AP ECONOMICSChapter 3

Chapter 3: U.S. Economy in Perspective Chapter 3 Assignment

Use margin questions to check understanding (no need to write them out now)

Questions for Thought and Review # 1-5, 9-13

Problems and Exercises # 2, 4, 5

Chapter 3: U.S. Economy in Perspective The U.S. Economy, Historical

Perspective U.S. strength is in its people and other

resources U.S. economy is a market economy –

based upon private property and the market in which principal individuals decide the three questions

Chapter 3: U.S. Economy in Perspective The U.S. Economy, Historical

Perspective Under a market economy:

Individuals encouraged to follow their own self-interest, market forces will coordinate

Distribution of goods is to each according to his or her ability, effort, or inherited property

Markets require private property rights Government allocates and defends private

property rights

Chapter 3: U.S. Economy in Perspective The U.S. Economy, Historical

Perspective How markets work:

System of rewards and payments Individuals are free to do what they want

as long as it’s legal Prices coordinate individuals’ wants Most economists believe the market is a

good way to coordinate needs, the debate is about structure and adjustment by gov’t

Chapter 3: U.S. Economy in Perspective The U.S. Economy, Historical

Perspective Capitalism and Socialism

Socialism is, in theory, and economic system based on goodwill towards others, now self-interest

Society decides the 3 questions, if individuals don’t consider the general good, the gov’t will force them to

Capitalism is and economic system based on the marked in which the ownership of the means of production resides with a small group called capitalists

Socialism in practice is often called Soviet-style socialism

Chapter 3: U.S. Economy in Perspective The U.S. Economy, Historical

Perspective Economic systems have evolved over

time Feudalism is an economic system in which

traditions rule. Lasted 8th to 15th century Mercantilism was next – gov’t determines

3 questions Industrial Revolution – reduced

mercantilist power, led to capitalism

Chapter 3: U.S. Economy in Perspective The U.S. Economy, Historical

Perspective Gov’ts are beginning to play less of a

role in market-based economies

Chapter 3: U.S. Economy in Perspective Diagram of the U.S. economy

Divided into 3 groups – Business, households, and gov’t (fig. 3-1)

Households supply factors of production to business and are paid by business for doing so – factor market

Business produces goods and services and sells them to households and gov’t – goods market

Chapter 3: U.S. Economy in Perspective Diagram of the U.S. economy

Gov’t engages in the following activities Buys goods and services from business,

buys labor services from households It provides services to both business and

households Gives some of its tax revenues directly

back to individuals Oversees interaction of business and

households in goods and factor markets Gov’ts are limited internally by voters,

and by relationships with other nations

Chapter 3: U.S. Economy in Perspective Diagram of the U.S. economy

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

Entrepreneurship is an important part of business

U.S. firms produce goods, and more importantly services

Services make up about 50 percent of the U.S. economy

Chapter 3: U.S. Economy in Perspective Diagram of the U.S. economy cont’d

Businesses are guided by consumer sovereignty – consumer’s wishes rule what is produced

3 major types of businesses – sole proprietorships, partnerships, and corporations (fig 3-2)

Finance and Business: Stocks are sold in organized markets such as the NYSE

Chapter 3: U.S. Economy in Perspective Diagram of the U.S. economy cont’d

Financial accountability must exist for financial markets to work

In 2002 accounting standards were abused and the market suffered

Chapter 3: U.S. Economy in Perspective Diagram of the U.S. economy cont’d

E-commerce - important Includes business selling to business

(B2B), business to consumers (B2C), consumers selling to business, and consumers selling to consumers

Brings people together at low cost at virtual marketplace – geography doesn’t matter

Since the dotcom bubble burst, economists see the importance of the internet in the economy

Chapter 3: U.S. Economy in Perspective Diagram of the U.S. economy cont’d

Households – single person or group of unrelated persons living together making decisions

Control gov’t and business Not active producers of output

(always), but passive recipients of income

Suppliers of labor

Chapter 3: U.S. Economy in Perspective Diagram of the U.S. economy cont’d

Largest source of household income is wages and salaries

Job trend toward more service related jobs away from manufacturing is continuing

Fastest gains in services, fastest declines in manufacturing and agriculture

Chapter 3: U.S. Economy in Perspective Diagram of the U.S. economy cont’d

Government: Actor (collecting money and spending it one projects) and referee (setting rules)

Actor: All levels of gov’t employ about 20% of

nation’s output, employ about 21 million people

State and local employ about 18 million, spend about $1 trillion a year on administration, education, roads

Chapter 3: U.S. Economy in Perspective Diagram of the U.S. economy cont’d

Actor: Federal gov’t – income taxes make up 59%

of revenue, spend mostly on income maintenance and defense

Referee: Controls interaction of households and

business Decides whether invisible hand can

operate freely

Chapter 3: U.S. Economy in Perspective Diagram of the U.S. economy cont’d

Referee: Businesses not free to hire and fire

whomever they want Many working conditions are regulated Businesses cannot collude

Chapter 3: U.S. Economy in Perspective Why transition? In groups, answer

the following: From the point of view of a typical

consumer What are some characteristics of a market

economy that might make it more appealing than a socialist economy?

What are some characteristics of a socialist economy that might make it more appealing than a market economy?

Chapter 3: U.S. Economy in Perspective Why transition? In groups, answer

the following: From the point of view of a typical

producer such as a baker What are some characteristics of a market

economy that might make it more appealing than a socialist economy?

What are some characteristics of a socialist economy that might make it more appealing than a market economy?

Chapter 3: U.S. Economy in Perspective U.S. Economy and Globalization

International issues must be taken into account for economic decisions

Global Corporations – any with substantial operations on production and sales in more than one country – becoming very important

Pose a number of problems for governments

No single gov’t can regulate it Can leave a nation if they don’t like

policies

Chapter 3: U.S. Economy in Perspective U.S. Economy and Globalization

Markets are becoming global WTO – World Trade Organization –

works to create free trade around the world

Globalization has two effects on competition Increases the size of the gain for the

winner (positive) Much harder to win (negative)

Chapter 3: U.S. Economy in Perspective U.S. Economy and Globalization

Globalization allows for greater specialization and division of labor

Increases growth and improves standard of living for everyone

Allows firms to move operation to countries with a comparative advantage, can lower costs

Surviving in a global economy is difficult

Chapter 3: U.S. Economy in Perspective U.S. Economy and Globalization

Firms are breaking down the production process May keep production within the company

but parcel out portions of the process to different parts of the world

May simply out-source that part of production that can be done more cheaply by firms in other countries

Labor is a significant part of these decisions

Chapter 3: U.S. Economy in Perspective U.S. Economy and Globalization

Global competition helps keep down prices and wages High prices charged by U.S. lawyers make

it hard to attack No uniformity in laws Manufacturing is susceptible to foreign

competition

Chapter 3: U.S. Economy in Perspective U.S. Economy and Globalization

Does globalization eliminate jobs? To some degree this is true in the U.S. Technology creates jobs U.S. firms see themselves as global

companies

Chapter 3: U.S. Economy in Perspective U.S. Economy and Globalization

U.S. firms can see a rise in demand for aspects of production that are still U.S. based

It helps the demand for U.S. goods and increases the demand for U.S. labor

The E.U. has protected European nations from competition

E.U. is made of 15 European nations

Chapter 3: U.S. Economy in Perspective U.S. Economy and Globalization

Dealing with Globalization: Institutions are changing but still cannot

control global business The closest thing to a regulator is the

U.N. U.N. edicts are often ignored Any meeting of nations to discuss trade is

voluntary Other international organizations are the

International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO)

Chapter 3: U.S. Economy in Perspective U.S. Economy and Globalization

Dealing with Globalization: There are also informal organizations

Group of Five (Japan, Germany, Britain, France, the U.S.) who promote negotiations and coordinate economic relations

Group of Eight (G8, the group of 5 plus Canada, Italy, and Russia) which does the same work