The U.S. Economy

What America Produces

•The output of the U.S. economy is large and varied.

•The total value of each good produced is determined by multiplying the physical output of each good by its price.

Gross Domestic Product (GDP)

•The total value of all final goods and services produced in a country during a given time period.

•It is a summary of a nation’s output (and its income!)

The Circular Flow

•http://people.morehead-st.edu/fs/t.creahan/circular.htm

Real GDP

•GDP has shortcomings in that either prices or an increase in physical output can cause GDP to increase.

How Much Output

Real GDP

•The inflation-adjusted value of GDP.

Inflation Adjustments

•Inflation adjustments delete the effects of rising prices by valuing output in constant dollars.

Inflation Adjustments

International Comparisons

•U.S. output is twenty percent of the world’s total output.

•U.S. output is two and one-half times larger than the world’s third largest economy, Japan.

•U.S. output exceeds the combined production of all countries in Africa and South America.

Per Capita GDP

•Total GDP divided by total population.

•Per capita GDP is simply an indicator of how much output the average person would get if all output were divided evenly among the population.

GDP per Capita Around the World (1999)

Historical Comparison

•People who the U.S. government currently classifies as “poor” live as well today as the average American family did in the 1950s.

Economic Growth

•An increase in output (real GDP).

•An expansion of production possibilities.

Economic Growth

•U.S. output grows 3% a year, population grows 1% a year.

The Uses of GDP

GDP Data

•http://www.bea.doc.gov/briefrm/tables/ebr1.htm

Government Services

•Income transfers — Not counted in GDP.

Government Services

•State and local governments use more resources than federal government.

Federal Outlays, by Type

A Century of GDP Changes

HOW America Produces

•Factors of Production

– Resource inputs used to produce goods and services, e.g., land, labor, capital, entrepreneurship.

Factors of Production

•The U.S. has ample resources to produce goods and services.

– World’s third-largest population.

– World’s fourth-largest land area.

•U.S. capital stock is over $30 trillion worth of machinery, factories, and buildings.

Factor Quality

•Productivity

– Output per unit of input or output per labor hour.

•Human Capital

– The knowledge and skills possessed by the work force.

Factor Productivity

•The high productivity of the U.S. economy results from using highly educated workers in capital-intensive production processes.

Economic Growth

•U.S. output grows 3% a year, population grows 1% a year.

•Incomes will double in thirty-five years at a 2% growth rate.

•But output must grow faster than population growth plus productivity growth for unemployment to fall.

Business Organization

•There are 20 million businesses in the U.S.

Business Organization

•Corporations — Owned by many stockholders.

Corporate America

•Corporations produce the largest portion of GDP.

•Proprietorships are most numerous but produce a small portion of GDP.

U.S. Business Firms:
Numbers vs. Size

Government Regulation

•Government plays a large role in how goods and services are produced.

– Provides a legal framework

– Protects consumers

– Protects labor

– Protects the environment

FOR WHOM America Produces?

•Who gets which slice of the pie?

– Will everyone get an equal slice?

– Will some get a lot more than others?

Market Economy

•In a market economy, a person’s income depends on the following:

– The quantity and quality of resources owned, and

– The price that those resources command in the market.

Personal Distribution of Income

•The way total personal income is divided up among households or income classes.

Slices of the U.S. Income Pie

Distribution of Personal Income: 1999

The Distribution of Income

•The richest fifth of U.S. households gets nearly half of all the income.

•The poorest fifth gets only a sliver.

Taxes and Transfers

•Taxes and transfers affect the FOR WHOM question by affecting the distribution of income.

Progressive Tax

•A tax system in which tax rates rise as incomes rise.

– An example is the federal income tax.

Progressive Tax

•A progressive tax makes after-tax incomes more equal than before-tax incomes.

Regressive tax

•A tax system in which tax rates fall as incomes rise.

– Regressive taxes include Social Security, payroll taxes, state and local sales tax.

•A regressive tax has a tendency to make after-tax distribution of income less equal.

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Taxes

•The net effects of progressive and regressive taxes are near zero.

•In total the tax system does not equalize incomes very much.

Transfers

•The largest income transfer program is Social Security

•Over $400 billion a year to 45 million people.