Macroeconomics

1. Macroeconomics Unit 2 The U.S. Economy: A Global View Top Five Concepts ©2007, 2005 by E.H. McKay III Some images ©2004, 2003 www.clipart.com

2. Concept 1: Gross Domestic Product (GDP) The 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. The GDP is stated as a dollar value ($). United States has the world’s largest annual GDP (over $12.5 trillion in 2005). China is the next largest economy in terms of GDP (over $8.6 trillion in 2005). Did you know that most of the output (GDP) produced in the U.S. is for the service sector? It’s true – almost 75% of the total output consists of services!

3. Concept 2: Per Capita GDP Per capita GDP is the dollar value of GDP divided by the total population of the country being measured. It indicates how much output the average person would get if all output was divided evenly among the population.

4. GDP Comparisons The U.S. has the largest per capita GDP ($41,950) China had the second largest dollar amount of GDP, but on a per capita basis, China was one of the lowest (6,600). Canada’s per capita GDP position and high levels of GDP are second only to the United States (see page 28 in the textbook). Any country with a small population and higher GDP will have a higher per capita GDP.

5. GDP Growth U.S. GDP growth has averaged 3% a year. U.S. population growth has averaged 1% a year. High population growth rates can adversely affect GDP per capita growth. For example, a country with a population growth rate of 5% or more that also has a GDP growth rate of 3% will have declining per capita GDP numbers. The growth in GDP is not keeping up with the population growth.

6. Mix of Output Within the U.S. almost 75% of all output (GDP) consists of services, not goods. About 70% of all output in the U.S. is produced for consumers. This trend is expected to continue into the future as the service sector of the economy grows faster than the other sectors (agriculture; manufacturing, mining, and construction). Future job growth will occur mostly in the service sector (education, health care, engineering, accounting, financial services, etc.).

7. Major Uses of Output Total output (GDP) is divided into four categories: • Consumption – Goods and services produced for consumer consumption. 70% of total output. • Investment – Plant, machinery, equipment, and structures produced for the business sector. 17% of total output.

8. Major Uses of Output • Government Services – Federal, state, and local purchases. 19% of total output. Federal purchases account for 7% while state and local account for 12%. Does not include income transfers. • Net Exports – Defined as the value of all exports minus the value of all imports. - 6% of total output. The negative value indicates that we are importing more goods and services than we are exporting.

9. Concept 3: Comparative Advantage Comparative advantage is defined as the ability of a country to produce a specific good at a lower opportunity cost than its trading partner. Simply put, a country will purchase a good or service from another country if the amount of resources necessary to produce the good are too high domestically. Countries seek to import goods with high opportunity costs and export goods with low opportunity costs.

10. Concept 3: Comparative Advantage For example, very little coffee is grown in the U.S. because of our climate and cost of labor. Hawaii is the largest producer of coffee in the U.S. However the opportunity cost of growing more coffee is too high (tourism, vacation resorts, environmental issues) to grow more coffee in Hawaii. Smaller countries can compete in the world market by specializing in a good or service.

11. Concept 4: Productivity Productivity is defined as the output per unit of input. It is frequently measured using labor or technological benchmarks. Higher productivity can be obtained by improving worker skills, improving technology, additional management training, efficient distribution systems. Productivity is positively impacted by capital-intensive processes.

12. Concept 4: Productivity A capital-intensive process is a production process that uses a high ratio of capital to labor inputs. For example the U.S. auto industry is a capital intensive industry. Industries where significant capital investments have made an impact include agriculture and computer manufacturing. Productivity can also be improved by investing in human capital.

13. Productivity And what is human capital? It is the knowledge and skills possessed by the work force. This includes the amount of education, training, and experience the workforce contains. Higher productivity is derived from using highly educated workers in capital-intensive production processes. Increasing the number and quality of high school and college graduates improves human capital and the productivity of the work force.

14. Concept 4: Productivity An important concern with our economy is the ability to shift resources from one industry to another. This ability is called factor mobility. Factor mobility is the ability to reallocate resources from one industry to another and the ease at which workers and other resources can move from one industry to another. Workers who have received more education and training in many areas have a greater opportunity to move into faster growing parts of our economy.

15. Productivity Other methods to achieve economic growth includes the use of technological advances to increase output by using existing resources. The government has a role in ensuring that market freedom continues to exist; when producers are subject to less regulation and taxation, greater economic growth can occur. Government regulation should provide the framework for business to operate and protect the workers, consumers and environment.

16. Concept 5: Externalities Externalities are costs or benefits of a market activity paid for or allocated to a third party. For example a company that produces paper may pollute a nearby river and destroy fishing and other recreational activity. Recreational activities in the area no longer exist because of the externality of pollution. This is a negative externality.

17. Concept 5: Externalities An example of a positive externality is sharing some of the knowledge you obtained from this economics course with a friend or spouse. The additional knowledge they receive did not “cost” them anything. Another example is getting a flu shot to prevent the flu and then being able to work while others are sick.

18. U.S. Income Distribution Inequitable distribution of income exists in the U.S. and all countries using a form of capitalism. In the U.S. and many capitalistic countries, resources are distributed to society based upon incomes. The determination of income is based upon the economic value of the work performed. A dentist performs a service which is deemed to have a higher value than a trash collector, therefore the dentist receives a higher level of income.

19. Income Inequality Income inequality also occurs because different jobs require different skills and abilities. Many economists argue having income inequality is desirable because it gives people incentives to work harder and obtain a higher level of knowledge and skills. Without income inequality, why would many people want greater work skills and responsibility if they did not receive any additional financial incentives?

20. Summary The five major concepts from this unit were: • GDP and its components • Per Capita GDP • Comparative Advantage • Productivity • Externalities