The U.S. and Global Economies

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The U.S. and Global Economies
CHAPTER
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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

Describe what, how, and for whom goods and
services are produced in the United States.
Use the circular flow model to provide a picture
of how households, firms, and governments
interact.
Describe what, how, and for whom goods and
services are produced in the global economy.
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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

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2.1 WHAT, HOW, AND FOR WHOM?

• Consumption goods and services
• Goods and services that are bought by individuals
  and used to provide personal enjoyment and
  contribute to a persons standard of living. For
  example, movies and Laundromat services.
• Capital goods
• Goods that are bought by businesses to increase
  their productive resources. For example, cranes
  and trucks.

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2.1 WHAT, HOW, AND FOR WHOM?

• Government goods and services
• Goods and services that are bought by
  governments. For example, missiles, bridges and
  police protection.
• Export goods and services
• Goods and services produced in one country and
  sold in other countries. For example, airplanes
  produced by Boeing and Citicorp banking services
  sold to China.

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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 15
Export goods 9
Government 16
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2.1 WHAT, HOW, AND FOR WHOM?

• Figure 2.1(b) shows the largest six types of
  services produced in 2005.

And the largest four types of goods produced.
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2.1 WHAT, HOW, AND FOR WHOM?

• How Do We Produce?
• Factors of production
• The productive resources used to produce goods
  and services.
• Factors of production are grouped into four
  categories
• Land
• Labor
• Capital
• Entrepreneurship

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2.1 WHAT, HOW, AND FOR WHOM?

• Land
• All the gifts of nature that we use to produce
  goods and services. All the things we call
  natural resources.
• Land includes minerals, water, air, wild plants,
  animals,birds, and fish as well as farmland and
  forests.

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2.1 WHAT, HOW, AND FOR WHOM?

• Labor
• The work time and work effort that people devote
  to producing goods and services.
• The quality of labor depends on how skilled
  people arewhat economists call human capital.
• Human capital
• The knowledge and skill that people obtain from
  education, on-the-job training, and work
  experience.

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2.1 WHAT, HOW, AND FOR WHOM?

• Figure 2.2 shows measures of human capital and
  how they have changed since 1910.

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2.1 WHAT, HOW, AND FOR WHOM?

• Capital
• Tools, instruments, machines, buildings, and
  other items that have been produced in the past
  and that businesses now use to produce goods and
  services.
• Capital includes semifinished goods, office
  buildings, and computers. Capital does not
  include money, stocks, and bonds. They are
  financial resources.

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2.1 WHAT, HOW, AND FOR WHOM?

• Entrepreneurship
• The human resource that organizes labor, land,
  and capital.
• Entrepreneurs come up with new ideas about what
  and how to produce, make business decisions, and
  bear the risks that arise from these decisions.

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2.1 WHAT, HOW, AND FOR WHOM?

• For Whom Do We Produce?
• Factors of production are paid incomes
• Rent Income paid for the use of land.
• Wages Income paid for the services of labor.
• Interest Income paid for the use of capital.
• Profit (or loss) Income earned by an
  entrepreneur for running a business.

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2.1 WHAT, HOW, AND FOR WHOM?

• Functional distribution of income
• The percentage distribution of income among the
  factors of production.
• Personal distribution of income
• The percentage distribution of income among
  individual persons.

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2.1 WHAT, HOW, AND FOR WHOM?

• Figure 2.3(a) shows the functional distribution
  of income

• Wages 64

Rent, interest, and profit 36
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2.1 WHAT, HOW, AND FOR WHOM?

• Figure 2.2(b) shows the personal distribution
  of income

The poorest 20 earned only 3.4 of total income.
The richest 20 earned 50 of total income.
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2.2 THE CIRCULAR FLOWS

• Circular flow model
• 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.

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2.2 THE CIRCULAR FLOWS

• Households and Firms
• Households
• Individuals or people living together as
  decision-making units.
• Firms
• Institutions that organize production of goods
  and services.

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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 markets are markets in which factors of
  production are bought and sold.
• Goods markets are markets in which goods and
  services are bought and sold.

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2.2 THE CIRCULAR FLOWS

• Real Flows and Money Flows

• In factor markets

• Households supply factors of production

• Firms hire factors of production.

In goods markets

• Firms supply goods and services produced.

• Households buy goods and services.

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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.
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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.

• The blue flows are incomes.

• The red flows are expenditures.

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2.2 THE CIRCULAR FLOWS

• Governments
• We divide governments into two broad levels
• Federal government
• State and local government
• Federal Government
• The federal governments major expenditures are
  to provide
• Goods and services
• Social security and welfare benefits
• Transfers to state and local governments

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2.2 THE CIRCULAR FLOWS

• The federal government finances its expenditures
  by collecting taxes.
• The main taxes are
• Personal income taxes
• Corporate (business) taxes
• Social security taxes
• During the 2005, the federal government spent
  2.5 trillionabout 20 cents in every dollar
  earned in the year. The federal government
  collected less than 2.5 trillion in taxes and so
  it had a deficit.

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2.2 THE CIRCULAR FLOWS

• State and Local Governments
• State and local governments expenditures provide
• Goods and services
• Welfare benefits
• State and local governments finance these
  expenditures by collecting taxes.
• The main taxes levied are
• Sales taxes
• Property taxes
• State income taxes

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2.2 THE CIRCULAR FLOWS

• Government in the Circular Flow

Households and firms pay taxes and receive
transfers.
Governments buy goods and services from firms.
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2.2 THE CIRCULAR FLOWS

• Federal Government Expenditures

Figure 2.6(a) shows federal government
expenditures.
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2.2 THE CIRCULAR FLOWS

• Federal Government Revenue

Figure 2.6(b) shows federal government revenue.
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2.2 THE CIRCULAR FLOWS

• Federal Government Expenditures and Revenue
• National debt
• The total amount that the government has borrowed
  to make expenditures that exceed tax
  revenueto run a government budget deficit.
• During the early 2000s, the federal governments
  budget is in deficit and the national debt is
  increasing.

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2.2 THE CIRCULAR FLOWS

• State and Local Government Expenditures and
  Revenue
• The largest part of the state and local
  governments expenditures are on
• Education
• Highways
• Public welfare benefits

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2.2 THE CIRCULAR FLOWS

• State and Local Government Expenditures

• Figure 2.7(a) shows
• state and local
• government expenditures.

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2.2 THE CIRCULAR FLOWS

• State and Local Government Revenue

Figure 2.7(b) shows state and local
government revenue.
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2.3 THE GLOBAL ECONOMY

• The People
• U.S. population 295,649,027 (March 13, 2005)
• World population 6,424,033,498

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2.3 THE GLOBAL ECONOMY

• Countries
• Advanced Economies
• The richest 29 countries (or areas).
• Almost 1 billion people (15 percent of the
  worlds population) live in advanced economies.

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2.3 THE GLOBAL ECONOMY

• Emerging Market and Developing Economies
• Emerging market economies are the 28 countries of
  Central and Eastern European and Asia that were
  until the 1990s part of the Soviet Union.
• Almost 500 million people live in these
  countries.
• Developing economies are the 118 countries in
  Africa, Asia, the Middle East, Europe, and
  Central and South America that have not yet
  achieved high average incomes for their people.
• More than 5 billion people live in these
  countries.

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2.3 THE GLOBAL ECONOMY

• What in the Global Economy

In 2005, global economy produced 60 trillion of
goods and services.
Figure 2.8 shows the shares of global production.
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2.3 THE GLOBAL ECONOMY
Energy
The location of oil, natural gas, and coal
determines the sources of the worlds energy.
Figure 2.9(a) shows the distribution of oil.
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2.3 THE GLOBAL ECONOMY
Energy
The location of oil, natural gas, and coal
determines the sources of the worlds energy.
Figure 2.9(b) shows the distribution of natural
gas.
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2.3 THE GLOBAL ECONOMY
Energy
The location of oil, natural gas, and coal
determines the sources of the worlds energy.
Figure 2.9(c) shows the distribution of coal.
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2.3 THE GLOBAL ECONOMY
You can now see why the United States takes a
strong interest in the Middle East. It has 65
percent of the worlds oil and 41 percent of the
worlds natural gas.
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2.3 THE GLOBAL ECONOMY
You can now see why the United States takes a
strong interest in the Middle East. It has 65
percent of the worlds oil and 41 percent of the
worlds natural gas.
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2.3 THE GLOBAL ECONOMY

• Food
• Agriculture in the United States is about 1.4
  percent of total U.S. production.
• Agriculture in developing countries averages 14
  percent of their total production.
• Advanced economies accounts for 2/3 of world
  agricultural production. Why?
• Farms are large and highly productive and U.S.
  and E.U. farmers receives subsidies, which
  encourages more production.

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2.3 THE GLOBAL ECONOMY

• Other Goods and Services
• The advanced economies produce similar goods and
  services agriculture is small manufacturing is
  small and services are the major and fast
  growing.
• In the developing countries, agriculture is big
  but shrinking manufacture is large and growing
  services are important but remain small.
• Emerging economies stand between the developing
  economies and the advanced economies.

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2.3 THE GLOBAL ECONOMY

• How in the Global Economy?
• Human Capital Differences
• The quality of labor depends on human capital.
• The differences in human capital between the
  advanced economies and the developing economies
  is enormous and it arises from
• Education, on-the-job training, and experience
• Physical ability and state of health.

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2.3 THE GLOBAL ECONOMY

• Physical Capital Differences
• The physical capital available for producing
  goods and services differentiates an advanced
  economy from a developing economy
• Transportation systemadvanced economies more
  developed
• Technologies used on farms and in
  factoriesadvanced economies use more
  capital-intensive technologies.

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2.3 THE GLOBAL ECONOMY
2.3 MACROECONOMIC PERFORMANCE

• For Whom in the Global Economy
• Who gets the worlds goods and services depends
  on the incomes that people earn.
• Figure 2.10 (on the next slide) shows the
  distribution of incomes around the world.

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2.3 THE GLOBAL ECONOMY
In 2005, U.S. average income was 108 per day.
In advanced economies, it was about 75 a day
In Africa, it was only 6 a day.
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The U.S. and Global Economies in YOUR Life

• How can you use the facts and trends about what,
  how, and for whom goods and services are produced
  in the U.S. and global economies?
• As you think about your future career, you know
  that a job in manufacturing is likely to be
  tough. A job in services is more likely to lead
  to success. What sort of job will you take?
• As you think about the stand you will take on the
  political question of protecting U.S. jobs, you
  are better informed. But how will you vote?
  Chapter 3 will help you decide.