The U.S. Economy in a Global Setting

1. The U.S. Economy in a Global Setting Chapter 3

2. Laugher Curve Frank: According to this economist, Ernie, it’s all very simple. In an endogenous business cycle where variable-span diffusion indices are neither rising nor falling and the capital-to-output ratio is low, then the interplay of liquidity preferences and reserve ratios escalates and interest rates rise, causing the yield ratio to drop on common stocks.

3. Laugher Curve Ernie: I get it! In other words, when the economy goes higgledy-piggledy, the Dow goes blooey!

4. The U.S. Economy • Ultimately the U.S. economy’s strength is its people and its other resources. • The U.S. economy is far from perfect.

5. Diagram of the U.S. Economy • The U.S. economy is divided into three groups: business, households, and government.

6. Diagram of the U.S. Economy • Households supply factors of production to business and are paid by business for doing so. The place where this takes place is called the factor market.

7. Diagram of the U.S. Economy • Business produces goods and services and sells them to households and government. The place where this takes place is called the goods market.

8. Diagram of the U.S. Economy • Government engages in the following activities: • It buys goods and services from business and buys labor services from households. • It provides services to both business and households.

9. Diagram of the U.S. Economy • Government engages in the following activities: • It gives some of its tax revenues directly back to individuals (income redistribution). • It oversees the interaction of business and households in the goods and factor markets.

10. Diagram of the U.S. Economy

11. Business • Business is the name given to private producing units in our society. • Businesses decide what to produce, how much to produce, and for whom to produce it. • Business is responsible for over 80 percent of U.S. production.

12. Entrepreneurship and Business • Entrepreneurship is the ability to organize and get something done. • It is an important part of business, and an important ingredient in the economy.

13. Consumer Sovereignty and Business • Although businesses decide what to produce, they are guided by consumer sovereignty. • Consumer sovereignty means that consumers’ wishes rule what is produced by businesses.

14. Consumer Sovereignty and Business • Before deciding to start a business, the key question is: "Can I make a profit?" Profit is what’s left over from total revenues after all the appropriate costs have been subtracted.

15. Consumer Sovereignty and Business • By channeling the desire to make a profit for the general good of society, the U.S. economic system allows the invisible hand to work.

16. Forms of Business • There are three major types of businesses: sole proprietorships, partnerships, and corporations.

17. Partnerships (7%) Sole proprietorships (5%) Corporations (20%) Partnerships (6%) Forms of Business By Numbers By Receipts Sole proprietorships (73%) Corporations (89%)

18. Sole Proprietorship • Businesses that have only one owner. • Advantages: • Minimum bureaucratic hassle. • Direct control by owner. • Disadvantages: • Limited ability to get funds. • Unlimited personal liability.

19. Partnership • Businesses with two or more owners. • Advantages: • Ability to share work and risks. • Relatively easy to form. • Disadvantages: • Unlimited personal liability (even for partner's blunder). • Limited ability to get funds.

20. Corporation • Businesses that are treated as a person and are legally owned by their stockholders who are not liable for the actions of the corporate "person."

21. Corporation • Advantages: • No personal liability. • Increasing ability to get funds. • Ability to shed personal income and gain added expenses.

22. Corporation • Disadvantages: • Legal hassle to organize. • Possible double taxation of income. • Monitoring problems.

23. Finance and Business • The dynamic stock market allows initial public offerings (IPOs) to quickly amass capital and to make their owners rich. • It is difficult to over emphasize the importance of e-commerce and the digital economy.

24. Households • Households are a single person or groups of related or unrelated persons living together and making decisions. • In the economy, households vote with their dollars.

25. The Power of Households • Households ultimately control the other two economic institutions – government and business.

26. The Power of Households • In many spheres of the economy households are not active producers of output but merely passive recipients of income.

27. Households as Suppliers of Labor • The largest source of household income is wages and salaries. • Households supply the labor with which businesses produce and government governs.

28. Households as Suppliers of Labor • The jobs trend toward more service-related jobs away from manufacturing is continuing. The fastest gains are in services while the fastest declining are in manufacturing and agriculture.

29. Government • Two general roles of government are: • An actor – collects money in taxes and spends that money on its own projects, such as defense and education. • A referee – sets the rules that determine relations between businesses and households.

30. Government as an Actor • All levels of government consume about 20 percent of the nation’s total output and employ about 21 million persons.

31. State and Local Government • State and local government employ 18 million workers and spend about $1 trillion per year. • They spend their tax revenues on administration, education, and roads.

32. Insurance trust revenue 18% Sales or gross 14% receipts Individual and corporation income 18% tax 21% Property tax Intergovernmental Other 14% 15% Income of State and Local Government

33. Central government 11% administration 6% 2% Transportation 12% Civilian safety 23% Education 10% Public welfare Health and hospitals Other 36% Expenditures of State and Local Government

34. Federal Government • Income taxes make up 53 percent of the federal government’s revenue, while payroll taxes make up about 40 percent. • The two largest categories of spending are income maintenance and defense.

35. 8% 11% Individual income taxes Social insurance taxes and contributions Corporate income 48% taxes Excise taxes and 33% other Income of the Federal Government

36. 14% 13% 4% Interest 19% Health and education Income security National defense Other 50% Expenditures of the Federal Government

37. Government as a Referee • Government controls the interaction of households and business • It sets the rules of interaction and acts as a referee, changing the rules when it sees fit. • It decides whether the invisible hand will be allowed to operate freely.

38. The Global Setting • International issues must now be taken into account in just about any economic decision a country or a firm faces.

39. Global Corporations • Those with substantial operations on both the production and sales sides in more than one country are becoming increasingly important.

40. Global Corporations • Global corporations offer great benefits for nations. • Global corporations create jobs, bring new ideas and new technologies to a country, and provide competition for domestic companies, keeping them on their toes.

41. Global Corporations • Global corporations pose a number of problems for governments. • Because a global corporation exists in a number of nations, no single government regulates or controls it. • If they don’t like the policies of the host nation, they can simply leave taking their jobs with them.

42. Global Corporations • Global corporations sometimes act as governments unto themselves – they can dominate the economy of a small nation.

43. International Trade • Sometimes international trade has grown rapidly • Other times it has grown slowly.

44. International Trade • Fluctuations in world trade result in part from fluctuations in world output. Fluctuations are also explained in part by trade restrictions that nations have imposed from time to time.

45. Differences in the Importance of Trade • The importance of international trade to countries’ economies differs widely. • For most nations, imports and exports roughly correspond.

46. What and With Whom the U.S. Trades • The primary trading partners of the U.S. are Canada, Mexico, the European Union, and Pacific Rim countries. • The majority of U.S. exports and imports involve manufactured goods.

47. What and With Whom the U.S. Trades • U.S. imports have exceeded exports in recent years leading the balance of trade to show a trade deficit rather than a trade surplus.

48. What and With Whom the U.S. Trades • Balance of trade – the difference between the value of exports and the value of imports

49. What and With Whom the U.S. Trades • Trade deficit – an excess of imports over exports. Tradesurplus – an excess of exports over imports.

50. Mexico 21% Canada 6% 12% OPEC Central and South America Pacific Rim 27% 23% Other Europe 8% 3% European Union U.S. Exports by Region, 1999