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Chapter 21Chapter 21The U.S. Economy and the WorldThe U.S. Economy and the World
Section 1:Section 1: Overview of the U.S. EconomyOverview of the U.S. EconomySection 2:Section 2: Factors Affecting the U.S. EconomyFactors Affecting the U.S. EconomySection 3:Section 3:
Government’s Role in the U.S. EconoGovernment’s Role in the U.S. Economymy
Section 4:Section 4: Living in a World EconomyLiving in a World Economy
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The Main IdeaIn a market economy, buyers and sellers interact in the
marketplace and respond to changes in prices by changing the amounts demanded and the amounts
supplied.
Reading Focus What are four basic economic systems? What is the free-enterprise economic system? What are three ways to invest in the economy?
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How goods and services flow through How goods and services flow through the U.S. economy:the U.S. economy: Consumers, producers, and the government Consumers, producers, and the government
exchange resources.exchange resources. Households supply resources to the Households supply resources to the
government and businesses.government and businesses. Businesses supply resources to the Businesses supply resources to the
government.government.
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How goods and services flow through How goods and services flow through the U.S. economy: the U.S. economy: (continued)(continued)
Businesses make products and sell to Businesses make products and sell to households and the government.households and the government.
The government produces goods and services The government produces goods and services to benefit businesses and households.to benefit businesses and households.
Employees earn wages, buy goods, and pay Employees earn wages, buy goods, and pay taxes.taxes.
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The marketplace affects the price of goods:The marketplace affects the price of goods:
Supply and demandSupply and demand——the demand and supply of the demand and supply of a good is related to its pricea good is related to its price
CompetitionCompetition——competitors may lower prices to competitors may lower prices to attract consumersattract consumers
Effect of competition on outputEffect of competition on output——competition competition increases selection and supplyincreases selection and supply
Surpluses and shortagesSurpluses and shortages——prices lowered with prices lowered with surpluses, raised with shortagessurpluses, raised with shortages
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How investments affect the economy:How investments affect the economy:
Entrepreneurship encourages economic growth and Entrepreneurship encourages economic growth and new product development.new product development.
Venture capital is used to develop products, improve Venture capital is used to develop products, improve facilities, and pay for distribution.facilities, and pay for distribution.
Business investmentsBusiness investments——money raised to hire workers money raised to hire workers and improve facilities; profits generate money for and improve facilities; profits generate money for shareholders and bondholdersshareholders and bondholders
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How investments affect the economy: How investments affect the economy: (continued)(continued)
Investment and technologyInvestment and technology——research and research and development investments lead to new technology development investments lead to new technology products in the marketplace; new technology aids products in the marketplace; new technology aids other businessesother businesses
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Question: How does the marketplace affect the price of goods?
PRICE
producers
supply
demand
competitionsurpluses
shortages
consumers
SECTION 1
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Section 2:Section 2: Factors Affecting the U.S. EconomyFactors Affecting the U.S. EconomyThe Main Idea
Sometimes the economy performs well. Sometimes economic activity is not as strong. Many factors affect the performance
of the economy. Economists try to understand how the economy is doing and predict its direction in order to advise
businesses and the government.
Reading Focus What is the business cycle? Why are human and capital resources important to the
economy? How do current events affect the economy?
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Factors influencing the business cycle:Factors influencing the business cycle:
Business investmentBusiness investment——creates demand and encourages creates demand and encourages competition; improves efficiency and lowers cost of competition; improves efficiency and lowers cost of production; leads to research and development production; leads to research and development
Money and creditMoney and credit——when borrowing declines, when borrowing declines, business investment declinesbusiness investment declines
Public opinionPublic opinion——consumers spend more when consumers spend more when economic future looks good, and thus businesses economic future looks good, and thus businesses invest moreinvest more
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Factors influencing the business cycle: Factors influencing the business cycle: (continued)(continued)
Changes in the global economyChanges in the global economy——for example, oil for example, oil prices have triggered recessions and expansionsprices have triggered recessions and expansions
WarWar——leads to government spending, new jobs, and leads to government spending, new jobs, and increased productionincreased production
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Tools used to predict the business Tools used to predict the business cycle:cycle: Leading indicatorsLeading indicators——used to predict about used to predict about
future economic growth; example: number of future economic growth; example: number of building permits issuedbuilding permits issued
Coincident indicatorsCoincident indicators——used to understand the used to understand the economy at the present time; example: economy at the present time; example: personal incomespersonal incomes
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Tools used to predict the business Tools used to predict the business cycle: cycle: (continued)(continued)
Lagging indicatorsLagging indicators——used to predict how long used to predict how long the current phase might last; example: the current phase might last; example: appearance of new businesses during an appearance of new businesses during an upturnupturn
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The movement and location of The movement and location of resources affects economic growth:resources affects economic growth: New companies seek locations with quality workers at New companies seek locations with quality workers at
the lowest wages.the lowest wages. Low cost of foreign workers has caused many businesses Low cost of foreign workers has caused many businesses
to move factories and jobs out of the country.to move factories and jobs out of the country. Many foreign workers immigrate seeking higher wages Many foreign workers immigrate seeking higher wages
in the United States.in the United States. More green cards are issued to skilled and educated More green cards are issued to skilled and educated
immigrants.immigrants.
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Question: What types of indicators help economics forecast the business cycle?
SECTION 2
appearance of new businesses
Coincident Indicators
Lagging Indicators
Leading Indicators
DOWNTURNUPTURN
increase in building permits
decrease in building permits
falling salesdecreased production
decline in number of businesses
rising salesincreased
production
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Section 3:Section 3: Government’s Role in the U.S EconomyGovernment’s Role in the U.S Economy
The Main IdeaThe government affects the economy through regulation
and through fiscal and monetary policies. Proper use of these tools helps keep the economy functioning
more smoothly and effectively.
Reading Focus What are the goals of government regulation? How is fiscal policy used to influence the economy? How does the Federal Reserve use monetary policy
to influence the economy?
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Goals of government regulation:Goals of government regulation: Protect workersProtect workers——Equal Employment Opportunity Equal Employment Opportunity
Commission, Occupational Safety and Health Commission, Occupational Safety and Health AdministrationAdministration
Protect consumersProtect consumers——Food and Drug Administration, Food and Drug Administration, Consumer Product Safety Commission Consumer Product Safety Commission
Limit negative effectsLimit negative effects——Environmental Protection Environmental Protection AgencyAgency
Encourage competitionEncourage competition——regulations to ensure fair regulations to ensure fair competitioncompetition
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Fiscal policy is used to influence the Fiscal policy is used to influence the economy.economy. TaxesTaxes——lowering taxes creates spending money, aids lowering taxes creates spending money, aids
business, and leads to new jobs; raising taxes slows business, and leads to new jobs; raising taxes slows growth and lowers prices; growth and lowers prices; tax incentivestax incentives encourage encourage business investmentsbusiness investments
Government spendingGovernment spending——increased spending raises increased spending raises demand and creates jobs; decreased spending demand and creates jobs; decreased spending reverses effectsreverses effects
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Fiscal policy is used to influence the Fiscal policy is used to influence the economy. economy. (continued)(continued)
Public transfer paymentsPublic transfer payments——government funds enable government funds enable poor and unemployed to continue spendingpoor and unemployed to continue spending
TimingTiming——economic forecasts used to time fiscal economic forecasts used to time fiscal policy changespolicy changes
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The Fed influences the economy:The Fed influences the economy:
Monetary policy determines the amount of money Monetary policy determines the amount of money available in the economy.available in the economy.
OpenOpen--market operationsmarket operations——securities are bought or securities are bought or sold to contract or expand money supplysold to contract or expand money supply
Discount rateDiscount rate——interest rate charged to banks is interest rate charged to banks is lowered to expand the economy, raised to slow lowered to expand the economy, raised to slow growth; banks borrow more when rate is lowgrowth; banks borrow more when rate is low
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The Fed influences the economy:The Fed influences the economy: (continued)(continued)
Reserve requirementReserve requirement——lowered to expand the lowered to expand the economy, raised to slow growth; banks lend more economy, raised to slow growth; banks lend more when reserve is lowwhen reserve is low
Timing and monetary policyTiming and monetary policy——changes take time to changes take time to affect economyaffect economy
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Question: What are the four main economic goals of government regulation?
SECTION 3
Government Regulation
protect consumers
encourage competition
limit negative effects
protect workers
Four Main Goals of Government RegulationFour Main Goals of Government Regulation
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The Main IdeaInternational trade allows countries to specialize in producing the
goods and services where they are most efficient. Trade gives people access to more goods and services. Trade also makes
countries interdependent.
Reading Focus Why do countries trade with one another? What are the differences between free trade and
protectionism? How does international trade affect jobs and consumers?
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Nations trade with one another.Nations trade with one another.
SpecializationSpecialization——resources determine types of resources determine types of goods nations produce; countries specialize in goods nations produce; countries specialize in certain goods and servicescertain goods and services
Trade increases a country’s supply of goods, Trade increases a country’s supply of goods, services, and resources.services, and resources.
Trade barriersTrade barriers are used to protect a country’s are used to protect a country’s industries from foreign competition.industries from foreign competition.
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Nations trade with one another. Nations trade with one another. (continued)(continued)
Reciprocal trade agreements, regional trade Reciprocal trade agreements, regional trade organizations, and international trade agreements organizations, and international trade agreements work to improve trade.work to improve trade.
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Free trade versus protectionism:Free trade versus protectionism:
Free trade—Supporters believe exports and Free trade—Supporters believe exports and imports should flow freely between countries; imports should flow freely between countries; free trade promotes competition and efficient free trade promotes competition and efficient businesses; trade barriers result in business businesses; trade barriers result in business and job losses; removing trade barriers and job losses; removing trade barriers promotes economic growth.promotes economic growth.
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Free trade versus protectionism:Free trade versus protectionism: (continued)(continued)
Protectionism—Supporters believe that tariffs Protectionism—Supporters believe that tariffs will protect domestic industries; reducing will protect domestic industries; reducing foreign competition creates more jobs at foreign competition creates more jobs at home; “infant industries” are vulnerable to home; “infant industries” are vulnerable to foreign competition; businesses foreign competition; businesses overspecialize; other nations do not promote overspecialize; other nations do not promote free trade.free trade.
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Effects of international trade on jobs Effects of international trade on jobs and consumers:and consumers: Impact on jobsImpact on jobs——new markets can increase new markets can increase
demand and create more jobs; however, lower demand and create more jobs; however, lower wages in foreign countries results in job losseswages in foreign countries results in job losses
Impact on consumersImpact on consumers——trade allows consumers trade allows consumers access to goods scarce in their countries; access to goods scarce in their countries; increases competition and lowers prices; increases competition and lowers prices; consumers have more choicesconsumers have more choices
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Question: What effects can international trade have on jobs and consumers?
SECTION 4
Jobs Consumers
As demand increases, companies build new
factories and hire more workers.
Jobs are lost when companies move to foreign countries for
inexpensive labor.
Consumers have access to goods that are scarce in their country.
Increased competition causes prices to decline.
The standard of living rises because consumers can afford more goods.
Consumers can enjoy more choices.
Effects of International Trade
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Chapter 21 Wrap-Up
1. What is the circular-flow model?2. Why is investment important in a free-enterprise system?3. How does the location of capital and human resources
affect the U.S. economy?4. What role do current events play in a country’s economy?5. What are the goals of government regulation?6. What is the role of the Federal Reserve System in the U.S.
economy?7. Why do countries have tariffs?8. What industries do both protectionists and free-trade
supporters believe must be protected from foreign competition?
1. What is the circular-flow model?2. Why is investment important in a free-enterprise system?3. How does the location of capital and human resources
affect the U.S. economy?4. What role do current events play in a country’s economy?5. What are the goals of government regulation?6. What is the role of the Federal Reserve System in the U.S.
economy?7. Why do countries have tariffs?8. What industries do both protectionists and free-trade
supporters believe must be protected from foreign competition?