti China Mexico Japan Britain Ethiopia Germany South Korea Saudi Arabia United States 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.

6. 35,060 28,070 26,070 26,180 16,480 11,050 8,540 7,820 7,570 4,390 4,070 2,570 1,500 1,280 770 720 U.S Haiti India Cuba China Japan Jordan France Mexico Nigeria Russia Canada Ethiopia South Korea Saudi Arabia World Average GDP Per Capita Around the World (2002)

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

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

9. 1,800 1,600 1,400 Real GDP 1,200 AND POPULATION (1900 = 100) INDEX OF REAL OUTPUT 1,000 Increasing GDP per capita 800 600 400 Population 200 1900 1920 1940 1960 1980 2000 YEAR U.S. Output and Population Growth Since 1900

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.

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.

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.

14. 100 Services 80 60 Percent of employment 40 Agriculture Manufacturing, mining and construction 20 0 1800 1840 1880 1920 1960 1993 The Changing Mix of Output

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

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

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

18. Net exports -5% Consumer Goods Investment 71% 15% Federal 7% Government Purchases State and local 12% WHAT America Produces

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.

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 15 percent of output to investment.

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.

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.

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.

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

25. U.S. Exports and Imports: 2006

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

27. Comparative Advantage • Comparative advantage is the ability of a country to produce a specific good at a lower opportunity cost than its trading partners.

28. How America Produces • All goods and service included in GDP are produced within the borders of the United States.

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

30. Productivity • Productivity is output per unit of input such as output per labor hour. • The productivity of workers is more important than sheer numbers.

31. Factors of Production • The high productivity of the U.S. economy results from highly educated workers using capital-intensive production processes.

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

33. 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.

34. 91% 94% 75% 46% Poor Middle- High-income United States countries income countries countries The Education Gap Between Rich and Poor Nations Enrollment in secondary school

35. 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.

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

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

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

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

40. 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.

41. 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.

42. Protecting Labor • The government regulates how labor resources are use in the production process.

43. 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.

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

45. Income Distribution • An income quintile is one-fifth of the population, rank-ordered by income (for example, top fifth).

46. Income Distribution • The top 20 percent (quintile) of U.S. households gets nearly half of all U.S. income. • The poorest 20 percent (quintile) get less than 4 percent of all income.

47. The U.S. Distribution of Income

48. Third fifth Fourth fifth Second fifth Poorest fifth Richest fifth of population The U.S. Distribution of Income

49. 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.

50. Income Share of the Rich