The U.S. Economy

1. The U.S. Economy

2. Gross Domestic Product (GDP) • Gross Domestic Product (GDP) is the total value of final goods and services produced within a nation’s borders in a given time period. • It is a summary measure of a nation’s output.

3. International Comparisons • With just 5% of the world’s population, the U.S. economy produces over 20% of the entire planet’s output. • The U.S. economy is two and a half times larger than Japan’s, the world’s third-largest.

4. International Comparisons • The U.S. economy is twelve times larger than Mexico’s. • U.S. output exceeds by a wide margin the combined production of all countries in Africa and South America.

5. How Much Output Nations Produce

6. Per Capita GDP • Per capita GDP is total GDP divided by total population: average GDP. • It is an indicator of how much output each person would get if all output were divided evenly among the population.

7. Per Capita Incomes Around the World (2004)

8. Historical Comparisons • People who the U.S. government currently classifies as poor: • Enjoy a much higher living standard than the human masses in Third World nations. • Are also more comfortable than the average American family was in the 1950s.

9. Consumer Goods • Consumer goods account for two-thirds of total U.S. output. • There are three types of consumer goods: • Durable goods • Nondurable goods • Services

10. Consumer Goods • Durable goods - expected to last three years. • They tend to be big-ticket items like cars, appliances, and furniture. • Purchases of durable goods are often cyclical, that is, very sensitive to economic trends.

11. Consumer Goods • Nondurable goods - items that are bought frequently. • They include clothes, food, and gasoline. • Services - the largest and fastest- growing component in consumption. • Over half of all consumer output consists of medical care, entertainment, utilities, and other services.

12. Investment Goods • Investment goods are used: • To replace worn-out equipment and factories, thus maintaining our production possibilities. • To increase and improve our stock of capital, thereby expanding our production possibilities.

13. Government Services • Federal, state, and local governments purchase resources to police the streets, teach classes, write laws, and build highways. • These resources are not available for consumption or investment.

14. Growth of Services • America has largely become a service economy. • Total service industries (including government) generate over 70% of total output. • Between 2005 and 2115, 98% of net job growth will be in service industries.

15. Growth in Trade • Increasing globalization of the U.S. economy is likely to continue due to: • Removal of trade barriers. • Advances in communications and transportation technologies. • Increased consumption of services.

16. How America Produces • International trade has also affected HOW goods and services are produced. • Factors of Production - resource inputs used to produce goods and services, e.g., land, labor, capital, entrepreneurship.

17. Factors of Production • The U.S. has ample resources to produce goods and services: • Third-largest population in the world. • World’s fourth-largest land area. • Profuse natural resources (e.g., oil, fertile soil, hydropower).

18. Business Organization • The three different legal organizations: • Corporations - owned by many individuals, each of whom owns shares (stock) of the corporation. • Partnerships - owned by a small number of individuals. • Proprietorships - owned by one individual.

19. Corporate America • Corporations tend to be much larger than other businesses and produce the largest portion of GDP. • Proprietorships are the most numerous but produce a small portion of GDP.

20. Government Regulation • Government plays a large role in deciding WHAT, HOW, and FOR WHOM goods are produced by: • Providing a Legal Framework • Protecting Consumers • Protecting Labor • Protecting the Environment

21. Providing a Legal Framework • By establishing ownership rights, contract rights, and other rules of the game, the government lays the foundation for market transactions.

22. Protecting Consumers • The government tries to protect consumers from a monopoly: • Monopoly - a firm that produces the entire market supply of a particular good or service. • Antitrust laws prohibit mergers or acquisitions that threaten competition.

23. Protecting Consumers • The U.S. Department of Justice and the Federal Trade Commission also regulate pricing practices and advertising claims. • The government ensures the safety of products by requiring testing of new drugs, food additives, and other products.

24. Protecting Labor • Child labor laws prevent the exploitation of children. • Labor has the right to organize and set rules for union-management relations.

25. Protecting the Environment • Historically the environment was not protected. • Decisions on how to produce were based on costs alone, not on how the environment is affected. • This resulted in air, water, and noise pollution.

26. Protecting the Environment • Without government intervention, these side effects of production would be common. • Decisions on how to produce would be based on private costs alone, not on how the environment is affected.