Chapter 2: The U.S. Economy
Chapter 2: The U.S. Economy 100
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This 4 page Class Notes was uploaded by Austin on Saturday September 17, 2016. The Class Notes belongs to 100 at University of Rhode Island taught by Carole Miller in Fall 2016. Since its upload, it has received 3 views. For similar materials see Introduction to Economics in Economics at University of Rhode Island.
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Date Created: 09/17/16
Chapter 2: The U.S. Economy Tuesday, September 13, 2016 11:41 AM Explain how an economy's size is measured. Explain why the U.S. economy can produce so much. Recount how the mix of U.S. output has changed over time. Describe how (un)equally incomes are distributed. The goal of this chapter is to understand how the three basic economic questions are answered in the US. Meaningful summaries of the US economy require adding up millions of different products. An overall summary of WHAT the US produces is Gross Domestic Product (GDP). GDP is the total value of final goods and services produced in a country in a given time period. Value is found by multiplying the physical output of each good by its price. There are two measures of output. Nominal GDP (NGDP) is the value of output measured in current prices. Real GDP (RGDP) is the value of output measured in constant prices. Because of inflation, only Real GDP can be used to compare output from one year to another. Real GDP is the inflation-adjusted value of GDP. Doubling prices doubles NGDP, but not RGDP. Because populations vary, a useful measure is per capita GDP. Per capita GDP = Total GDP / Total Population Indicates how much output each person would get if all output were divided evenly among the population. US Real GDP increases by about 3% per year, causing persistent economic growth. Economic growth is an increase in output (real GDP). Economic growth permits higher standards of living and social welfare for many. GDP is the single best measure of a nation's economic well-being. Production is one element of collective well-being. Material possessions do not substitute for health, justice, security, and other dimensions of well-being. The content of output can be measured by end use. GDP: Consumption (C): Expenditures by consumers Investment (I): Expenditures on new plants and equipment + inventories Government (G): Federal, state, and local government expenditures (excludes transfers). Net Exports: Exports minus imports (Higher net = higher GDP) The biggest slice of the US economy is consumption. Structural change to the US economy has occurred over 150 years. 1 Substantial technological progress. Agriculture Manufacturing 1 Employment shift to service (as a result of improving technology) Agriculture to manufacturing Manufacturing to service (cannot outsource services) 1 Expansion of international trade As the economy grows, the mix of output changes dramatically. The substantial productivity of the U.S. economy is explained by the use of highly educated workers in a capital-intensive production processes. Capital intensive production processes requires a high ratio of capital to labor inputs. The factors of production are organized and reallocated by businesses. Corporations are owned by many individuals. Partnerships are owned by a small number of individuals. Proprietorships are owned by one individual. The government plays a large role in deciding WHAT, HOW, and FOR WHOM goods are produced by: Providing legal framework Protecting consumers Protecting labor Protecting the environment The government lays the foundation for market transactions by establishing and enforcing: Ownership rights Contract rights Other rules of the game Prevents businesses from becoming too powerful and regulates the safety of products Establishes labor law regarding o Entry into the workforce o Workplace safety o Number of hours one can work o Compensation Establishes regulations that limit air, water, and noise pollution. In addition, it regulates environmental use of resources. The final question is HOW American production is distributed. In a market economy, an individual's income depends on: o Quantity and quality of resources owned o Price those resources command In a command economy, the government decides the distribution of goods Often individuals feel that the income distribution is unfair Governments can redistribute incomes through taxes and transfers. Progressive taxes set tax rates higher as incomes rise. The federal income tax is designed to be progressive. The government can transfer tax revenue to the poor. The largest US transfer program is Social Security benefits Summary We explained how an economy's size is measured using Real GDP and Nominal GDP. We explained why the US economy can produce so much. We recounted how the mix of US output has changed over time.
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