The U.S.

Economy: A Global View

Chapter 2
McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

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?

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What America Produces

The U.S. has 12 percent of the worlds arable land and less than 5 percent of the worlds population The U.S. produces more than 20 percent of the worlds output

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Gross Domestic Product

Gross Domestic Product (GDP): The total market value of all final goods and services produced within a nations borders in a given time period

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Comparative Output

Source: From World Development Report 2009. www.worldbank.org.

The market value of output (GDP) is a basic measure of an economys size.

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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

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GDP Per Capita Around the World

Per capita GDP is a measure of output that reflects average living standards.
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Source: From World Development Report 2009. www.worldbank.org.

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

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U.S. Output and Population Growth

The growth of output in the United States has greatly exceeded population growth.

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GDP Growth vs Population Growth

High-income countries UnitedStates Canada Japan France Low-income countries China India Madagascar Niger Haiti IvoryCoast Zimbabwe Zambia

Average Growth Rate (20002007) of GDP Population Per Capita GDP

2.7 2.7 1.7 1.7 10.2 7.8 3.3 3.9 0.2 0.2 -4.4 -5.7

0.9 1.8 1.0 1.7 0.1 1.6 0.7 1.0 0.6 9.6 1.4 6.4 2.8 0.5 3.5 0.4 1.6 -1.4 1.7 -1.5 0.8 -5.2 Source: From World Development Report, 2009. www.worldbank.org. 1.9 -7.6

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.

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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.

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The Changing Mix of Output

100
Percent of employment

80 60 40
Agriculture

Services

20 0 1800

Manufacturing, mining and construction

1840

1880

1920

1960

1993

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Development Patterns
The transformation of the U.S. into a service economy is a reflection of high incomes Citizens in poor countries dont have enough income to buy many services, so production is weighted toward goods

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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

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

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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

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The Education Gap Between Rich and Poor Nations

Source: From World Development Indicators, 2009. www.worldbank.org.

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.
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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

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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

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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

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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

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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

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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

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

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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

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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

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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

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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

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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

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For Whom America Produces

How many goods and services one gets largely depends on how much income one has to spend

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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

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U.S. Distribution of Income

Income Quintile Highest fifth Third fifth Fourth fifth Lowest fifth

2007 Income

Average Share of Total Income Income (%) $168,000 49.7 23.4 14.8 8.7 3.4

above$100,000

Second fifth $62,000100,000 $79,000 $39,00062,000 $50,000 $20,00039,000 $29,000 $020,000 $12,000

Source: U.S. Department of Commerce, Bureau of the Census

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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

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Income Share of the Rich

Source: From World Development Indicators, 2009. www.worldbank.org.

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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

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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

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The U.S. Economy: A Global View

End of Chapter 2
McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved.