The U.S. Economy: A Global View Chapter 2 Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2-2 The U.S. Economy Economic outcomes vary greatly across nations –WHAT goods and services does the United States produce? –HOW is that output produced? –FOR WHOM is the output produced?

2-3 What America Produces The U.S. has 12 percent of the world’s arable land and less than 5 percent of the world’s population The U.S. produces more than 20 percent of the world’s output

2-4 Gross Domestic Product Gross Domestic Product (GDP): The total market value of all final goods and services produced within a nation’s borders in a given time period

2-5 Comparative Output The market value of output (GDP) is a basic measure of an economy’s size. Source: From World Development Report

2-6 Per Capita GDP Per Capita GDP: The dollar value of GDP divided by total population; average GDP –Output per person in an economy if all output were divided up evenly across the population Economic growth: An increase in output (real GDP); an expansion of production possibilities

2-7 GDP Per Capita Around the World Per capita GDP is a measure of output that reflects average living standards. Source: From World Development Report

2-8 Growth in Per Capita GDP To attain growth in GDP per capita, the economy needs a higher rate of GDP growth than population growth –U.S. output has grown by roughly 3 percent per year –U.S. population grows by about 1 percent per year

2-9 U.S. Output and Population Growth The growth of output in the United States has greatly exceeded population growth.

2-10 GDP Growth vs Population Growth Average Growth Rate (2000–2007) of GDP Population Per Capita GDP High-income countries United States Canada Japan France Low-income countries China India Madagascar Niger Haiti Ivory Coast Zimbabwe Zambia Populations of rich countries are growing slowly, and gains in per capita GDP are easily achieved. In the poorest countries, population is still increasing rapidly, making it difficult to raise living standards. Source: From World Development Report,

2-11 The Mix of Output The mix of output includes goods and services –A century ago, about two-thirds of U.S. output consisted of goods while one-third of output consisted of services. –Today, nearly 75 percent of U.S. output now consists of services, not goods.

2-12 The Changing Mix of Output 1800 Services Agriculture Manufacturing, mining and construction Percent of employment

2-13 Development Patterns The transformation of the U.S. into a service economy is a reflection of high incomes Citizens in poor countries don’t have enough income to buy many services, so production is weighted toward goods

2-14 How America Produces Production in every nation depends on its available resources Differences in GDP across countries is explained by HOW those resources are used

2-15 Factors of Production Factors of production: Resource inputs used to produce goods and services –Land –Labor –Capital –Entrepreneurship

2-16 Human Capital Human capital: The knowledge and skills possessed by the workforce –High school graduation rates in the U.S. are over 85 percent –In many less developed countries, only 1 out of 2 youths attend high school

2-17 The Education Gap Between Rich and Poor Nations The high productivity of the American economy is explained in part by the quality of its labor resources. Workers in poorer, less developed countries get much less education and training. Source: From World Development Indicators,

2-18 Capital Stock America has accumulated a massive stock of capital, including machinery, factories, and buildings Capital-intensive: Production processes that use a high ratio of capital to labor inputs

2-19 High Productivity Productivity: Output per unit of input, such as output per labor hour The high productivity of the U.S economy results from using highly educated workers in capital-intensive production processes

2-20 Factor Mobility Our continuing ability to produce also depends on our agility in reallocating resources Land, labor, capital, and entrepreneurship move from one industry to another in response to changing demands and technology

2-21 Technological Advance Technological Advance: Finding new and better ways to produce goods and services Whenever technology advances, an economy can produce more output with existing resources

2-22 Outsourcing and Trade Advancing technology facilitates global resource use Outsourcing allows U.S. workers to pursue their comparative advantage in high-skill, capital-intensive jobs

2-23 Economic Freedom and Growth As nations become freer, relying more on markets and less on government, GDP growth is enhanced Government plays a critical role in establishing a framework in which private business can operate

2-24 Role of Government Providing a Legal Framework Protecting the Environment Protecting Consumers Protecting Labor

2-25 Providing a Legal Framework One of the most basic functions of government is to establish and enforce the rules of the game By establishing ownership rights, contract rights, and other rules, the government lays the foundation for market transactions

2-26 Protecting the Environment Externalities: Costs (or benefits) of a market activity borne by a third party To reduce the external costs of production, the government limits air, water, and noise pollution, and regulates environmental use

2-27 Protecting Consumers The government prevents individual firms from becoming too powerful –Monopoly: A firm that produces the entire market supply of a particular good or service The government also regulates product safety

2-28 Protecting Labor The government regulates how labor resources are use in the production process –In the United States, child labor laws prevent minor children from being exploited Government regulations also set standards for workplace safety, minimum wages, fringe benefits, and overtime provisions

2-29 Striking a Balance Government interventions are designed to change the way resources are used Government failure might replace market failure, leaving us no better off and possibly worse off

2-30 For Whom America Produces How many goods and services one gets largely depends on how much income one has to spend

2-31 U.S. Income Distribution Income quintile: One-fifth of the population, rank-ordered by income The top 20 percent (quintile) of U.S. households get half of all U.S. income The poorest 20 percent (quintile) get less than 4 percent of all income

2-32 U.S. Distribution of Income Income Quintile 2007 Income Average Income Share of Total Income (%) Highest fifth above $100,000 $168, Second fifth $62,000 – 100,000 $ 79, Third fifth $39,000 – 62,000 $ 50, Fourth fifth $20,000 – 39,000 $ 29, Lowest fifth $0 – 20,000 $ 12, Source: U.S. Department of Commerce, Bureau of the Census

2-33 Global Inequality Income disparities are greater in many other countries Poor people in the United States receive more goods and services than the average household in most low-income countries

2-34 Income Share of the Rich Source: From World Development Indicators,

2-35 Ending Global Poverty Over 3 billion people still live in poverty The World Bank has ambitious goals for 2015 –Reduce poverty and hunger by one-half –Achieve universal primary education –Reduce child and maternal mortality by two-thirds –Reduce by half the number of people without access to potable water

2-36 Ending Global Poverty People in rich countries also aspire to higher living standards The challenge is to find the right balance between market and government forces

The U.S. Economy: A Global View End of Chapter 2 Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin