Chapter 3: Economic Activity in a Changing World

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U.S. Economic History

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The Changing U.S. Economy

• Sometimes major shifts in certain growth areas can change the emphasis of the U.S. economy.
• The United States has experienced four major economic shifts.
• During the early 1600s, the colonists bartered, or traded, goods and services. This created our service-based economy.
• In the 1700s, farming was a common way of life. This formed the agriculture-based economy.
• In the mid-1850s, the Industrial Revolution enabled the advent of big machines for producing goods. This started the industry-based economy.
• The 1900s saw the rapid movement of information, with the invention of the computer. This created the information-based economy.
• Computers have transformed the ways that goods and services are produced, delivered, and sold.
• While we live in the information age, we also still rely upon aspects of the other types of economies.

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Measuring Economic Activity

• Figures are used to measure economic performance.
• These figures are called economic indicators
  • They measure things such as how much a country is producing, whether its economy is growing, and how it compares to other countries.
• One way of telling how well an economy is performing is to measure how many goods and services it produces.
• The total value of the goods and services produced in a country in a given year is called its gross domestic product (GDP).
• GDP is one of the most important indicators of the status of an economy.
  • To calculate the GDP, economists compute the sum of goods and services sold to businesses, consumers, the government, and other countries.
• Another important measure of a country’s economic health is its standard of living.
• The standard of living is the level of material comfort as measured by the goods and services that are available.
  • The more goods and services produced per person, the higher the standard of living.
  • The standard of living refers to the amount of goods and services people can buy with the money they have.
• In the free-enterprise system, the wealth created by businesses benefits the entire community because businesses pay taxes and provide jobs.
• The unemployment rate measures the number of people who are able and willing to work but cannot find work during a given period.
• Another important measure of economic strength is the rate of inflation.
• Inflation is a general increase in the price of goods and services.
• When the supply of goods is greater than demand, deflation can result.
• Deflation is a general decrease in the price of goods and services.
• Countries can run up large debts.
• The main source of income for a government is taxes.
• When the government spends more on programs than it collects in taxes, the difference in the amount is called a budget deficit.
• To pay for the difference, governments borrow money from the public, banks, and even other countries.
• The total amount of money a government owes is its national debt.
• When a government’s revenue exceeds its expenditures during a one-year period, it has a budget surplus.

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The Business Cycle

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Guiding the Economy

• The U.S. economy is shaped by a mix of public and private forces.
• Individuals have an enormous role on the market for goods and services.
• Congress and the President enact laws that impact fiscal policy.
• Whenever tax money is spent, it has an effect on the economy.
• The Federal Reserve, informally called “the Fed,” is a government agency that guides the economy by regulating the amount of money in circulation, controlling interest rates, and controlling the amount of money loaned.

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Four Stages of the Business Cycle

• Economies go through ups and downs.
• This can happen for many reasons, including wars, foreign competition, changes in technology, and changes in consumer wants.
• Over long periods of time, these changes form patterns.
• The rise and fall of economic activity over time is called the business cycle.
• There are four stages of the business cycle—prosperity, recession, depression, and recovery.
• If a nation is in a period of economic expansion, it may purchase goods and services from other countries, promoting expansion in those countries.
• When unemployment is low, production of goods and services is high, new businesses open, and there is prosperity.
• Prosperity is a peak of economic activity.
• During a recession, economic activity slows down.
• Businesses produce less, so they need fewer workers.
• As the unemployment rate increases, people have less money to spend.
• In a recession there are downturns in many industries.
• A downturn in one industry can affect others.
• When this happens, it is called the ripple effect.
• During a depression there is high unemployment and low production of goods and services.
• A depression is a deep recession that affects the entire economy and lasts for several years.
• During a recovery, production starts to increase.
• A recovery is a rise in business activity after a recession or depression.
• A recovery can take a long time or it can happen quickly.
• During a recovery, some businesses innovate—meaning that they bring out new goods and services.
• If the innovation is popular with consumers, sales increase dramatically, per unit costs decrease, and profitability increases.
• Businesses grow and economic activity soars.

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