Chapter Three: The Economy: Myth and Reality

The American Economy: A Thumbnail Sketch Inputs/Factors of Production: Labor, machinery, buildings, and natural resources used to make outputs. Outputs: Goods and services that consumers want to acquire. The United States has the biggest national economy on Earth because: We have a large population We are a very rich country. Our population is very productive in the production of goods and services. A Private Enterprise Economy Gross Domestic Product (GDP): The standard measure of the total output of an economy Americas success can be attributed to the fact that free markets and private enterprises flourish in America. Ex. Utility companies are privatized and not owned by the government like Russia. Direct government production of goods is rare in our society. They amount to about 11% of GDP A Relatively Closed Economy Open Economy: Exports and imports constitute a large share of its GDP Closed Economy: A country that does not trade with other nations in goods or assets Imports exceed exports in the U.S. $900 billion vs. $1000 billion The U.S. produces most of what we consume and consumes most of what we produce The U.S. does not important most products from other countries. Only 13% of U.S. GDP is imported A Growing EconomyBut with Inflation The U.S. economy gets bigger almost every year Must consider the population size and price inflation when graphing GDP growth. Must divide the real GDP by the size of the population to obtain real per capita GDP Bumps Along the Growth Path: Recessions Recessions: Some periods of declining economic activity A consequence in the ups and downs in economic growth is that unemployment varies greatly year to year. The American Workforce: Who is in it? The expanding role of women in the labor has grown from 29% in the 1950s to 46% of the workforce in 1999. It has raised many controversial questions such as: Are they discriminated against Maternity leave The American Workforce: What does it do? The majority of American workers produce services, not goods All industrial nations have become service economies. This has resulted because of an increased demand for labor by the service sector and reduced demand for manufacturing. The American Work Force: What it Earns Workers wages account for nearly three quarters of the income that the production process generates Average wage rate is $13 an hour for the U.S. and many other rich countries Capital and Its Earnings

The rest of the national income mainly accrues to the owners of capitalthe machines and buildings that make up the nations industrial plant

The Outputs: What does America produce? Consumer spending accounts for about 70% of GDP About 1/3 of the GDP goes for nonconsumption uses. Government services take up about 17% of GDP. Business purchases and industrial structures are about 12% Consumer purchases on homes is about 4% The Central Role of Business Firms About 80,000 businesses fail every year. However, the desire for riches entices Americans to start new businesses every year. Firms compete with other companies in their industry. Most economists believe that this competition is the key to industrial efficiency. Measuring Economic Progress The American economy has achieved progress through increased American labor productivity. The increase in productivity has allowed products such as computers, TVs, etc. to also decresase since we can make them more efficiently. Whats missing from the picture? Government Firms use their receipts from sales to pay employee wages and interest and profits to people who provide capital. These income flows, in turn, enable consumers to purchase the goods and services that companies produce. Government lies in the center of the circular flow. The traditional role of government in a free market economy revolves around five jobs: Providing certain goods and services such as national defense Levying taxes to pay for these goods and services Redistributing income Regulating business Making and enforcing laws The Government as Referee Congress and state/local legislators pass laws that define rules of the economic game Executive branches share a level of responsibility for enforcing them Courts interpret the laws and give a ruling to disputes The Government as Business Regulator The government must intervene in some parts of the free market economy in order to make it run effectively. Ex. Antitrust laws against monopolies Government Expenditures & Taxes in America Americans are among some of the least taxed people in the world Personal income tax federal governments biggest revenue source Payroll tax flat-rate tax on wages and salaries up to a certain limit Corporate income tax rest of federal revenue comes from here The Government as a Redistributor Transfer Payments: Sums of money that certain individuals receive as outright grants from the government rather than payments for services rendered

Progressive Taxation: A tax where the average tax rate is the same at all income levels Mixed Economies: One with some public influence over the workings of free markets. There may also be some public ownership mixed in with private property. In a market economy, people earn incomes according to what they have to sell