PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 The Economy: Myth and Reality E pluribus unum (Out of many, one) MOTTO ON U.S. CURRENCY © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The American Economy U.S. economy –Biggest national economy –Population: over 300 million Working population: 145 million –Very rich country –High efficiency Productivity –$46,000 per person –$100,000 per worker 2 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The American Economy Inputs / factors of production –Labor, machinery –Buildings, natural resources –Used to make outputs Outputs –Goods and services –Consumers and others want to acquire 3 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The American Economy U.S. = private-enterprise economy America’s economic success –Free markets –Private enterprise –“Land of opportunity” –Most “privatized” economy –Most “marketized” economy 4 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The American Economy Gross domestic product (GDP) –Measure of the size of the economy –Total amount it produces in a year Real GDP –Adjusted GDP For changes in purchasing power of money [for inflation] 5 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The American Economy U.S. = relatively :closed” economy –Exports: $1.5 trillion –Imports: $2 trillion –Exports and imports: 12% of GDP Relatively open economy –Exports & imports – large share of GDP Relatively closed economy –Exports & imports – small share of GDP 6 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 1 Share of U.S. Gross Domestic Product (GDP) Exported and Imported, 1959– © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Table 1 Openness of Various National Economies, © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The American Economy U.S. = growing economy –2009 GDP = $14 trillion –2009 GDP per capita = $46, times higher in 2009 than in 1960 –Purchasing power: increased nearly 600% over the entire twentieth century 9 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 2 Real Gross Domestic Product (GDP) since © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The American Economy U.S. = bumps along the growth path Economic fluctuations –Alternating periods of good and bad times –Business cycles Recession –Period of declining economic activity –Total output falls 11 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 3 The Growth Rate of Real Gross Domestic Product (GDP) in the United States since © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The American Economy GDP growth rate –Percentage change from one year to the next Unemployment rate –Varies considerably from one year to the next 13 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 4 The Unemployment Rate in the United States since © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Inputs: Labor and Capital American workforce – composition –145 million –54% men –46% women –3.4% teenagers (5 million) –Expanding role of women 15 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 5 The Composition of Employment by Sex, 1950 and © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 6 Working Women as a Percentage of the Labor Force, 1960 versus © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 7 Teenage Employment as a Percentage of Total Employment, 1950– © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Inputs: Labor and Capital American workforce –Produce mostly services –68% - employed by private service industries 16.5 million: educational and health services 17.7 million: business and professional services 15 million: retail trade –14% - produced goods 12 million people [a third of them in offices] 19 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 8 Civilian Non-Farm Payroll Employment by Sector, Nov © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Inputs: Labor and Capital American workforce –Government: 22 million people Federal civilian employment: 2.8 million Armed forces: 2.4 million men and women in uniform State and local governments: 19.5 million –Farms: 2 million people –Self-employed: 9 million Shift to services: Information age 21 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 9 The Growing Share of Service Sector Jobs, 1967 versus © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Inputs: Labor and Capital American workforce – earnings –Wages: 70% of income –Average hourly wage: $19 Plus fringe benefits [health insurance and pensions] –Average weekly paycheck: $740 Capital [business assets] –$30 trillion –Average rate of return: 10% 23 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 10 Average Hourly Compensation Rates in Manufacturing, © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Outputs Consumer spending – 70% of GDP –Households 68% of budget – on services –Housing, health care –Phone bills: $140 billion –Personal care products and services: $71 billion –Doctors: $90 billion 32% of budget – on goods –Motor vehicles: $313 billion –Shoes: $40 billion 25 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Outputs Non-consumption uses – 30% of GDP –Government services Airplanes, guns, and the services of soldiers, teachers, and bureaucrats –Business purchases of machinery and industrial structures –Consumer purchases of new houses 26 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Central Role of Business Firms 27.5 million business firms –10% fail each year Multinational corporations Competition –Key to industrial efficiency 27 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Government Markets –Places where goods and services are bought and sold –Concrete physical locations –Abstract places Firms –Sell goods & services Outputs markets; receive receipts –Use resources Inputs markets; pay for resources 28 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Government Consumers –Buy goods and services Outputs markets Expenditures –Sell resources Inputs markets Receive income 29 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 11 The Circular Flow of Goods and Money 30 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Government Role of government 1.Making and enforcing the laws 2.Regulating business 3.Providing certain goods and services such as national defense 4.Levying taxes to pay for these goods and services 5.Redistributing income 31 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Government 1.Making & enforcing laws –Rule maker, Referee, Arbitrator –Congress and state and local legislatures Pass the laws that define the rules of the economic game –Executive branches Share the responsibility for enforcing them –The courts Interpret the laws and adjudicate disputes 32 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Government 2.Regulating business –Antitrust laws Protect competition against possible encroachment by monopoly –Promote social objectives Environmental regulations 33 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Government 3.Providing certain goods & services –Federal spending, fiscal year 2009: $3.5 trillion 34%: pensions & income security programs 20%: national defense; 25%: health care Interest on national debt Education, Transportation, Agriculture Housing, Foreign aid –State and local spending: $2.0 trillion 34 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 12 The Allocation of Government Expenditures, © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Government 4.Levying taxes –Pay for these goods and services –Income & payroll taxes –Sales taxes, Property taxes –Gasoline taxes –Liquor taxes –Telephone taxes 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 13 The Tax Burden in Selected Countries, © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Government 5.Redistributing income –Reduce income inequality –Taxes –Transfer payments –Progressive taxation –Antipoverty programs 38 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Government Transfer payments –Sums of money Received by certain individuals –Outright grants from government –Not payments for services Progressive taxation –Ratio: taxes to income Rises as income rises 39 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

It’s a Mixed Economy Mixed economy –Some public influence over the workings of free markets –Some public ownership mixed in with private property 40 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.