Goods Chapter The U.S. 2. Describe The Patterns And .

CHAPTER CHECKLISTThe U.S.EconomyChapter21. Describe the patterns and changes in what goodsand services are produced in the United States.2. Describe the patterns and changes in how goodsand services are produced in the United States.3. Describe for whom goods and services areproduced in the United States.4. Use the circular flow to provide a picture of howhouseholds, firms, and government interact todetermine what, how, and for whom goods andservices are produced.Copyright 2002 Addison WesleyLECTURE TOPICS What Goods and Services Are Produced? How Are Goods and Services Produced?2.1 WHAT GOODS ARE PRODUCED? What We ConsumePeople buy millions of different goods and services. For Whom Are Goods and Services Produced? Circular FlowsWe can describe what they buy only if we classify themin large groups.1

2.1 WHAT GOODS ARE PRODUCED?2.1 WHAT GOODS ARE PRODUCED?Figure 2.1(a) showswhat we consume.Figure 2.1(b) showsthat Americans spend:Americans spend thelargest share of theirincome on: A falling share of totalexpenditure on foodand other necessities. Medical careHousingTransportFoodRecreation2.1 WHAT GOODS ARE PRODUCED? What We ProduceBusinesses located in the United States producemost of the goods and services that people in theUnited States buy.Businesses in the rest of the world produce goodsand services that the United States imports.The largest part of what we produce today is services,not goods. An increasing shareon services, such asmeals away fromhome2.1 WHAT GOODS ARE PRODUCED?Figure 2.2shows thelargest fiveservicesproduced.And the fivelargest goodsproduced.2

2.1 WHAT GOODS ARE PRODUCED? What We Buy from the Rest of the World2.2 HOW ARE GOODS PRODUCED?Factors of productionThe productive resources used to produce goods andservices.Figure 2.3shows whatwe import.2.2 HOW ARE GOODS PRODUCED?Factors of production are grouped into four categories: Land Labor Capital Entrepreneurship2.2 HOW ARE GOODS PRODUCED?LandEntrepreneurshipAll the “gifts of nature” that we use to produce goodsand services. All the things we call natural resources.The human resource that organizes labor, land, andcapital.LaborWork time and work effort that people devote toproducing goods and servicesCapitalEntrepreneurs come up with new ideas about what andhow to produce, make business decisions, and bear therisks that arise from these decisions.Tools, instruments, machines, buildings, and otherconstructions that have been produced in the past andthat businesses now use to produce goods andservices.3

2.2 HOW ARE GOODS PRODUCED? LandAll the “gifts of nature” thatwe use to produce goodsand services.2.2 HOW ARE GOODS PRODUCED? LaborWork time and work effort that people devote toproducing goods and servicesHuman capitalAll the things we call naturalresources.The knowledge and skill that people obtain fromeducation, on-the-job training, and work experience.Figure 2.4(a) shows howland is used in the UnitedStates.2.2 HOW ARE GOODS PRODUCED?Figure 2.6shows theU.S. laborforce andhow it haschangedsince 1980.2.2 HOW ARE GOODS PRODUCED?Figure 2.7showsmeasures ofhumancapital andhow theyhavechangedsince 1910.4

2.3 FOR WHOM ARE GOODS PRODUCED?Factors of production are paid incomes:Rent2.3 FOR WHOM ARE GOODS PRODUCED?Profit (or loss)Income paid for the use of land.Income earned by an entrepreneur for running abusiness.WagesFunctional distribution of incomeIncome paid for the services of labor.The percentage distribution of income among thefactors of production.InterestPersonal distribution of incomeIncome paid for the use of capital.The percentage distribution of income among individualpersons.2.3 FOR WHOM ARE GOODS PRODUCED?2.3 FOR WHOM ARE GOODS PRODUCED?Figure 2.8(a) shows thefunctional distribution ofincome:Figure 2.8(b) showsthe personaldistribution of income:Labor income 71%The poorest 20%earned only 4% oftotal income.Net interest income 4%Personal rental income 2%Corporate income 12 %Proprietors’ income 9%The richest 20%earned 49% oftotal income.5

2.4 CIRCULAR FLOWSCircular flow modelA model of the economy that shows:The circular flow of expenditures and incomes thatresult from decision makers’ choices and the way thosechoices interact in markets to determine what, how, andfor whom goods and services are produced.2.4 CIRCULAR FLOWS Households andFirmsHouseholdsIndividuals or peopleliving together asdecision-making units.FirmsInstitutions that organizeproduction of goods andservices.2.4 CIRCULAR FLOWS MarketsArrangementsthat bringbuyers andsellerstogether andenable them toget informationand dobusiness witheach other.2.4 CIRCULAR FLOWS MarketsFactor marketsMarkets in whichfactors of productionare bought and sold.Goods marketsMarkets in whichgoods and services arebought and sold.6

2.4 CIRCULAR FLOWS2.4 CIRCULAR FLOWSFactor marketsGoods markets Householdssupply factorsof production Firms supply goodsand servicesproduced. Firms hirefactors ofproduction. Households buygoods and services.2.4 CIRCULAR FLOWS Firms payhouseholdsincomes forthe services offactors ofproduction.2.4 CIRCULAR FLOWS Householdspay firms forthe goods andservices theybuy.7

2.4 CIRCULAR FLOWS Real flowsOrange flows of factorsof production and ofgoods and services. Money flowsBlue flows of incomeand red flows ofexpenditures on goodsand services.2.4 CIRCULAR FLOWSThe main taxes paid to the federal government are:1. Personal income taxes2. Corporate (business) taxes3. Social security taxes2.4 CIRCULAR FLOWS The Government Sector Federal government State and local governmentsFederal GovernmentMajor expenditures are to provide:1.Goods and services2.Social security and welfare benefits3.Transfers to state and local governments2.4 CIRCULAR FLOWSState and Local GovernmentsThe major expenditures are to provide:1. Local goods and services2. Welfare benefitsThe main taxes levied are:1. Sales taxes2. Property taxes3. State income taxes8

2.4 CIRCULAR FLOWS Government inthe Circular FlowHouseholds andfirms pay taxesand receivetransfers.2.4 CIRCULAR FLOWS FederalGovernmentExpendituresFigure 2.11(a) showsfederal governmentexpenditures.Government buysgoods and servicesfrom firms.2.4 CIRCULAR FLOWS FederalGovernmentRevenueFigure 2.11(b) showsfederal governmentrevenue.2.4 CIRCULAR FLOWS State and Local Government Expendituresand RevenueThe largest part of the state and local governmentsexpenditures are on: Education Highways Public welfare benefits9

2.4 CIRCULAR FLOWS2.4 CIRCULAR FLOWS State and LocalGovernmentExpenditures State andLocalGovernmentRevenueFigure 2.12(a) showsstate and localgovernment expenditures.Figure 2.12(b)shows state andlocal governmentrevenue.2.2 HOW ARE GOODS PRODUCED?ChapterThe End2Figure 2.4(b) showsthe urban distribution.A quarter lives in thesix largest cities.Almost a third live inthe ten largest cities.More than a half livesin cities that exceed 1million.Copyright 2002 Addison WesleyAnd the rest 10

2.4 CIRCULAR FLOWS2.2 HOW ARE GOODS PRODUCED?Figure 2.5shows U.S. andglobalnonrenewableenergyresources. Federal Government Expenditures andRevenueNational debtThe total amount that the government has borrowed tomake expenditures that exceed tax revenue—to run agovernment budget deficit.11

The main taxes paid to the federal government are: 1. Personal income taxes 2. Corporate (business) taxes 3. Social security taxes 2.4 CIRCULAR FLOWS State and Local Governments The major expenditures are to provide: 1. Local goods and services 2. Welfare benefits The main taxes levied are: 1. Sales taxes 2. Property