the u.s. economy in a global setting

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

The U.S. Economy in The U.S. Economy in a Global Settinga Global Setting

Chapter 3Chapter 3


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Laugher CurveLaugher CurveFrank: According to this economist, Ernie,

it’s all very simple.In an endogenous business cycle where variable-span diffusion indices are neither rising nor falling and the capital-to-output ratio is low, then the interplay of liquidity preferences and reserve ratios escalates and interest rates rise, causing the yield ratio to drop on common stocks.


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Laugher CurveLaugher CurveErnie: I get it!

In other words, when the economy goes higgledy-piggledy, the Dow goes blooey!


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The U.S. EconomyThe U.S. Economy Ultimately the U.S. economy’s strength

is its people and its other resources. The U.S. economy is far from perfect.


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Diagram of the U.S. Diagram of the U.S. EconomyEconomy The U.S. economy is divided into three

groups: business, households, and government.


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Diagram of the U.S. Diagram of the U.S. EconomyEconomy Households supply factors of production

to business and are paid by business for doing so. The place where this takes place is called the factor market.


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Diagram of the U.S. Diagram of the U.S. EconomyEconomy Business produces goods and services

and sells them to households and government. The place where this takes place is called the goods market.


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Diagram of the U.S. Diagram of the U.S. EconomyEconomy Government engages in the following

activities:It buys goods and services from business and buys labor services from households.It provides services to both business and households.


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Diagram of the U.S. Diagram of the U.S. EconomyEconomy Government engages in the following

activities:It gives some of its tax revenues directly back to individuals (income redistribution).It oversees the interaction of business and households in the goods and factor markets.


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Diagram of the U.S. Diagram of the U.S. EconomyEconomy


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BusinessBusiness Business is the name given to private

producing units in our society. Businesses decide what to produce,

how much to produce, and for whom to produce it.

Business is responsible for over 80 percent of U.S. production.


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Entrepreneurship and Entrepreneurship and BusinessBusiness Entrepreneurship is the ability to

organize and get something done. It is an important part of business, and

an important ingredient in the economy.


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Consumer Sovereignty Consumer Sovereignty and Businessand Business Although businesses decide what to

produce, they are guided by consumer sovereignty.

Consumer sovereignty means that consumers’ wishes rule what is produced by businesses.


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Consumer Sovereignty Consumer Sovereignty and Businessand Business Before deciding to start a business, the

key question is: "Can I make a profit?"Profit is what’s left over from total revenues after all the appropriate costs have been subtracted.


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Consumer Sovereignty Consumer Sovereignty and Businessand Business By channeling the desire to make a

profit for the general good of society, the U.S. economic system allows the invisible hand to work.


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Forms of BusinessForms of Business There are three major types of

businesses: sole proprietorships, partnerships, and corporations.


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Forms of BusinessForms of Business

Sole proprietorships (73%) Corporations (89%)

Corporations (20%)

Partnerships (7%)

Partnerships (6%)

Sole proprietorships (5%)

By NumbersBy Numbers By ReceiptsBy Receipts


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Sole ProprietorshipSole Proprietorship Businesses that have only one owner. Advantages:

Minimum bureaucratic hassle. Direct control by owner.

Disadvantages: Limited ability to get funds. Unlimited personal liability.


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PartnershipPartnership Businesses with two or more owners. Advantages:

Ability to share work and risks. Relatively easy to form.

Disadvantages: Unlimited personal liability (even for

partner's blunder). Limited ability to get funds.


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CorporationCorporation Businesses that are treated as a person

and are legally owned by their stockholders who are not liable for the actions of the corporate "person."


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CorporationCorporation Advantages:

No personal liability.Increasing ability to get funds.Ability to shed personal income and gain added expenses.


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CorporationCorporation Disadvantages:

Legal hassle to organize.Possible double taxation of income.Monitoring problems.


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Finance and BusinessFinance and Business The dynamic stock market allows initial

public offerings (IPOs) to quickly amass capital and to make their owners rich.

It is difficult to over emphasize the importance of e-commerce and the digital economy.


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HouseholdsHouseholds Households are a single person or

groups of related or unrelated persons living together and making decisions.

In the economy, households vote with their dollars.


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The Power of The Power of HouseholdsHouseholds Households ultimately control the other

two economic institutions – government and business.


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The Power of The Power of HouseholdsHouseholds In many spheres of the economy

households are not active producers of output but merely passive recipients of income.


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Households as Households as Suppliers of LaborSuppliers of Labor The largest source of household income

is wages and salaries. Households supply the labor with which

businesses produce and government governs.


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Households as Households as Suppliers of LaborSuppliers of Labor The jobs trend toward more service-related

jobs away from manufacturing is continuing.

The fastest gains are in services while the fastest declining are in manufacturing and agriculture.


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GovernmentGovernment Two general roles of government are:

An actor – collects money in taxes and spends that money on its own projects, such as defense and education.

A referee – sets the rules that determine relations between businesses and households.


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Government as an Government as an ActorActor All levels of government consume about

20 percent of the nation’s total output and employ about 21 million persons.


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State and Local State and Local GovernmentGovernment State and local government employ 18

million workers and spend about $1 trillion per year.

They spend their tax revenues on administration, education, and roads.


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Income of State and Income of State and Local GovernmentLocal Government

14%

21%

15%14%

18%

18%Insurance trustrevenueSales or grossreceiptsIndividual andcorporation incometaxProperty taxIntergovernmentalOther


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Expenditures of State Expenditures of State and Local Governmentand Local Government

6%

12%

10%

36%

23%

2%11% Central government

administration

Transportation

Civilian safety

Education

Public welfare

Health and hospitals

Other


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Federal GovernmentFederal Government Income taxes make up 53 percent of the

federal government’s revenue, while payroll taxes make up about 40 percent.

The two largest categories of spending are income maintenance and defense.


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Income of the Federal Income of the Federal GovernmentGovernment

48%

33%

11%8%

Individual incometaxes

Social insurance taxesand contributions

Corporate incometaxes

Excise taxes andother


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Expenditures of the Expenditures of the Federal GovernmentFederal Government

13%

4%

50%

19%

14%

Interest

Health and education

Income security

National defense

Other


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Government as a Government as a RefereeReferee Government controls the interaction of

households and business It sets the rules of interaction and acts

as a referee, changing the rules when it sees fit.

It decides whether the invisible hand will be allowed to operate freely.


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The Global SettingThe Global Setting International issues must now be taken

into account in just about any economic decision a country or a firm faces.


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Global CorporationsGlobal Corporations Those with substantial operations on

both the production and sales sides in more than one country are becoming increasingly important.


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Global CorporationsGlobal Corporations Global corporations offer great benefits

for nations.Global corporations create jobs, bring new ideas and new technologies to a country, and provide competition for domestic companies, keeping them on their toes.


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Global CorporationsGlobal Corporations Global corporations pose a number of

problems for governments.Because a global corporation exists in a number of nations, no single government regulates or controls it.If they don’t like the policies of the host nation, they can simply leave taking their jobs with them.


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Global CorporationsGlobal Corporations Global corporations sometimes act as

governments unto themselves – they can dominate the economy of a small nation.


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International TradeInternational Trade Sometimes international trade has

grown rapidly Other times it has grown slowly.


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International TradeInternational Trade Fluctuations in world trade result in part

from fluctuations in world output.Fluctuations are also explained in part by trade restrictions that nations have imposed from time to time.


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Differences in the Differences in the Importance of TradeImportance of Trade The importance of international trade to

countries’ economies differs widely. For most nations, imports and exports

roughly correspond.


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What and With Whom What and With Whom the U.S. Tradesthe U.S. Trades The primary trading partners of the U.S.

are Canada, Mexico, the European Union, and Pacific Rim countries.

The majority of U.S. exports and imports involve manufactured goods.


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What and With Whom What and With Whom the U.S. Tradesthe U.S. Trades U.S. imports have exceeded exports in

recent years leading the balance of trade to show a trade deficit rather than a trade surplus.


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What and With Whom What and With Whom the U.S. Tradesthe U.S. Trades Balance of trade – the difference

between the value of exports and the value of imports


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What and With Whom What and With Whom the U.S. Tradesthe U.S. Trades Trade deficit – an excess of imports

over exports.Trade surplus – an excess of exports over imports.


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U.S. Exports by Region, U.S. Exports by Region, 19991999

12%

23%

3%8%

27%

6%21% Mexico

Canada

OPEC

Central and SouthAmerica

Pacific Rim

Other Europe

European Union


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U.S. Imports by Region, U.S. Imports by Region, 19991999

11%

19%

4%6%

35%

6%19% Mexico

Canada

OPEC

Central and SouthAmerica

Pacific Rim

Other Europe

European Union


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Debtor and Creditor Debtor and Creditor NationsNations Following World War II, the U.S. ran

trade surpluses. In recent years, the U.S. has run a

significant trade deficit.


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How International How International Trade Differs From Trade Differs From Domestic TradeDomestic Trade International trade involves potential

barriers to trade. Quotas are limitations on how much of

a good can be shipped into a country. Tariffs are taxes on imports. Nontariff barriers are indirect

regulatory restrictions on imports and exports.


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How International How International Trade Differs From Trade Differs From Domestic TradeDomestic Trade International trade involves multiple

currencies that are bought and sold in foreign exchange markets.


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How International How International Trade Differs From Trade Differs From Domestic TradeDomestic Trade The exchange rate determines how much

various goods will likely cost in different countries.The exchange rate is the rate at which one currency is traded for another.


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Institutions Supporting Institutions Supporting Free TradeFree Trade Most economists, liberal and

conservative alike, generally oppose trade restrictions.


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Free Trade Free Trade OrganizationsOrganizations


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Free Trade Free Trade OrganizationsOrganizations Despite political pressures to restrict

trade, nations have entered into a variety of international agreements and organizations.


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Free Trade Free Trade OrganizationsOrganizations The World Trade Organization (WTO)

is committed to getting nations to agree not to impost new tariffs or other trade restrictions except under certain limited conditions.


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Free Trade Free Trade OrganizationsOrganizations The WTO is the successor to the

General Agreement on Tariffs and Trade (GATT) – an agreement among many subscribing nations on certain conditions of international trade.


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Free Trade Free Trade OrganizationsOrganizations The push for free trade has a

geographic dimension.Groups of nations have formed free trade associations – groups of nations that have reduced or eliminated trade barriers among themselves.


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NAFTA – U.S.-Canada-Mexico free trade zone that is phasing in reductions in tariffs.

Free Trade Free Trade OrganizationsOrganizations The leading example of this are the

European Union (EU) and the North American Free Trade Agreement (NAFTA).


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International Economic International Economic Policy OrganizationsPolicy Organizations There is no international counterpart to

the U.S. federal government. Any meeting of a group of nations to

discuss trade policy is voluntary. There is no international body that has

powers of compulsion.


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International Economic International Economic Policy Organizations Policy Organizations Governmental international organizations

that encourage international cooperation include:The United Nations (UN)The World Bank – a multinational, international financial institution that works with developing countries to secure low-interest loans.


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International Economic International Economic Policy Organizations Policy Organizations Governmental international organizations

that encourage international cooperation include:The International Monetary Fund (IMF) – a multinational, international financial institution concerned primarily with monetary issues.


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International Economic International Economic Policy Organizations Policy Organizations There are also informal organizations

such as:The Group of Five (Japan, Germany, Britain, France, and the U.S.) which meets to promote negotiations and coordinate economic relations among nations.


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International Economic International Economic Policy Organizations Policy Organizations There are also informal organizations

such as:The Group of Seven, which includes the Group of Five plus Canada and Italy, and does much the same work as the Group of Five


The U.S. Economy in The U.S. Economy in a Global Settinga Global Setting

End of Chapter 3End of Chapter 3

the u.s. economy in a global setting

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