U.S. and Global Economies

2 U.S. and Global Economies CHECKPOINTS

Checkpoint 2.3 Checkpoint 2.1 Checkpoint 2.2 Clicker version Clicker version Clicker version Problem 1 Problem 1 Problem 1 Clickerversion Problem 2 Problem 2 Clicker version Problem 2 Problem 3 Clicker version Problem 4 Clickerversion Problem 5

Practice Problem 1 Name the four broad categories of goods and services that we use in economics, provide an example of each, and say what percentage of total production each accounted for in 2009. CHECKPOINT 2.1

Solution The four categories are Consumption goods and services—a shirt and a haircut—were 62 percent of total production. Capital goods—an oil rig—were 10 percent of total production. Government goods and services—highway and police protection—were 18 percent of total production. Export goods and services—computer chips and banking services sold to Ireland—were 10 percent of total production. CHECKPOINT 2.1

Study Plan Problem One of the four broad categories of goods and services that we use in economics is _______, of which _______ is an example. This category accounted for _____ percent of total production in 2009. A. export goods and services; a car sold to India; 5 B. capital goods; an apartment; 60 C. consumption goods and services; a shirt; 62 D. consumption goods and services; a gas station; 62 E. capital good; banking services; 25 CHECKPOINT 2.1

Practice Problem 2 Name the four factors of production and the incomes they earn. Solution The factors of production are land, labor, capital, and entrepreneurship. Land earns rent. Labor earns wages. Capital earns interest. Entrepreneurship earns profit or incurs a loss. CHECKPOINT 2.1

Study Plan Problem The four factors of production are ________ and they earn ________. A. labor, land, capital, and entrepreneurship; wages, interest, profit, and rent respectively B. land, capital, labor, and human capital; interest, profit, wages, and rent respectively C. capital, entrepreneurship, labor, and human capital; rent, wages, interest, and profit respectively D. entrepreneurship, land, labor, and capital; profit, rent, wages, and interest respectively CHECKPOINT 2.1

Practice Problem 3 Distinguish between the functional distribution of income and the personal distribution of income. Solution The functional distribution of income shows the percentage of total income received by each factor of production. The personal distribution of income shows the percentage of total income received by households. CHECKPOINT 2.1

Study Plan Problem The functional distribution of income shows the distribution of income among ______ and the personal distribution of income shows the distribution of income among ______. A. firms; households according to age B. factors of production; households C. firms and households; individuals D. different types of workers; households according to location CHECKPOINT 2.1

Practice Problem 4 In the United States, which factor of production earned the largest share of income in 2008 and what percentage did it earn? Solution Labor is the factor of production that earns the largest share of income in the United States. In 2008, labor earned 65 percent of total income. CHECKPOINT 2.1

Study Plan Problem In the United States, which factor of production earned the largest share of income in 2008 and what percentage did it earn? The factor of production was ______ and it earned ______ percent of total income in 2008. A. capital; 65 B. entrepreneurship; 36 C. labor; 65 D. land; 36 CHECKPOINT 2.1

CHECKPOINT 2.1 • Practice Problem 5 • What microloans miss • Muhammad Yunus (along with Grameen Bank) was awarded the Nobel Peace Prize in 2006. Yunus has said that “all people are entrepreneurs” and that microloans will pull poor people out of poverty. Only 14 percent of Americans are entrepreneurs while almost forty percent of Peruvians are. • Source: James Surowiecki, The New Yorker, March 17, 2008 • With only 14 percent of Americans earning their income from entrepreneurship, from what factor of production do most Americans earn their income? What is that income called? • Why do you think so many people in Peru are entrepreneurs?

CHECKPOINT 2.1 • Solution • Most Americans earn their income from labor and the income they earn is called a wage. • Peru is a poor country in which jobs are more limited than in the United States. So to earn an income, many people are self-employed and work as small entrepreneurs.

Practice Problem 1 Describe what, how, and for whom goods and services are produced in developing economies. CHECKPOINT 2.2

Solution In developing countries: Agriculture is the largest percentage, manufacturing is an increasing percentage, and services are important but a small percentage of total production. Most production does not use modern capital-intensive technologies, but some industries do. People who are willing and can find jobs in factories experience increasing income, while those who work in rural industries are left behind. CHECKPOINT 2.2

CHECKPOINT 2.2 • Practice Problem 2 • Success story: Rwandan coffee farmers • The Clinton Foundation loaned $23,000 to Misozi to support improvements to coffee washing stations and provided technical support. • Source: The Clinton Foundation • What was the source of the success?

CHECKPOINT 2.2 • Solution • Misozi growers improved their knowledge of coffee farming and increased their human capital. • They also improved the operation of their washing stations.

Practice Problem 1 What are the real flows and money flows that run between households, firms, and governments in the circular flow model? CHECKPOINT 2.3

Solution The real flows are The services of factors of production that flow from households to firms through factor markets The goods and services that flow from firms to households and from firms to governments through goods markets The money flows are Factor incomes Household and government expenditures on goods and services, taxes, and transfers CHECKPOINT 2.3

Study Plan Problem In the circular flow model, the real flows are_______ that flow from households to firms through _______ markets and _______ that flow from firms to households and governments through _______ markets. A. the services of factors of production; factor; the goods and services; goods B. consumption goods; financial; the services of factors of production; factor C. government goods; goods; labor services; financial D. payments; financial; capital goods; goods CHECKPOINT 2.3

Practice Problem 2 Global slump crimps U.S. exports The Commerce Department reports that export orders in the second half of 2008 fell by almost $35 billion while U.S. consumers slashed their spending. Source: USA Today, February 11, 2009 Where, in the circular flow model, do these choices appear? CHECKPOINT 2.3

Solution The fall in U.S. exports is a decrease in the expenditure flow from the rest of the world to the U.S. economy through goods markets. The cut in U.S. consumer spending is a decrease in the expenditure flow from U.S. households to U.S. firms through goods markets. CHECKPOINT 2.3

U.S. and Global Economies