Chapter 2: The U.S. and Global Economies What, How and for Whom? Types of Goods and Services: Consumption Goods and Services = Bought by individuals and used for enjoyment or to improve the quality of life Capital Goods and Services = Bought by businesses to increase productivity Government Goods and Services = Produced in one country and sold in another Factors of Production Land = ?gifts of nature? Labor = Time and Effort Human capital = Knowledge and skill that is derived from education; on-the-job training and work experience Directly proportional to the quality of labor Capital = Items that have been produced in the past and are now used to promote goods and services Entrepreneurship = Human resource that organizes labor, land, and capital Rent = Income paid for land use Wages = Income paid for the services of labor Interest = Income paid for the use of capital Profit or Loss = Income earned by an entrepreneur for running a business Functional Distribution of Income = Distribution of income among the factors of production Personal Distribution of Income = Distribution of income among households The Circular Flows Circular Flow Model = Shows the result and interaction between decision makers? choices Households = Individuals or groups of people living together Choose the quantities of goods and services to buy Firms = Institutions that organize the production of goods and services Market = Any arrangement that brings buyers and sellers together and enables them to get information and do business with each other Goods Markets = Goods and services are bought and sold Factor Markets = Factors of production are bought and sold Parts of a Circular Flow Model Real Flows = The flows of the factors of production that go from households through factor markets to firms and of the goods and services that go from firms through goods markets to households Money Flows = The flows of payments made in exchange for the services of factors of production and of expenditures on goods and services Two Levels of Government Economies Federal Government Expenditures Goods and Services Social Security and Welfare Transfers to state and local governments Main Federal Revenue Personal Income Taxes Corporate Income Taxes Social Security Taxes State Government Expenditures Goods and Services Welfare Benefits Major Revenues Sales Taxes Property Taxes State Income Taxes The Global Economy Two Economic Classifications Advanced Economies 29 Countries 15% of global population Emerging Market and Developing Economies Emerging Market Economies Mostly former USSR 5% of global population In process of transferring from state owned to free conomices Developing Economies 118 Countries 80% of global population Not yet achieved high average incomes Energy Proven Resources = Quantities that have been detected and that can be extracted and used with existing technologies and at current costs Middles East = 2/3 of world?s natural gas and 3/5 of world?s oil North America = 1/20 of world?s oil and natural gas; 1/4 of world?s coal How Long Will it Last? Oil = 40 Years Natural Gas = 60 Years Coal = 200 Years Cost is the main deterrence for alternative energy Food Agriculture is biggest makes up the highest percentage in developing economies Advanced economies account for 1/3 of total global food production Due to farming Subsidies Other Goods and Services Services are fastest growing part of advanced economies Manufacturing is the fastest growing part of developing economies Emerging economies straddle the fence, but are more like advanced economies Human Capital Differences Percentage of people with higher education is greater in advanced countries On-the-job training is also better in advanced economies Physical Capital Differences More advanced economies have more physical capital Major difference between developing and advanced economies is the use of modern capital-intensive-technologies Personal Distribution of Income U.S. Lowest 20% = 3% of total income Highest 20% = 50% of total income World Wide Lowest 20% = 2% of world income Highest 20% = 20% of world income
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