PAS 2201- The U.S. Economy

Gross Domestic Product (GDP)

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

A summary measure of a nation’s output measured in monetary terms.

Nominal GDP

The value of GDP measured in current dollars.

Inflation disallows for year-to-year comparison.

Real GDP

The inflation-adjusted value of GDP or the value of output measured in constant prices.

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

Per Capita GDP

Total GDP divided by total population: average GDP.

Per capita GDP = total GDP/total population

An indicator of how much output each person would get if all output were divided evenly among the population.

The Major Uses of Total Output

Household consumption

Business investment

Government services

Net exports

Consumer Goods (C)

Three types:

Durable goods

Nondurable goods

Services

Durable Goods

Goods expected to last at least three years.

Tend to be big-ticket items like cars, appliances, and furniture.

Purchases of durable goods are often cyclical (very sensitive to economic trends).

Nondurable Goods

Goods that are bought frequently because they don’t last long.

Include clothes, food, and gasoline.

Services

The largest and fastest-growing component in consumption.

Over half of all consumer output consists of medical care, entertainment, utilities, and other services.

Investment

Expenditures on (production of) new plant and equipment (capital) in a given time period, plus changes in business inventories.

Investment Goods (I)

Include the plant, machinery, and equipment that are produced for use in the business sector.

Investment goods are used:

To replace worn-out equipment and factories, thus maintaining our production possibilities.

To increase and improve our stock of capital, thereby expanding our production possibilities.

Investment leads to improved productivity.

Government Services (G)

Federal, state, and local governments purchase resources to police the streets, teach classes, write laws, and build highways.

Such resources are not available for consumption or investment.

Income Transfers

Payments to individuals for which no current goods or services are exchanged. (Social Security, welfare, and unemployment benefits.)

State and local governments use far more of our scarce resources than does the federal government.

Only part of GDP with no expectation of monetary return (profit)

Exports

Goods and services sold to foreign buyers.

Imports

Goods and services purchased from foreign sources.

Net Exports (NX)

Net Exports = Exports – Imports

Decline in Farming

Over time the mix of output has changed dramatically.

In 1900, nearly 4 of 10 workers were employed in agriculture.

Today fewer than 2% of workers are farmers due in great part to technological advances.

Farmers: 40% to 2% (from, 1900 to current)

U.S. Growth of Services

America has become largely a service economy.

Total service industries (including government) generate over 70% of total output.

Between 2010 and 2020, 98% of net job growth will be in service industries.

The opportunity cost of producing services is the forgone production of goods.

U.S. Growth in Trade

Increasing globalization of the U.S. economy is likely to continue due to:

Advances in communications and transportation technologies.

Increased consumption of services.

Factors of Production

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

Productivity

Output per unit of input

(e.g., output per labor hour…per capita GDP is a good approximation for productivity)

Human Capital

The knowledge and skills possessed by the work force.

The high productivity of the U.S. economy results from using highly educated workers (human capital) in capital-intensive production processes (advanced technology).

Corporations

Owned by many individuals who owns shares of (stock in) the corporation and have limited liability.

Partnerships

Owned by a small number of individuals who share liability.

Proprietorships

Owned by one individual with sole liability.

Karl Marx Beliefs

Karl Marx believed that:

Capitalists would continue to accumulate wealth, power, and income.

All capitalist are rich, all workers are poor.

Karl Marx Predictions

1) Labor’s share of output has risen greatly over time.

2) Differences within the labor and capitalist classes have become more important than differences between the classes.

3) The distinction between workers and capitalists has been blurred by profit-sharing plans, employee ownership, and widespread ownership of corporate stock.

The Distribution of Income

1) The richest fifth (or quintile) of U.S. households gets half of all the income.

2) The poorest fifth gets only a sliver.

3) Inequalities tend to be larger in poorer countries.

4) As countries develop, the personal distribution of income tends to become more equal.

Personal Distribution of Income

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

Progressive Tax

A tax system in which tax rates rise as incomes rise (federal income tax).

Makes after-tax incomes more equal than before-tax incomes.

Regressive Tax

A tax system in which tax rates fall as incomes rise. (Social Security payroll taxes and state/local sales taxes).

Makes after-tax incomes less equal than before-tax incomes.

Largest U.S. Income Transfer?

Social Security

Over $700 billion per year is paid to 50 million older or disabled persons.

The income-transfer system gives lower-income households more output than the market itself would provide and raises their share from 1% to 3.4% of total income.