2 The Economy Myth and Reality E pluribus unum Out of many one Motto on U S currency Contents Contents The TheAmerican American Economy Economy A AThumbnail Thumbnail Sketch Sketch The The Inputs Inputs Labor Labor and and Capital Capital The The Outputs Outputs What What Does DoesAmerica America Produce Produce The The Central Central Role Role of of Business Business Firms Firms What s What s Missing Missing from fromthe the Picture Picture Government Government Conclusion Conclusion It s It s aa Mixed Mixed Economy Economy Copyright 2006 South Western Thomson Learning All rights reserved The The American American Economy Economy A A Thumbnail Thumbnail Sketch Sketch A APrivate Private Enterprise Enterprise Economy Economy Most Most production production completed completed by by private private enterprises enterprises in in free free markets markets Gross Gross Domestic Domestic Product Product GDP GDP standard standard measure measure of of the the economy s economy s output output Government Government spending spending accounts accounts for for about about 18 18 percent percent of of GDP GDP Copyright 2006 South Western Thomson Learning All rights reserved The The American American Economy Economy A A Thumbnail Thumbnail Sketch Sketch A ARelatively Relatively Closed Closed Economy Economy Open Open versus versus closed closed economy economy Copyright 2006 South Western Thomson Learning All rights reserved The The American American Economy Economy A A Thumbnail Thumbnail Sketch Sketch A A Growing Growing Economy Economy U S U S GDP GDP4 4 4 4 times times larger larger in in 2004 2004 versus versus 1959 1959 U S U S GDP GDPper per capita capita isis 2 7 2 7 times times larger larger Copyright 2006 South Western Thomson Learning All rights reserved FIGURE FIGURE 2 2 Real Real GDP GDP Since Since 1959 1959 12000 10000 8000 6000 4000 2000 0 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 Copyright 2006 South Western Thomson Learning All rights reserved The The American American Economy Economy A A Thumbnail Thumbnail Sketch Sketch But But with with Bumps Bumps along along the the Growth Growth Path Path Growth Growth isis irregular irregular from from year year to to year year Periods Periods of of boom boomand and bust bust recession recession known known as as business business cycles cycles or or economic economic fluctuations fluctuations Unemployment Unemployment rises rises during duringrecessions recessions and and declines declines during during booms booms Copyright 2006 South Western Thomson Learning All rights reserved FIGURE FIGURE 4 4 Unemployment Unemployment Rate Rate in in the the U S U S 1929 2004 1929 2004 Percentage of Civilian Workers Who are Unemployed 30 Great Depression 25 20 1980 83 recessions 15 10 1973 75 recession 1960s boom World War II 5 0 1929 1939 1949 1959 1969 1979 1980s boom 1989 1990s boom 1999 2004 Copyright 2006 South Western Thomson Learning All rights reserved The The Inputs Inputs Labor Labor and and Capital Capital The TheAmerican American Workforce Workforce Who Who is is in in it it 140 140 million millionAmericans Americans hold hold jobs jobs Increased Increased participation participation of of women women since since 1950 1950 Teenage Teenage workforce workforce participation participation has has declined declined since since mid 1970s mid 1970s Copyright 2006 South Western Thomson Learning All rights reserved The The Inputs Inputs Labor Labor and and Capital Capital The TheAmerican American Workforce Workforce What What does does itit do do Majority Majority of of workers workers produce produce services services not not goods goods Similar Similar to to other other industrialized industrialized countries countries Labor saving Labor saving innovations innovations in in manufacturing manufacturing has has reduced reduced the the share share of of workers workers in in goods producing goods producing industries industries Copyright 2006 South Western Thomson Learning All rights reserved FIGURE FIGURE 9 9 Share Share of of Service Service Sector Sector Jobs Jobs 90 1967 2003 80 70 62 9 63 6 73 65 6 40 38 3 75 2 75 2 58 7 42 8 78 3 66 6 60 50 74 7 45 1 58 9 48 8 44 8 50 8 36 2 30 20 10 0 Italy Spain German y Japan France Canada Sweden United United Kingdom States Copyright 2006 South Western Thomson Learning All rights reserved The The Inputs Inputs Labor Labor and and Capital Capital The TheAmerican American Workforce Workforce What What itit earns earns Wages Wages account account for for 70 70 percent percent of of income income Average Average hourly hourly wage wage 16 16 plus plus benefits benefits Similar Similar to to wages wages in in industrialized industrialized countries countries Copyright 2006 South Western Thomson Learning All rights reserved The The Inputs Inputs Labor Labor and and Capital Capital Capital Capital and and Earnings Earnings Capital Capital machines machines and and buildings buildings Payments Payments to to capital capital account account for for the the remainder remainder of of national national income income Owners Owners of of capital capital receive receiveprofit profit and and interest interest Profit Profit accounts accounts for for about about 99 percent percent of of the the price price of of aa typical typical product product Copyright 2006 South Western Thomson Learning All rights reserved The The Outputs Outputs What What does does America America Produce Produce Consumption Consumption versus versus nonconsumption nonconsumption uses uses Consumption Consumption consumer consumer spending spending on on goods goods and and services services Accounts Accounts for for 70 70 percent percent of of GDP GDP Nonconsumption Nonconsumption uses uses include include government government services services business business purchases purchases and and consumer consumer purchases purchases of of new new homes homes Copyright 2006 South Western Thomson Learning All rights reserved The The Central Central Role Role of of Business Business Firms Firms Private Private business business Turn Turn inputs inputs into into output output 25 25million millionbusiness businessfirms firms one onefor forevery every12 12people people 80 000 80 000businesses businessesfail faileach eachyear year Nationality Nationality of of aa business business Difficult Difficult to to determine determine Multinational Multinationalcorporations corporations Businesses Businessesthat thatoperate operate factories factoriesin