Chapter 3 American Free Enterprise Understanding America’s Economic Structure

Tradition of Free Enterprise The Economic Trade-off: Freedom vs. Protection Traditionally Americans have favored economic freedom over economic regulation. While we value freedom, we still expect the government to protect us from the problems that can exist in free markets. The more freedom that Americans give up in the name of public interest—the further we move away from the free market end of the continuum. All Americans act to decide when the benefits of government protection outweigh the drawbacks to free enterprise.

Rights and Roles of the American Consumer RightsRights Property Rights Contracts Taxation RolesRoles Consumer Voter

The Role of Government The Role of Government 1. Protect the Public Interest 2.Provide Information 3. Promote Growth and Stability

The Financial System Key Indicators Inflation Employment Gross Domestic Product

The main indicator used to determine overall health of the economy is gross domestic product (GDP) which is the dollar value of all final goods and services produced within a country’s borders in a given year. This will allow them to better determine upcoming business cycles to determine prosperity, recession or depression.

Limitation of GDP Non-market activities Underground economy Quality of life Other Indicators GDP vs. GNP Annual income earned by US owned firms and citizens United States GDP Source: Q Q Q Q3-0.3 United States GDP Source:

Types of Unemployment 1.Frictional Unemployment- Occurs when people change jobs, get laid off from their current jobs, take some time to find the right job after they finish their schooling, or take time off from working for a variety of other reasons 2.Structural Unemployment- Occurs when workers' skills do not match the jobs that are available. Technological advances are one cause of structural unemployment 3.Seasonal Unemployment- Occurs when industries slow or shut down for a season or make seasonal shifts in their production schedules 4.Cyclical Unemployment- Unemployment that rises during economic downturns and falls when the economy improves

Unemployment Rates A nation’s unemployment rate is an important indicator of the health of the economy. The Bureau of Labor StatisticsThe Bureau of Labor Statistics polls a sample of the population to determine how many people are employed and unemployed. unemployment rateThe unemployment rate is the percentage of the nation’s labor force that is unemployed.

Getting Everyone To Work!!!! Economists generally agree that in an economy that is working properly, an unemployment rate of around 4 to 6 percent is normal. Sometimes people are underemployed, that is working a job for which they are over- qualified, or working part-time when they desire full-time work. Discouraged workers are people who want a job, but have given up looking for one. Full employment is the level of employment reached when there is no cyclical unemployment. Other Indicators

Going….UP!!!!!!!!!! Inflation is a general increase in prices. Purchasing power, the ability to purchase goods and services, is decreased by rising prices.

To Market, To Market A price index is a measurement that shows how the average price of a standard group of goods changes over time. The consumer price index (CPI) is computed each month by the Bureau of Labor Statistics. The CPI is determined by measuring the price of a standard group of goods meant to represent the typical “market basket” of an urban consumer. What would it cost in 1925?

What is in the basket? There are over two hundred categories of products that are included in the basket. These categories fall under 8 major groups: FOOD AND BEVERAGES HOUSING APPAREL TRANSPORTATION MEDICAL CARE RECREATION EDUCATION AND COMMUNICATION OTHER GOODS AND SERVICES

Inflation Theory Quantity Theory –Too much $ in the economy Demand-Pull –Demand exceeds supply Cost-Push –Increased input costs for the supplier

Danger…Prices on the Rise High inflation is a major economic problem, especially when inflation rates change greatly from year to year. The three main problems are: –Reduced Purchasing Power –Erosion of Interest Income –Erosion of Wages/Income

How does inflation impact consumers?

How does the increase in gas prices impact the cost of other products? What theory of inflation is represented in this image?

The Financial System The United States financial system includes banks, securities exchanges, pension funds, insurers, the Federal Reserve and national regulators. These firms and institutions: –Provide infrastructure for economic transactions –Channel funds from savings to investment –Control monetary policy A sound financial system is essential for macroeconomic growth and financial stability.

Result of Instability in the Financial System 1.Diminished monetary policy 2.Prolonged economic downturn 3.Capital flight 4.Costs of “rescue” 5.Impact global markets

The Ups and Downs of American Free Enterprise

Issue Focus: The Poverty Problem

Questions to Consider  What role does the government play in fighting poverty, inflation and unemployment? How are these related issues?  What role should the government play in fighting poverty?  What government programs attempt to aid those facing poverty and/or unemployment?  Have these safety nets always existed?

The Poverty Problem  Although the free market is the most successful economic system at producing wealth—distribution is HIGHLY uneven.  The poverty threshold is an income level below what is needed to support families or households. What is the current threshold?!?!?!?!?!?!!?? POVERTY...THE FORGOTTEN STATE POVERTY...THE FORGOTTEN STATE

What factors contribute to poverty?  Lack of jobs  Lack of educational opportunities  Changes in family structure  Economic shifts  Racial and gender discrimination  Culture of poverty

Who does the government provide a safety net for?  Elderly  Disabled  Children  Poor

Welfare Programs  Welfare is a general term that refers to government aid to the poor  1930’s- Under Roosevelt the government began welfare programs to reduce the impact of the Great Depression.  1960’s- Lyndon Johnson launched the “War on Poverty”  1990’s- Clinton transformed welfare program to Temporary Assistance to Needy Families (TANF)

The Four Types of Redistribution Programs

Cash Transfers Direct payment of cash to eligible people EXAMPLES Temporary Assistance to Needy Families (TANF) Social Security Unemployment Insurance Workers Compensation

EXAMPLES Food Stamps Legal Aid Subsidized Housing In-Kind Benefits Goods and services provided by the government for free or reduced prices

Medical benefits Health insurance is provided to those that cannot provide it for themselves. EXAMPLES Medicare for the elderly and disabledMedicare for the elderly and disabled Medicaid for the poorMedicaid for the poor

Education benefits Federal, state, and local government all provide money for the poor and disabled to ensure all people receive educational opportunities. EXAMPLES Head Start Special Education Programs Need-Based College Grants

According to the U.S. Census Bureau in 2004: ~32 million Americans (11.8%) live at or below the federal poverty level - an annual income of $17,463 for a family of four ~33 million Americans live in households that are food insecure, meaning they are either hungry or at risk of hunger.

There was never a war on poverty. Maybe there was a skirmish on poverty. ~Andrew Cuomo US HUD Secretary

According to the U.S. Census Bureau: 14,812,000 people in the United States are members of working poor families. ·Of the 23.3 million needy people seeking emergency food assistance in the U.S., more than 9 million are children. 70% of poor families with children in the U.S. include a person who works.