The U.S. economy, like any economy must answer the questions about what, how, and for whom to produce. As mentioned in chapter 1, these decisions are made in the U.S. through a combination of private markets and government intervention.

I.  What America Produces

The short answer to this question is "a whole lot," but this answer is not particularly informative. For a more specific answer we need to measure output. This measure is known as Gross Domestic Product or GDP which is the total market value of all goods and services produced in the United States in a given year. In other words, it is each thing we produce, multiplied by the price and then added up. The bar graph on page 27 shows very clearly how the United States produces WAY more than any other country in the world. In fact, California by itself has a GDP larger than all but 6 countries in the world. In addition to GDP itself, we are also interested in

• GDP per capita. This divides GDP by the population of the country. Again, the U.S. per capita GDP is the largest among the countries listed on page 28. GDP per capita is a measure of standard of living: rich nations have high per capita GDPs and poor nations have low per capita GDPs. Just looking at GDP alone can be misleading: note how China has the second largest GDP in the world, but its GDP per capita is below the world average. Why? because there are so many people in China sharing that production.

• GDP growth. The standard of living you enjoy today is higher than the standard of living of your grandparents. Why? Because GDP has growth over time AND has grown faster than the U.S. population so that GDP per capita has grown over time. Economic growth is essential if we hope for a better standard of living for our children. On average, the U.S. economy has grown about 3% per year. Between 1996 and 1999 GDP growth has averaged over 4% per year. Recall that GDP growth shifts out the production possibilities curve over time.

So what is all of this stuff we are producing? In the U.S. today, most of what we produce (over 75%) are services, not actual goods. This has changed from 100 years ago, when most of our output consisted of agricultural and manufacturing good (See figures 2.2 and 2.3, p. 30-31). This trend toward a service-based economy is expected to continue. High growth is expected in retail services, medical services, and financial services.

These goods and services produced in the U.S. go to four areas: consumers, firms, government, and other countries. Of these four areas, the consumer is king. Consumer goods and services account for 67% of the U.S. GDP. This is why economists are always concerned about consumer confidence and why holiday retail sales are followed so closely. If consumer do not buy, GDP will fall.

II.  How America Produces

"Very well, thank you." Seriously, behind the huge GDP of the United States is the abundance of high quality resources, and the efficient use of resources. Many countries match the U.S. in natural resources but NOT in GDP. Why is the U.S. able to squeeze so much output out of its factors of production?

Workers in the United States are highly educated and very productive. U.S. workers are able to produce more output per worker than workers in other countries. This is due to their skills, formal schooling (like college), and...

The United States has a large capital stock. This means we have many buildings, factories, machinery, computers. We also have a highly developed infrastructure. This refers to structures that make communication and transportation possible: electricity wiring, fiber optics networks, paved roads, bridges, railroads, oil and gas pipelines, etc. This capital stock makes our skilled labor force more productive than other countries where workers may be just as skilled, but do not have networked computers or even reliable phone service.

In the United States, the factors of production are privately-owned. Companies and their machinery are owned by the stock holders. We own our labor, and sell it, in the form of wages, to the highest bidder. This private ownership creates a powerful incentive, known as the profit motive. If people get to keep the fruits of their labor, they will work harder, and/or produce a product as cheaply as possible.

Business firms come in 3 types:  Corporations, partnerships, proprietorships.  Corporations are owned by many shareholders (or stockholders).  Proprietorships have one owner, while partnerships have a small number of owners.  The principle distinction with a corporation is the principle of limited liability:  shareholders are not individually liable for corporation debts.  If I own shares of the company Etoys, and they go bankrupt, I lose only the value of my stock--the lenders to Etoys cannot go after my house or my checking account.  About 20% of firms are corporations, but they are the large firms, so they account for 84% of all firm assets.  (See figure 2.5, page 36).

In the United States, private property rights are protected. My right to own my own home means nothing if somebody can just stop by and take it. By setting and enforcing the law, the government establishes the rules of the game that allow markets to function. In fact, many historians argue that the foundation of U.S. law, the Constitution, reflects the desire of wealth landowners to protect their property and their wealth. The growth of crime is a major obstacle to economic growth in Russia.

III.  For Whom America Produces

For the most part, income determines who gets what, although the government does have many programs that assist the poor in obtaining essentials goods and services like housing, food,and medical care.

The result of the market system is hugh inequality--large gaps between the rich and the poor. This is probably the biggest criticism of capitalism. The profit motive gives us efficientcy but there is no guarantee of equality. Table 2.2 demonstrates the income inequality that exists in the United States.

Even though the United States has a great deal of income inequality, this does not mean a market economy is a bad thing. Market economies have built-in incentives for efficiency and entrepreneurship that lead to economic growth, and this growth can make everyone better off, whether rich or poor. This is what Republicans mean when they argue that "a rising tide lifts all boats."

If we think of the U.S. economy as a pie, then our economy is the biggest pie in the world, and it is growing in size over time. Because our pie is so big, a small piece of the U.S. pie may actually be larger than a big piece of pie in, say, Bangledesh.

Other industrialized countries seem to place a greater value on economic security and equality, such a France, Germany, and Canada. Americans place more emphasis on equality of opportunity rather than equality of result.

FYI:  Related Links

Check Your Head (Chapter 2)   A self-quiz from the Schiller web site

Index of Economic Freedom 2001  A joint publication of the conservative Heritage Foundation and Wall Street Journal.  This document measures the economic freedom of over 150 nations using a set of criteria.  Their main point is that the wealthiest nations also have the greatest degree of economic freedom.