Essential Foundations of Economics Chapter

Essential Foundations of Economics

• The book is titled "Essential Foundations of Economics, Ninth Edition" by Bade and Parkin.

Chapter Checklist

• The chapter checklist for "The U.S. and Global Economies" outlines key learning objectives: describe production in the U.S. and the global economy, and use the circular flow model for both.

What, How, and For Whom?

• What do we produce?

• Consumption goods and services (e.g., movies, laundry services)

• Capital goods (e.g., cranes, trucks)

• How do we produce?

• Factors of production:

• Land (natural resources: minerals, water, air, plants, animals, farmland, forests)

• Labor (work effort; human capital: knowledge, skills, education, training, experience)

• Capital (tools, instruments, machinery, buildings, semifinished goods, office buildings, computers)

• Entrepreneurship (organizing labor, land, and capital; new ideas, business decisions, risk-taking)

• For whom do we produce?

• Factors of production are paid incomes:

• Rent (land)

• Wages (labor)

• Interest (capital)

• Profit (entrepreneurs)

• Functional distribution of income: distribution of income among factors of production.

• Personal distribution of income: distribution of income among households.

• 2017 functional distribution of income (example data): Wages (68%), Rent, interest, and profit (32%).

• 2017 personal distribution of income (example data): Poorest 20% earned 3.5% of total income; Richest 20% earned 50% of total income.

The Global Economy

• The People:

• U.S. population (April 10, 2019) = 328,701,000

• World population = 7,564,563,000

• The Economies:

• Advanced economies: The richest 39 countries (or areas); almost 1 billion people (15% of world's population) live in advanced economies.

• Emerging market and developing economies: Other 155 economies; in Central and Eastern Europe and Asia (almost 500 million people); in Africa, Asia, the Middle East, Europe, and Central & South America (more than 5.5 billion people).

• 2018 global production = ~$135 trillion

• If the global pie were shared equally: $18,000 per person

• Differences in What is Produced:

• Developing economies: large, expanding manufacturing industries (textiles, footwear, sports gear, etc.).

• Advanced economies: smaller portion of food production; larger proportion of services.

• Similarities in What is Produced:

• Retail industries are similar in structure across economies.

• Agriculture and manufacturing are a shrinking portion of production, while services are growing.

• How in the Global Economy:

• Human capital differences: Education, training, experience, physical ability, and health

• Physical capital differences: Transportation systems, technologies (e.g., capital-intensive technologies in advanced economies).

• For Whom in the Global Economy?

• Income influences access to goods/services.

• 2018 average income (example data): U.S. ~171/day,EU 171/day, EU ~171/day,EU 119/day, Russia ~80/day,China 80/day, China ~80/day,China 50/day, India ~21/day,Sub−SaharanAfrica 21/day, Sub-Saharan Africa ~21/day,Sub−SaharanAfrica 11/day

The Circular Flow Model

• A model of the economy showing flows of expenditures and incomes from decision-makers.
• Interactions in markets determine what, how, and for whom goods/services are produced.
• Households and Firms: Households are individuals or groups acting as decision-making units; firms organize production of goods/services.
• Markets: Arrangement where buyers and sellers interact (Goods markets, Factor markets)
• Real Flows and Money Flows:
• Factor markets: Households provide factors of production (labor, land, capital); firms use these factors in production.
• Goods markets: Firms sell goods/services; households purchase them.
• Governments: Federal, state, and local. Federal government's expenditures: goods/services, social safety nets, and transfer payments. Taxes-funding government expenditures (Personal income, corporate, social security).
• International Trade: Households/firms from one country interact with those in other countries through buying/selling goods/services.
• International Finance: Borrowing/lending between countries. U.S. imports > exports=borrowing from rest of world.