SOLUTION MANUAL FOR THE ECONOMY TODAY 13TH EDITION SCHILLER

WHAT IS THIS CHAPTER ALL ABOUT? All nations confront the central economic questions: What to produce, How to produce; and For Whom to produce. However, the nations of the world approach these issues with very different production possibilities. The objective of this chapter is to assess how the U.S. economy stacks up. Specifically, this chapter address these three questions: WHAT goods and services does the United States produce? HOW is that output produced? FOR WHOM is the output produced? LEARNING OBJECTIVES: After reading this chapter, the students should know: 1. The relative size of the U.S. economy. 2. How the U.S. output mix has changed over time. 3. How the U.S. is able to produce so much output. 4. How incomes are distributed in the United States and elsewhere. NEW TO THIS EDITION The changes to this chapter include: • Updated for the Great Recession • All global economic data updated • 2 revised Discussion Questions • Revised all problems • Solutions to Discussion Questions and Problems now in Solutions Manual  LECTURE LAUNCHERS How long will this chapter take? – Two 75-minute class periods. Where should you start? 1. Begin your discussion by asking students how does economic freedom affect a nations ability to grow. a. Ask students if economic freedom can help create jobs and grow the economy in poor countries. b. Ask student if the high degree of market reliance in the U.S. economy is responsible for our superior economic growth. 2. Ask students why we need government regulation of economic activities. Government provides the framework in which businesses can operate. 3. Ask students what may be contributing to income inequality. Are we becoming a nation of “haves” and “have not’s”. COMMON STUDENT ERRORS Students often believe the following statements are true. Each incorrect statement is followed by a corrected version and an explanation. These common errors are also included in the student study guide. 1. A higher GDP means an increase in the standard of living. WRONG! A high per capital GDP is an imperfect measure of the standard of living. RIGHT! Many developing countries experience a rise in GDP, but their population grows faster. This means that there is actually less income per person and the standard of living falls! The growth in population must be taken into account in measuring the standard of living, which is the reason that the per capita GDP, not just the GDP, is used. However, even the per capita GDP measure fails to take into account the distribution of income. 2. Investors make an economic investment when they invest in the stock market. WRONG! Economic investment occurs only with the tangible creation or maintenance of capital goods. RIGHT! A distinction must be made between financial investment and economic investment. Common usage usually refers to financial investment in which individuals purchase a financial security backed by a financial institution. Such an activity is called saving–the alternative to immediate consumption. This saving may eventually be used by financial corporations to make loans that will lead to economic investment. But economists have found that there are a lot of things that can happen to saving before it turns into tangible production of capital goods. Therefore economists analyze saving and investment separately. ANNOTATED OUTLINE 1. Introduction A. All nations confront the central economic questions of WHAT to produce, HOW to produce, and FOR WHOM to produce it. However, the nations of the world approach these issues with very different production possibilities. B. In addition to varying production possibilities, the nations of the world use different mechanisms for deciding WHAT, HOW, and FOR WHOM to produce. C. The objective of this chapter is to assess how the U.S. economy stacks up. Specifically, 1. WHAT goods and services does the United States produce? 2. HOW is that output produced? 3. FOR WHOM is the output produced? II.What America Produces A. The U.S. has less than 5 percent of the world’s population, yet it produces over 20 percent of the world’s output. 2. GDP Comparisons 1. Definition: Gross Domestic Product (GDP) – The total market value of all final goods and services produced within a nation’s borders in a given time period. 2. WORLD VIEW: Comparative Output The market value of output (GDP) is a basic measure of an economy’s size. The U.S. economy is far larger than any other and accounts for nearly one-fifth of the entire world’s output. This World View provides bar chart data comparing U.S. GDP to several other nations. 3. In 2010, the U.S. economy produced about $14.6 trillion worth of output compared to the second largest economy, China, which produced only $10.1 trillion. 4. Per Capita GDP • Per capita GDP is an indicator of how much output the average person would get if all output were divided up evenly among the population. • Definition: Per Capita GDP – The dollar value of GDP divided by total population: average GDP. • With less than 5 percent of the world’s population, the United States produces far more output per person than other countries do. • In Ethiopia and Haiti, per capita incomes are only about $1,000 per year – which is less than four dollars per day. • WORLD VIEW: GDP per Capita Around the World Per capita GDP is a measure of average living standards. Americans have access to far more goods and services than do people in other nations. This World View provides bar chart data comparing U.S. GDP per capita to several other nations. 5. GDP Growth (Figure 2.1) • The GDP gap between the United States and the world’s poor nations keeps growing. • The reason for this growing gap is economic growth. • Definition: Economic Growth – An increase in output (real GDP); an expansion of production possibilities. • On average, U.S. output has grown by roughly 3 percent a year, nearly three times faster than population growth (1 percent). • As a result, not only does total output keep rising, but so does per capital output. 6. Poor Nations (Table 2.1) • Some poor nations demonstrated economic growth (China and India). • However, in many poor nations, total output has actually declined year after year, depressing living standards. • For example, between 2000 and 2009, Zimbabwe’s GDP declined by an average of 7.5 percent per year. • As a result, Zimbabwe’s output in 2009 was 90 percent smaller than in 2000. • With negative economic growth and 0.9 percent average annual population growth, Zimbabwe’s per capital GDP fell below $400 a year with two-thirds of Zambia’s population being undernourished. • Even nations with positive GDP growth (e.g. Haiti, West Bank/Gaza) didn’t grow fast enough to raise living standards. 7. The Mix of Out