The U.S. and Global Economies

1. 2 The U.S. and Global Economies CHAPTER • Famous economics majors • Mick Jagger • Tiger Woods • Kenneth Lay • Paul Newman • Cate Blanchett • Ronald Reagan • Sandra Day-O'Connor

2. C H A P T E R C H E C K L I S T • When you have completed your study of this chapter, you will be able to • 1Describe what, how, and for whom goods and services are produced in the United States. • 2 Use the circular flow model to provide a picture of how households, firms, and governments interact. • 3 Describe what, how, and for whom goods and services are produced in the global economy.

3. 2.1 WHAT, HOW, AND FOR WHOM? • What Do We Produce? • We divide the vast array of goods and services produced into: • Consumption goods and services • Capital goods • Government goods and services • Export goods and services

4. 2.1 WHAT, HOW, AND FOR WHOM? • Consumption goods and services are goods and servicesthat are bought by individuals and used to provide personal enjoyment and contribute to a person’s standard of living. • Examples are movies and Laundromat services. • Capital goods are goods that are bought by businesses to increase their productive resources (or goods produced in order to produce other goods). • Examples are cranes and trucks.

5. 2.1 WHAT, HOW, AND FOR WHOM? • Government goods and services are goods and servicesthat are bought by governments. • Examples are missiles, bridges, and police protection. • Export goods and services are goods and services produced in one country and sold in other countries. • Examples are airplanes produced by Boeing and Citicorp banking services sold to China.

6. 2.1 WHAT, HOW, AND FOR WHOM? Figure 2.1(a) shows the relative magnitudes of the goods and services produced in 2005: Consumption 60% Capital goods 14% Export goods 10% Government 16%

7. 2.1 WHAT, HOW, AND FOR WHOM? • Figure 2.1(b) shows the largest six types of services produced in 2007, And the largest four types of goods produced.

8. 2.1 WHAT, HOW, AND FOR WHOM? • How Do We Produce? • Factors of productionare the productive resources used to produce goods and services. • Factors of production are grouped into four categories: • Land • Labor • Capital • Entrepreneurship

9. 2.1 WHAT, HOW, AND FOR WHOM? • Land • Land includes all the “gifts of nature” that we use to produce goods and services. All the things we call natural (not man-made) resources. • Land includes minerals, water, air, wild plants, animals, birds, fish, farmland and forests.

10. 2.1 WHAT, HOW, AND FOR WHOM? • Labor • Labor is the work time and work effort that people devote to producing goods and services. • The quality of labor depends on how skilled people are—what economists call human capital. • Human capitalis the knowledge and skill that people obtain from education, on-the-job training, and work experience.

11. 2.1 WHAT, HOW, AND FOR WHOM? • Figure 2.2 shows measures of human capital and how they have changed since 1910.

12. 2.1 WHAT, HOW, AND FOR WHOM? • Capital • Capital consists of tools, instruments, machines, buildings, and other items that have been produced in the past and that businesses now use to produce goods and services (goods produced to produce other goods). • Capital includes office buildings, bulldozers, pizza delivery trucks, factories, machinery and computers. (Capital does not include money, stocks, and bonds. They are financial resources.)

13. 2.1 WHAT, HOW, AND FOR WHOM? • Entrepreneurship • Entrepreneurship is the human resource that organizes labor, land, and capital. • Entrepreneurscome up with new ideas about what and how to produce, make business decisions, and bear the risks that arise from these decisions. • Bill Gates, Donald Trump, the developers of Amazon.com, eBay and Facebook, the owners of the new video store in a small town and the local florist shop.

14. 2.1 WHAT, HOW, AND FOR WHOM? • For Whom Do We Produce? Owners of the factors of production are paid incomes: RentIncome paid for the use of land. WagesIncome paid for the services of labor. InterestIncome paid for the use of capital. Profit (or loss) Income earned by an entrepreneur for running a business.

15. 2.1 WHAT, HOW, AND FOR WHOM?

16. 2.1 WHAT, HOW, AND FOR WHOM? Functional distribution of income is the percentage distribution of income among the factors of production. Personal distribution of income is the percentage distribution of income among individual persons.

17. 2.1 WHAT, HOW, AND FOR WHOM? Figure 2.3(a) shows the functional distribution of income: • Wages 64% Rent, interest, and profit 36%

18. 2.1 WHAT, HOW, AND FOR WHOM? Figure 2.2(b) shows the personal distribution of income: The poorest 20% earned only 3% of total income. The richest 20% earned 50% of total income.

19. 2.2 THE CIRCULAR FLOWS • Circular flow model is a model of the economy that shows: • The circular flow of expenditures and incomes that result from decision makers’ choices and • The way those choices interact in markets to determine what, how, and for whom goods and services are produced.

20. 2.2 THE CIRCULAR FLOWS • Households and Firms • Households are individuals or people living together as decision-making units. • Firms are institutions that organize production of goods and services.

21. 2.2 THE CIRCULAR FLOWS • Markets • A market is any arrangement that brings buyers and sellers together and enables them to get information and do business with each other. • Factor marketsare markets in which factors of production are bought and sold. • Goods marketsare markets in which goods and services are bought and sold.

22. 2.2 THE CIRCULAR FLOWS • Real Flows and Money Flows • In factor markets: • Households supply (sell) factors of production • Firms hire (buy) factors of production. • In goods markets: • Firms supply goods and services produced. • Households buy goods and services.

23. 2.2 THE CIRCULAR FLOWS • Real Flows and Money Flows • These are the real flows in the economy. • Money flows run in the opposite direction to the real flows.

24. 2.2 THE CIRCULAR FLOWS • Real Flows and Money Flows • Firms pay households incomes for the services of factors of production. • Households pay firms for the goods and services they buy. • These are the money flows. • Blue flows are incomes. • Red flows are expenditures.