About the Author Gary E. Clayton teaches economics at Northern Kentucky University in Highland Heights, Kentucky. Dr. Clayton received his Ph.D. in economics from the University of Utah, has taught economics and finance at several universities, and has authored textbooks, including several at the college level, as well as a number of articles in various educational, professional, and technical journals. Dr. Clayton has also appeared on a number of radio and television programs, and was a guest commentator specializing in economic statistics for Marketplace, which is broadcast on American Public Radio. Dr. Clayton has a long-standing interest in economic education. He has participated in and directed numerous economic education workshops. He received the Outstanding Citizen Certificate of Recognition from the state of Arkansas for his work in economic education. He has served as vice president for the Kentucky Council on Economic Education and received the state’s highest honor when he received a commission as an honorary
Kentucky colonel. More recently, Dr. Clayton was the year 2000 Leavey Awards Winner for Excellence in Private Enterprise Education, which is presented annually by the Freedoms Foundation, in Valley Forge, Pennsylvania. During the summer months he participates in various study-abroad programs that take college students to Europe.
Business Week is the most widely read business publication in the world and is the only weekly business news publication in existence. Business Week provides incisive and comprehensive interpretations of events by evaluating the news and its implications for the United States, regional, and world economies. Business Week offers writing that is informative and often inspiring to uncover what is crucial to understanding the economy —today as well as tomorrow’s. Business Week features in Economics: Principles and Practices are a tool that enables students to see real-world economics in action.
Standard & Poor’s is a leading source for information on regional, national, and global economic developments. Standard & Poor’s data, information, news and analysis on the United States, regional, and world economies is used by industrial firms, financial institutions, and government agencies for setting policy, managing financial positions, planning production, formulating marketing strategies, and a range of similar activities. Standard & Poor’s information services represent the single most sophisticated source of information for organizations that need to understand the impact of the path of economic growth and of government fiscal and monetary policy on their activities.
Using Using Charts Charts The The cooperative cooperative is is aa volunvoluntary association of of people people formed formed to to carry carry on some kind of economic activity that will benefit its members. members. How How do do the the three three kinds kinds of of cooperatives cooperatives differ? differ? xii
A Model of the CD Market . . . . 143 Dynamics of the Price Adjustment Process . . . . . . . . . 145 Factors Affecting Price Changes in Agriculture . . . . . . . . . . . . . . 146 The Price of Gold When Supply and Demand Change . . . . . . . . 147 Distorting Market Outcomes with Price Ceilings and Price Floors . . . . . . . . . . . . . . . 151 Agricultural Price Support Programs . . . . . . . . . . . . . . . . . . . 154
Chapter 8 Employment and Union Affiliation . . . . . . . . . . . . . . . . . 194 Figure 8.2 Union Membership and Representation by Industry . . . . 195 Figure 8.3 Trade (Craft) and Industrial Unions . . . . . . . . . . . . . . . . . . . 197 Figure 8.4 Right to Work, State by State . . . 201 Figure 8.5 The Traditional Theory of Wage Determination . . . . . . . . . . . . . 207 Figure 8.6 Median Weekly Earnings by Occupation and Union Affiliation . . . . . . . . . . . . . . . . . 208 Figure 8.7 Union Membership . . . . . . . . . . . 212 Figure 8.8 Median Female Income as a Percentage of Male Income . . . . 213 Figure 8.9 Distribution of Male and Female Jobs by Occupation . . . . 214 Figure 8.10 The Minimum Wage . . . . . . . . . . 217 Figure 8.1
Chapter 9 Total Government Receipts Per Capita, Adjusted for Inflation . . . 224 Figure 9.2 Shifting the Incidence of a Tax . . . 225 Figure 9.3 Three Types of Taxes . . . . . . . . . . 228 Figure 9.4 Federal Government Revenues by Source . . . . . . . . . . . . . . . . . 232 Figure 9.5 Individual Income Tax Rates, 2000 233 Figure 9.6 Average Individual and FICA Taxes, Single Individuals . . . . . . 234 Figure 9.7 Sources of State and Local Government Revenue . . . . . . . . 239 Figure 9.8 State and Local Taxes as a Percentage of State Income . . . . 240 Figure 9.9 Biweekly Paycheck and Withholding Statement . . . . . . . 241 Figure 9.10 The Value-Added Tax . . . . . . . . . . 247 Figure 9.1
Chapter 10 Figure 10.1 Total Government Expenditures Per Capita, Adjusted for Inflation . . 256
Government Spending as a Percent of Total Output, 2000 . . 257 The Federal Budget for Fiscal Year 2000 . . . . . . . . . . . . . . . . . 262 Federal Government Expenditures, 1980–2000 . . . . . 263 Expenditures by State and Local Governments . . . . . . . . . . 269 The Federal Deficit . . . . . . . . . . . 273 Three Views of the Federal Debt . . 274 How Big is the Public Debt? . . . . . 275 The Crowding-Out Effect Caused by Federal Spending . . . 277
Chapter 11 The 50 State Quarter Program . . . 294 Number of State and National Banks . . . . . . . . . . . . .302
Figure 11.1 Figure 11.2
Chapter 12 Overview of the Financial System . . . . . . . . . . . . . . . . . . . 315 Figure 12.2 The Relationship Between Risk and Return . . . . . . . . . . . . . . . . 319 Figure 12.3 The Power of Compound Interest . . . . . . . . . . . . . . . . . . . 320 Figure 12.4 How Much Will You Have at Retirement? . . . . . . . . . . . . . . . 321 Figure 12.5 Bond Classifications . . . . . . . . . . 322 Figure 12.6 Financial Assets and Their Markets . . . . . . . . . . . . . . . . . . 325 Figure 12.7 The New York Stock Exchange . . 330 Figure 12.8 Tracking Stocks with the DJIA and the S&P 500 . . . . . . . . . . . . 331 Figure 12.1
Distribution of the Population by Age and Gender, 2000 . . . . . 359 Projected Change in U.S. Population by Race and Ethnic Origin, 1990–2050 . . . . . . . . . . . . . . . 360 Real GDP vs. Real GDP Per Capita . . . . . . . . . . . . . . . . 364 Annual Growth Rates of Real GDP Per Capita . . . . . . . . 365 Labor Productivity, 1959–1999 . . 367
The Government Sector Federal Government Expenditures, 1949–1999 . . . . . . . . . . . . . . . . . . . . . . . . . A21 Total Government Expenditures, 1949–1999 . . . . . . . . . . . . . . . . . . . . . . . . . A21 Federal Government Net Receipts and Net Outlays, 1950–2000 . . . . . . . . . . . . . . . . . . A22 Federal Debt, Total Outstanding, 1960–2000 . A22 National Debt Per Capita, 1940–2000 . . . . . . A22 Federal Budget Receipts, 1980–1999 . . . . . . . A23 The Financial Sector Interest Rates, 1929–2000 . . . . . . . . . . . . . . . A24 Consumer Credit Outstanding, 1980–2000 . . A24 Personal Saving, 1960–2000 . . . . . . . . . . . . . A25 Money Stock, 1970–2000 . . . . . . . . . . . . . . . A25 The Global Economy Economic Groups: Population, Exports, and GDP, 1998 . . . . . . . . . . . . . . . . . . . . . A26 Growth Rates in Real GDP, 1980–1998 . . . . . A26 World Population by Age, 2000–2050 . . . . . . A27 Countries Ranked by Population, 2000 and 2050 . . . . . . . . . . . . . . . . . . . . . . A27 Aging Index in Selected Nations of the Americas, 1997 and 2025 . . . . . . . . . A28 Median Age, World, 1975–2025 . . . . . . . . . . A28 U.S. Exports and Imports, 1950–2000 . . . . . . A29 Employment and Unemployment, Selected Economies . . . . . . . . . . . . . . . . . . A29
Percentage of Total Receipts 14%
Individual Income Taxes Employment Taxes Corporate Income Taxes
Economics: Principles and Practices incorporates the 21 basic concepts established in A Framework for Teaching Basic Economic Concepts, published by the National Council on Economic Education.
1. Scarcity and Choice Scarcity is the universal problem that faces all societies because there are not enough resources to produce everything people want. Scarcity requires people to make choices about the goods and services they use.
2. Opportunity Cost and Trade-Offs Opportunity cost is the foregone benefit of the next best alternative when scarce resources are used for one purpose rather than another. Trade-offs involve choosing less of one thing to get more of something else.
3. Productivity Productivity is a measure of the amount of output (goods and services) produced per unit of input (productive resources) used.
4. Economic Systems Economic systems are the ways in which people organize economic life to deal with the basic economic problem of scarcity.
5. Economic Institutions and Incentives Economic institutions include households and families and formal organizations such as corporations, government agencies, banks, labor unions, and cooperatives. Incentives are factors that motivate and influence human behavior.
6. Exchange, Money, and Interdependence Exchange is a voluntary transaction between buyers and sellers. It is the trading of a good or service for another good or service, or for money. Money is anything that is generally accepted as final payment for goods and services, and thus serves as a medium of exchange. Interdependence means that decisions or events in one part of the world or in one sector of the economy affect decisions and events in other parts of the world or sectors of the economy.
7. Markets and Prices Markets are arrangements that enable buyers and sellers to exchange goods and services. Prices are the amounts of money that people pay for a unit of a particular good or service.
8. Supply and Demand Supply is defined as the different quantities of a resource, good, or service that will be offered for sale at various possible prices during a specific time period. Demand is defined as the different quantities of a resource, good, or service that will be purchased at various possible prices during a specific time period.
9. Competition and Market Structure Competition is the struggle between businesses that strive for the same customer or market. Competition depends on market structure—the number of buyers and sellers, the extent to which firms can control price, the nature of the product, the accuracy and timeliness of information, and the ease with which firms can enter and exit the market.
10. Income Distribution Income distribution refers to the way the nation’s income is distributed by function—to those who provide productive resources—and by recipient, primarily individuals and families. xxviii BASIC CONCEPTS IN ECONOMICS
11. Market Failures Market failures occur when there is inadequate competition, lack of access to reliable information, resource immobility, externalities, and the need for public goods.
12. The Role of Government The role of government includes establishing a framework of law and order in which a market economy functions. The government plays a direct and an indirect role in the economy as both a producer and a consumer of goods and services.
13. Gross Domestic Product Gross Domestic Product (GDP) is defined as the market value of the total output of all final goods and services produced within a country’s boundaries during one year.
14. Aggregate Supply and Aggregate Demand Aggregate supply is the total amount of goods and services produced by the economy during a period of time. Aggregate demand is the total amount of spending on goods and services in the economy during a period of time.
15. Unemployment Unemployment is defined as the number of people without jobs who are actively seeking work. This is also expressed as a rate when the number of unemployed is divided by the number of people in the labor force.
16. Inflation and Deflation Inflation is a sustained increase in the average price level of the entire economy. Deflation is a sustained decrease in the average price level of an entire economy.
17. Monetary Policy Monetary policy consists of actions initiated by a nation’s central bank that affect the amount of money available in the economy and its cost (interest rates).
18. Fiscal Policy Fiscal policy consists of changes in taxes, in government expenditures on goods and services, and in transfer payments that are designed to affect the level of aggregate demand in the economy.
19. Absolute and Comparative Advantage and Barriers to Trade Absolute advantage and comparative advantage are concepts that are used to explain why trade takes place. Barriers to trade include tariffs, quotas, import licenses, and cartels.
20. Exchange Rates and the Balance of Payments An exchange rate is the price of one nation’s currency in terms of another nation’s currency. The balance of payments of a country is a statistical accounting that records, for a given period, all payments that the residents, businesses, and governments of one country make to the rest of the world as well as the receipts that they receive from the rest of the world.
21. International Aspects of Growth and Stability International aspects of growth and stability are more important today than in the past because all nations are much more interdependent. BASIC CONCEPTS IN ECONOMICS 1
What Is Economics? CHAPTER 2
Economic Systems and Decision Making CHAPTER 3
As you read this unit, learn how the study of economics helps answer the following questions:
How do you make the decision between buying gas for your car or taking your friend out for pizza? Why is your friend from Russia stunned by all the shoes available at your local shoe store? Why is an item at a department store less expensive than that same item at a specialty shop? 2 UNIT 1 FUNDAMENTAL ECONOMIC CONCEPTS
The factors of production—land, labor, capital, and entrepreneurship—make production possible.
To learn more about basic economic concepts through information, activities, and links to other sites, visit the Economics: Principles and Practices Web site at epp.glencoe.com
The study of economics will help you become a better decision maker—it helps you develop a way of thinking about how to make the best choices for you. To learn more about the scope of economics, view the Chapter 2 video lesson:
What Is Economics?
Chapter Overview Visit the Economics: Principles and Practices Web site at epp.glencoe.com and click on Chapter 1—Chapter Overviews to preview chapter information.
Consumers must make choices from many alternatives.
Scarcity and the Science of Economics Main Idea
Scarcity forces us to make choices. We can’t have everything we want, so we are forced to choose what we want most.
scarcity, economics, need, want, factors of production, land, capital, financial capital, labor, entrepreneur, production, Gross Domestic Product (GDP)
Reading Strategy Graphic Organizer As you read the section, complete a graphic organizer like the one below by listing and describing the three economic choices every society must make. Economic choices
Objectives After studying this section, you will be able to: 1. Explain the fundamental economic problem. 2. Examine the three basic economic questions every society must decide.
Applying Economic Concepts Scarcity Read to find out why scarcity is the basic economic problem that faces everyone.
Cover Story terest Harris Poll Shows High In in Economics American adults have an exceptionally keen interest in economics. More than seven in ten say they share the same high level of interest in economics as they do politics, business and finance. A full 96% caThe focus on economics edu believe basic economg. win tion is gro ics should be taught in f hal , Yet . ool high sch ool two out of three high sch of these same adults and c mi no eco ic ntary quiz on bas students flunked an eleme eco ce pla ] [to e has come concepts. Clearly the tim a. nd age ion cat edu the national nomic literacy higher on
ase, The National Council —April 27, 1999 press rele on Economic Education
o you think the study of economics is worth your time and effort? According to the Harris poll in the cover story, a huge percentage of Americans think it is. They must know what economists know—that a basic understanding of economics can help make sense of the world around us.
The Fundamental Economic Problem Have you ever noticed that very few people are satisfied with the things they have? Someone without a home may want a small one; someone else with a small home may want a larger one; someone with a large home may want a mansion. Others want things like expensive sports cars, lavish jewelry, and exotic trips. Whether they are rich or poor, most people seem to want more than they already have. In fact, if each of us were to make a list of all the things we want, it would include more things than we could ever hope to obtain. The fundamental economic problem facing all societies is that of scarcity. Scarcity is the condition that results from society not having enough resources to produce all the things people would like to have. CHAPTER 1: WHAT IS ECONOMICS? 5
ECONOMICS AT A GLANCE
AT A GLANCE
Scarcity Unlimited Wants
What to Produce
How to Produce
For Whom to Produce
Using Charts Scarcity is the fundamental economic problem that forces consumers and producers to use resources wisely. Why is scarcity a universal problem?
“There Is No Such Thing as a Free Lunch” Because resources are limited, virtually everything we do has a cost—even when it seems as if we are getting something “for free.” For example, you may think you are getting a free lunch when you use a “buy one, get one free” coupon. However, while you may not pay for the extra lunch then and there, someone had to pay the farmer for raising the food, the truck driver for delivering the food, the chef for preparing the food, and the server for serving the food. How does business recover these costs? Chances are that the price of the giveaway is usually hidden somewhere in the prices the firm charges for its products. As a result, the more a business gives away “free,” the more it has to raise the prices for the items it sells. In the end, someone always pays for the supposedly “free” lunch—and that someone may be you! Unfortunately, most things in life are not free because someone has to pay for the production in the first place. Economic educators use the term TINSTAAFL to describe this concept. In short, this term means that There Is No Such Thing As A Free Lunch.
Three Basic Questions As shown in Figure 1.1, scarcity affects almost every decision we make. This is where the study of economics comes in. Economics is the study of how people try to satisfy what appears to be seemingly unlimited and competing wants through the careful use of relatively scarce resources.
Because we live in a world of relatively scarce resources, we have to make wise economic choices. Figure 1.1 presents three of the basic questions we have to answer. In so doing, we make decisions about the ways our limited resources will be used.
Needs and Wants
WHAT to Produce
Economists often talk about people’s needs and wants. A need is a basic requirement for survival and includes food, clothing, and shelter. A want is a way of expressing a need. Food, for example, is a basic need related to survival. To satisfy the need for food, a person may “want” a pizza or other favorite meal. Because any number of foods will satisfy the need for nourishment, the range of things represented by the term want is much broader than that represented by the term need.
The first question is that of WHAT to produce. Should a society direct most of its resources to the production of military equipment or to other items such as food, clothing, or housing? Suppose the decision is to produce housing. Should its limited resources be used for low-income, middleincome, or upper-income housing? How many of each will be needed? A society cannot have everything its people want, so it must decide WHAT to produce.
6 UNIT 1 FUNDAMENTAL ECONOMIC CONCEPTS
HOW to Produce A second question is that of HOW to produce. Should factory owners use mass production methods that require a lot of equipment and few workers, or should they use less equipment and more workers? If an area has many unemployed people, the second method might be better. On the other hand, mass production methods in countries where machinery and equipment is widely available can often lower production costs. Lower costs make manufactured items less expensive and, therefore, available to more people.
FOR WHOM to Produce The third question deals with FOR WHOM to produce. After a society decides WHAT and HOW to produce, the things produced must be allocated to someone. If the society decides to produce housing, should it be distributed to workers, professional people, or government employees? If there are not enough houses for everyone, a choice must be made as to who will receive the existing supply. These questions concerning WHAT, HOW, and FOR WHOM to produce are not easy for any society to answer. Nevertheless, they must be answered as long as there are not enough resources to satisfy people’s seemingly unlimited wants.
not created by humans. “Land” includes deserts, fertile fields, forests, mineral deposits, livestock, sunshine, and the climate necessary to grow crops. Because only so many natural resources are available at any given time, economists tend to think of land as being fixed, or in limited supply. For example, there is not enough good farmland to adequately feed all of the earth’s population, nor enough sandy beaches for everyone to enjoy, nor enough oil and minerals to meet our expanding energy needs indefinitely. Because the supply of a productive factor like land is relatively fixed, the problem of scarcity is likely to become worse as population grows in the future.
Capital Another factor of production is capital—the tools, equipment, machinery, and factories used in the production of goods and services. Such items also are called capital goods to distinguish them from financial capital, the money used to buy the tools and equipment used in production.
The Factors of Production The reason people cannot satisfy all their wants and needs is the scarcity of productive resources. The factors of production, or resources required to produce the things we would like to have, are land, capital, labor, and entrepreneurs. As shown in Figure 1.2, all four are required if goods and services are to be produced.
Land In economics, land refers to the “gifts of nature,” or natural resources
Making Decisions If we cannot have everything we want, then we have to choose what we want the most. Why must a society face the choices about what, how, and for whom to produce?
CHAPTER 1: WHAT IS ECONOMICS? 7
ECONOMICS AT A GLANCE
AT A GLANCE
The Factors of Production Land
Land includes the “gifts of nature,” or natural resources not created by human effort.
Capital includes the tools, equipment, and factories used in production.
Labor includes people with all their efforts and abilities.
Entrepreneurs are individuals who start a new business or bring a product to market.
Synthesizing Information The four factors of production are necessary for production to take place. What four factors of production are necessary to bring jewelry to consumers?
Capital is unique in that it is the result of production. A bulldozer, for example, is a capital good used in construction. It also was built in a factory, which makes it the result of earlier production. Like the bulldozer, the cash register in a neighborhood store is a capital good, as are the computers in your school that are used to produce the service of education.
Labor A third factor of production is labor—people with all their efforts, abilities, and skills. This category includes all people except for a unique group of individuals called entrepreneurs, which we single out because of their special role in the economy. Unlike land, labor is a resource that may vary in size over time. Historically, factors such as population growth, immigration, famine, war, and disease have had a dramatic impact on both the quantity and quality of labor. 8 UNIT 1 FUNDAMENTAL ECONOMIC CONCEPTS
Entrepreneurs Some people are special because they are the innovators responsible for much of the change in our economy. Such an individual is an entrepreneur, a risk-taker in search of profits who does something new with existing resources. Entrepreneurs often are thought of as being the driving force in an economy because they exhibit the ability to start new businesses or bring new products to market. They provide the initiative that combines the resources of land, labor, and capital into new products.
Production When all factors of production—land, capital, labor, and entrepreneurs—are present, production, or the process of creating goods and services, can take place. In fact, everything we produce requires these factors. For example, the chalkboards, desks, and audiovisual equipment used in schools are capital goods. The labor is in the form of services supplied
by teachers, administrators, and other employees. Land, such as the iron ore, granite, and timber used to make the building and desks, as well as the land where the school is located, is also needed. Finally, entrepreneurs are needed to organize the other three factors and make sure that everything gets done.
The Scope of Economics Economics is the study of human efforts to satisfy what appear to be unlimited and competing wants through the careful use of relatively scarce resources. As such, it is a social science because it deals with the behavior of people as they deal with this basic issue. There are four key elements to this study: description, analysis, explanation, and prediction.
Description Economics deals with the description of economic activity. For example, you will often hear about the Gross Domestic Product (GDP)—the
UNITED STATES LEADS IN ENTREPRENEURS A vast majority of the owners of the nearly 20 million businesses in the United States are entrepreneurs. Most either work for themselves or have a few employees. A 10-nation study found that the United States leads when it comes to entrepreneurs. According to the survey, nearly 1 in 12 Americans is trying to start a new business. In second place is Canada. The study also shows a strong link between business start-up rates and overall economic growth. The graph shows the percentage of the adult population starting new businesses.
dollar value of all final goods and services, and structures produced within a country’s borders in a 12-month period. GDP is the most comprehensive measure of a country’s total output and is a key measure of the nation’s economic health. Economics is also concerned with what is produced and who gets how much, as well as with topics such as unemployment, inflation, international trade, the interaction of business and labor, and the effects of government spending and taxes. Description is important because we need to know what the world around us looks like. However, description is only part of the picture because it leaves many important “why” and “how” questions unanswered.
Analysis In order to answer such questions, economics must focus on the analysis of economic activity as well. Why, for example, are prices of some items high while others are low? Why do some people earn higher incomes than others? How do taxes affect people’s desire to work and save?
Italy Britain Germany Denmark France Finland U.S. Canada
3.4% 3.3% 2.2% 2.0% 1.8% 1.4% 8.5% 6.8%
Source: 1999 Global Entrepreneurship Monitor
Critical Thinking 1. Analyzing Information In which nation is entrepreneurial activity strongest? Weakest? 2. Making Comparisons How does the level of North America’s entrepreneurial activity compare with Europe’s? 3. Drawing Conclusions Do you think there is a link between business start-up rates and overall economic growth? Why or why not? CHAPTER 1: WHAT IS ECONOMICS? 9