The U.S. Economy in a Global Setting

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The U.S. Economy in a Global Setting

• Chapter 3

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Laugher Curve

• Frank According to this economist, Ernie, its
  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 Curve

• Ernie I get it!
• In other words, when the economy goes
  higgledy-piggledy, the Dow goes blooey!

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The U.S. Economy

• Ultimately the U.S. economys 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. Economy

• The U.S. economy is divided into three groups
  business, households, and government.

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Diagram of the U.S. Economy

• 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. Economy

• 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. Economy

• Government engages in the following activities

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Diagram of the U.S. Economy

• Government engages in the following activities

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Diagram of the U.S. Economy
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Business

• 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 Business

• 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 and 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 and Business

• Before deciding to start a business, the key
  question is "Can I make a profit?"

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Consumer Sovereignty and 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 Business

• There are three major types of businesses sole
  proprietorships, partnerships, and corporations.

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Forms of Business
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Sole 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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Partnership

• 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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Corporation

• 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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Corporation

• Advantages

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Corporation

• Disadvantages

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Finance 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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Households

• 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 Households

• Households ultimately control the other two
  economic institutions government and business.

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The Power of Households

• 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 Suppliers 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 Suppliers of Labor

• The jobs trend toward more service-related jobs
  away from manufacturing is continuing.

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Government

• 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 Actor

• All levels of government consume about 20 percent
  of the nations total output and employ about 21
  million persons.

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State and Local Government

• 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 Local Government
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Expenditures of State and Local Government
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Federal Government

• Income taxes make up 53 percent of the federal
  governments 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 Government
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Expenditures of the Federal Government
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Government as a Referee

• 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 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 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 Corporations

• Global corporations offer great benefits for
  nations.

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Global Corporations

• Global corporations pose a number of problems for
  governments.

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Global Corporations

• Global corporations sometimes act as governments
  unto themselves they can dominate the economy
  of a small nation.

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International Trade

• Sometimes international trade has grown rapidly
• Other times it has grown slowly.

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International Trade

• Fluctuations in world trade result in part from
  fluctuations in world output.

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Differences in the Importance 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 the 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 the 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 the 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 the U.S. Trades

• Trade deficit an excess of imports over exports.

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U.S. Exports by Region, 1999
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U.S. Imports by Region, 1999
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Debtor and Creditor Nations

• 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 Trade Differs From Domestic
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 Trade Differs From Domestic
Trade

• International trade involves multiple currencies
  that are bought and sold in foreign exchange
  markets.

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How International Trade Differs From Domestic
Trade

• The exchange rate determines how much various
  goods will likely cost in different countries.

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Institutions Supporting Free Trade

• Most economists, liberal and conservative alike,
  generally oppose trade restrictions.

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Free Trade Organizations
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Free Trade Organizations

• Despite political pressures to restrict trade,
  nations have entered into a variety of
  international agreements and organizations.

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Free Trade Organizations

• 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 Organizations

• 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 Organizations

• The push for free trade has a geographic
  dimension.

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Free Trade Organizations

• The leading example of this are the European
  Union (EU) and the North American Free Trade
  Agreement (NAFTA).

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International Economic Policy 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 Policy Organizations

• Governmental international organizations that
  encourage international cooperation include

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International Economic Policy Organizations

• Governmental international organizations that
  encourage international cooperation include

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International Economic Policy Organizations

• There are also informal organizations such as

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International Economic Policy Organizations

• There are also informal organizations such as

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The U.S. Economy in a Global Setting

• End of Chapter 3

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