The United States Economy
Past and Present
private individuals and business firms make most of the decisions. The onrush of technology largely explains the gradual development of a "two-tier labor market" in which those at the bottom lack the education and the professional/technical skills of those at the top and. aerospace. and military equipment. more and more. In this market-oriented economy. they face higher barriers to enter their rivals' home markets than foreign firms face entering US markets. Economy: Introduction
The US has the largest and most technologically powerful economy in the world. US business firms enjoy greater flexibility than their counterparts in Western Europe and Japan in decisions to expand capital plant. and the federal and state governments buy needed goods and services predominantly in the private marketplace. health insurance coverage.S. their advantage has narrowed since the end of World War II.100. and other benefits. US firms are at or near the forefront in technological advances. and to develop new products. The U.
. with a per capita GDP of $48. At the same time. to lay off surplus workers. fail to get comparable pay raises. especially in computers and in medical.I.
dividends and capital gains have grown faster than wages or any other category of after-tax income. with the global recession deepening. the year home prices peaked. higher gasoline prices ate into consumers' budgets and many individuals fell behind in their mortgage payments. oil prices dropped 40% and the US trade deficit shrank. soaring oil prices threatened inflation and caused a deterioration in the US merchandise trade deficit. which peaked at $840 billion. Oil prices doubled between 2001 and 2006. In 2009. as oil prices climbed once more. but in 2011 the trade deficit ramped back up to $803 billion.
.S. Imported oil accounts for nearly 55% of US consumption. Since 1996. Economy: Introduction
Since 1975. Oil prices increased another 50% between 2006 and 2008.The U. In 2008. practically all the gains in household income have gone to the top 20% of households. as US domestic demand declined.
two-thirds on additional spending and one-third on tax cuts to create jobs and to help the economy recover. falling home prices.The US Economy: Introduction
The global economic downturn. To help stabilize financial markets. The government used some of these funds to purchase equity in US banks and industrial corporations. investment bank failures. the federal budget deficit reached nearly 9% of GDP. GDP contracted until the third quarter of 2009.
. as a percentage of GDP. the sub-prime mortgage crisis. In 2010 and 2011. total government revenues from taxes and other sources are lower. and tight credit pushed the United States into a recession by mid-2008. than that of most other developed countries. in October 2008 the US Congress established a $700 billion Troubled Asset Relief Program (TARP). much of which had been returned to the government by early 2011. In January 2009 the US Congress passed and President Barack OBAMA signed a bill providing an additional $787 billion fiscal stimulus to be used over 10 years . making this the deepest and longest downturn since the Great Depression.
a law designed to promote financial stability by protecting consumers from financial abuses.rose from 9. the president signed the DODD-FRANK Wall Street Reform and Consumer Protection Act. Economy: Introduction
The wars in Iraq and Afghanistan required major shifts in national resources from civilian to military purposes and contributed to the growth of the US budget deficit and public debt .9% in 2010.through 2011.S. President OBAMA signed into law the Patient Protection and Affordable Care Act. and stagnation of wages for lower-income families.0% of GDP in 1980 to 17. by requiring certain financial derivatives to be traded in markets that are subject to government regulation and oversight. Total spending on health care . Long-term problems include inadequate investment in deteriorating infrastructure.The U. rapidly rising medical and pension costs of an aging population.energy shortages. a health insurance reform bill that will extend coverage to an additional 32 million American citizens by 2016. In March 2010.public plus private . In July 2010. ending taxpayer bailouts of financial firms.in particular. the direct costs of the wars totaled nearly $900 billion.
. dealing with troubled banks that are "too big to fail." and improving accountability and transparency in the financial system . through private health insurance for the general population and Medicaid for the impoverished. according to US government figures.including significant budget shortages for state governments . sizable current account and budget deficits .
country comparison to the world: 3 GDP: $15.)
.465 (July 2012 est.09 trillion (2011 est.) Inflation rate (consumer prices): 3.000 (2011 est. country comparison to the world: 2 GDP per capita: $49.1% (2010 est. Economy: Facts
Population: 313.The U.Gini index: 45 (2007) Public debt: 67.).S.7% of GDP (2011 est.).1% (2011 est.847.6 million Unemployment rate: 9% (2011 est.) country comparison to the world: 11 Labor force: 153.) Population below poverty line: 15.) Distribution of family income .
II.Jpan (39%). Rugged Individualism. Changing structure of US economy
Sector Agriculture Industry Services 1870 1900 1920 1940 1995 47 35 24 19 3 27 34 41 35 20 26 31 35 46 77 2011 1 90 80
. Britain 62%. Europe (30%) 2. The philosophy of melting pot: Positives (US benefits from diversity of skills and talents) Negatives (discrimination: economic inefficiency 3. Factors with Lasting Impact on the US Economy and Society Rugged Individualism: (i) philosophy of individualism basis of American dream (ii) belief that individual wealth reward for hard work and frugality (iii)American oppose schemes to redistribute wealth and income. Germany 50%. Spain 72%) (iv) philosophy of individualism also explains Am preoccupation with higher education (among those in their 20s US (66%). Government should take responsibility for those who cannot take care of themselves(USA 25%. Melting Pot and changing Structure of US Economy
The U.S. mailing and printing may be performed more efficiently if moved from small offices in industrial firms into specialized firms in the service sector. education. employment must increase rapidly to compensate for lower growth of productivity. Phases of service sector: (i) end of civil war (1865) to the Great Depression (1929). Many women found jobs in SS. so as a proportion of GDP up (iv) Economies of scale hypothesis: Growth of SS arose from efforts to improve organizational efficiency. recreation and health 2. mainly wholesale and retail trade (ii) Expansion of public sector services during the GD (iii) Since WWII increased prosperity. Many business such as accounting. Also prices up. Causes of rapid growth of service sector: (i) Income elasticity of demand hypothesis (Americans richer) (ii) deindustrialization hypothesis (Americans less competitive) (iii) cost disease hypothesis (service sector productivity slower.III. Therefore SS increased. (v) Labor supply hypothesis: changing structure of LF (women 1950=28%today 47%. Service Sector
1. computer programming.
(iii) SS increase contributed to inequality. computers. so prices have increased in this than any other sector of the economy. (vi) SS contributes positively to US BOP. child care workers. (v) SS automatic stabilizer as government services not reduced during recession. Significance of Shift to Service Sector: (i)Changed Nature of Work and Employment (more Americans engaged in sales than manufacturing.S. self employed employees. barbers. 1993 merchandise deficit $133B.(iv) SS immune to recession: many self employed (lawyers. recreation. no surpluses to be sold before production resumes.The U. in manufacturing industries wages less flexible. college students 1950-60 specialized in engineering. less likely to join labor unions. Divided in low income jobs like barbers and janitors and high income financial and professional services. Service Sector
3. realtors. now in business.(iii) SS faces little foreign competition. Decreased demand for services means decreased income but not loss of job.(ii) SS employees more likely to be part time. cannot store inventories.
. education. SS surplus$57B.
2. Edison.6 B tons of cargo transported by river/canals (ii) 1828 first steam engine railways. (vii) 1879 standard oil trust (Rockefeller) controlled 90% of US oil refining (viii) Carnegie in 1900 produced half of US steel (viii)1889 NJ legislature legalized formation of holding companies and mergers (ix) 1880 US by-passed UK . Industrial Sector
IV. The US Industrial Sector:
1.to become World’s leading producer of industrial goods. by 1850.IV. Many other canals. (ii) 1870s average firm in oil and steel industry employed fewer than 100 people. (iii) Govt. no single plant controlled as much as 10 percent of the output. The U. Emergence of US Giants: (i) Spread transportation and communication network (Erie canal 1825 linked NYC with agricultural areas of western NY . (vi) By 1880 many US giants established (Standard Oil. firm price taker. Westinghouse. 1. by 1860. no barriers. played limited role. and telegraph lines of western union reached the pacific coast by 1861 (v) These rapid advances in transportation and communication formed a national market (vi) Factories would be built with the assurance that output could be sold throughout the US and overseas.000 miles of railway track (iv) 1837 Sam Morse invented telegraph.S.Before civil war : (i) US economy about text book model of perfect competition (large number of Buyers and sellers.
. General Electric. homogenous product. 30.
4.goods jewelry 90 72 74 44 13 12
. price controls (iii) Oligopoly: FFCR above 60%. extent
3. Levels of concentration/Strucuture of Industrial Firms Each industrial sector could be assigned in one out of 4 categories. steel sp. Vehicle aircraft alum. (v) A recent estimate shows the following. (i) Pure monopoly: market share 100%. no close rivals. stable market share. It is the percentage of output that is produced by the four largest firms of an industry. Concentration of Economic Power/Measuring Level of Concentration :
Most familiar yard stick is four firm concentration ratio (FFCR). entry barriers. flexible pricing. lower less monopolistic. no rivals. Higher more monopolistic. medium to high barriers. strong entry barriers. unstable market share .Concentration of Economic Power: Measurement. rigid prices (iv) Effective competition: FFCR below 40%. Levels. price controls (ii) dominant firm: market share 50-90 %. no barriers.
Backlash against monopolies and anti-trust laws: (i) In 1887 interstate commerce commission (ISCC) established to regulate railroad rates (ii) 1890 Sherman anti trust act: to prohibit conspiracy in restraint of trade or any attempt to monopolize any part of trade and commerce (iii) 1914 Clayton Act: declared 4 specific practices illegal (1) merger of competing Cos.
. Social Costs of Industrial concentration: (i) public opinion against political and economic Power concentration (ii) Am. (2) Price discrimination (3) Tying contracts (requiring purchasers to buy from the sellers (4) interlocking Directorates (director of one company sitting in the board of directors of a competing company). then: a decrease in investment. growth. If a small number of corporate executives become pessimistic about business outlook. recession and Unemployment.
6. believe profits of large corporations excessive (iii) monopolies restrict output and raise prices (iv) All K expenditure and investment in manufacturing sector is controlled by 200 large firms.Concentration of Economic Power: Backlash and Anti-Trust Laws
V. Reasons for declining Unionization: (i) job satisfaction hyp (ii) employer resistance hyp (iii) Govt. no monopolies on employer side and or monopoly on labor side. The U. Unionization at its peak in 1955 at 33% of LF (ii) Unions in USA organized along industry lines all union workers in auto industry members of united auto workers (UAW) (iii) Britain organized along occupational lines. substitution hyp (iv) growth of service sector/self employment (v) late labor legislation giving collective bargaining rights to labor (vi) perceived association of communism and socialism. (v) The US labor markets competitive. All electricians belong to an electricians union irrespective of industry (iv) In Japan organized along company lines and represent white and blue collar workers. The US Labor Market: (i) Labor allowed to unionize and collectively bargain in USA since 1930s Wagner Act.V.
. yet there is unemployment (vi) Why? According to classical economic theory this is because of (i) downward inflexibility of wages stemming from (a) long term contracts/unions (b) minimum wage laws.S.
Trends in US banking (i) before 1863. The Fed controls the Money supply by increasing/decreasing discount rates. The U. insurance) provide efficient methods for payments between buyers and sellers. savings. Chairman appointed for a period of 4 years. allow individuals to share their risks with larger number of people. unregulated banking. securities firms. Each district bank controlled by 7 member board of governors appointed by the president of the US for a period of 14 years. extend credit.S. The Financial Sector Financial institutions (banks.VI. Financial Sector
VI. . increasing/decreasing the RRR and by selling/buying bonds/securities. The federal reserve act of 1913 established 12 federal reserve districts each owned by member banks. (ii) Banking act 1863-64 established uniform and safe banking system. 2000 banks could issue their own currency.