Chapter 3American Free

EnterpriseUnderstanding

America’s Economic Structure

Tradition of Free EnterpriseTradition of Free Enterprise

The Economic Trade-off: Freedom vs. Protection

Traditionally Americans have favored economic freedom over economic regulation.

While we value freedom, we still expect the government to protect us from the problems that can exist in free markets.

The more freedom that Americans give up in the name of public interest—the further we move away from the free market end

of the continuum.

All Americans act to decide when the benefits of government protection outweigh the drawbacks to free enterprise.

RightsRights and and Roles Roles of the American Consumerof the American Consumer

• Rights Rights • Property Rights• Contracts • Taxation

• RolesRoles• Consumer• Voter

The The RoleRole of Government of Government1. Protect the Public Interest

2.Provide Information 3. Promote Growth and Stability

The Financial SystemKey IndicatorsKey Indicators

Inflation

Employment

Gross Domestic Product

Gross Domestic Product

The main indicator used to determine overall health of the economy is gross domestic product (GDP) which is the dollar value of all final goods and services produced within a country’s borders in a given year.

This will allow them to better determine upcoming business cycles to determine prosperity, recession or depression.

Limitation of GDP• Non-market

activities• Underground

economy• Quality of life

Other Other IndicatorsIndicators

GDP vs. GNPAnnual income earned by

US owned firms and citizens.

2004 3.1

2005 2.7

2006 2.4

2007 2.3

United States GDP 2004-2007United States GDP 2004-2007Source: http://www.bea.gov/national/index.htm#gdpSource: http://www.bea.gov/national/index.htm#gdp

2007 Q4 -0.2

2008 Q1 0.9

2008 Q2 -0.1

2008 Q3 -0.3

United States GDP 2007-2008United States GDP 2007-2008Source: http://www.bea.gov/national/index.htm#gdpSource: http://www.bea.gov/national/index.htm#gdp

Types of Unemployment1. Frictional Unemployment- Occurs when people change jobs,

get laid off from their current jobs, take some time to find the right job after they finish their schooling, or take time off from working for a variety of other reasons

2. Structural Unemployment- Occurs when workers' skills do not match the jobs that are available. Technological advances are one cause of structural unemployment

3. Seasonal Unemployment- Occurs when industries slow or shut down for a season or make seasonal shifts in their production schedules

4. Cyclical Unemployment- Unemployment that rises during economic downturns and falls when the economy improves

                                             

Unemployment Rates•A nation’s unemployment rate is an important indicator of the health of the economy.•The Bureau of Labor StatisticsThe Bureau of Labor Statistics polls a sample of the population to determine how many people are employed and unemployed.•The unemployment rateunemployment rate is the percentage of the nation’s labor force that is unemployed.

Getting Everyone To Work!!!!• Economists generally agree that in an economy

that is working properly, an unemployment rate of around 4 to 6 percent is normal.

• Sometimes people are underemployed, that is working a job for which they are over-qualified, or working part-time when they desire full-time work.

• Discouraged workers are people who want a job, but have given up looking for one.

Full employmentFull employment is the level of employment reached is the level of employment reached when there is no cyclical unemploymentwhen there is no cyclical unemployment..

Other Other IndicatorsIndicators

Going….UP!!!!!!!!!!

• Inflation is a general increase in prices.

• Purchasing power, the ability to purchase goods and services, is decreased by rising prices.

To Market, To MarketA price index is a measurement that shows how the average

price of a standard group of goods changes over time.

• The consumer price index (CPI) is computed each month by the Bureau of Labor Statistics.

• The CPI is determined by measuring the price of a standard group of goods meant to represent the typical “market basket” of an urban consumer.

What would it cost in 1925?

What is in the basket?There are over two hundred categories of products that are

included in the basket. These categories fall under 8 major groups:

FOOD AND BEVERAGES HOUSING APPAREL

TRANSPORTATION MEDICAL CARE

RECREATIONEDUCATION AND COMMUNICATION

OTHER GOODS AND SERVICES

Inflation Theory• Quantity Theory

– Too much $ in the economy • Demand-Pull

– Demand exceeds supply• Cost-Push

– Increased input costs for the supplier

Danger…Prices on the RiseHigh inflation is a major economic problem, especially when inflation High inflation is a major economic problem, especially when inflation

rates change greatly from year to year. The three main problems rates change greatly from year to year. The three main problems are:are:

–Reduced Purchasing Power

–Erosion of Interest Income

–Erosion of Wages/Income

                                                            

How does inflation impact consumers?

                                                            

How does the increase in gas prices impact the cost of other products? What

theory of inflation is represented in this image?

The Financial System• The United States financial system includes

banks, securities exchanges, pension funds, insurers, the Federal Reserve and national regulators.

• These firms and institutions:– Provide infrastructure for economic transactions– Channel funds from savings to investment – Control monetary policy

• A sound financial system is essential for macroeconomic growth and financial stability.

Result of Instability in the Financial System

1. Diminished monetary policy2. Prolonged economic downturn3. Capital flight4. Costs of “rescue”5. Impact global markets

The Ups and Downs The Ups and Downs of American Free of American Free

EnterpriseEnterprise

Issue Focus:Issue Focus:

The Poverty ProblemThe Poverty Problem

Questions to ConsiderWhat role does the government play in fighting poverty, inflation and unemployment? How are these related issues?

What role should the government play in fighting poverty?

What government programs attempt to aid those facing poverty and/or unemployment?

Have these safety nets always existed?

The Poverty ProblemThe Poverty Problem

Although the free market is the most Although the free market is the most successful economic system at producing successful economic system at producing wealth—distribution is HIGHLY uneven. wealth—distribution is HIGHLY uneven.

The poverty threshold is an income level The poverty threshold is an income level below what is needed to support families or below what is needed to support families or households. What is the current households. What is the current threshold?!?!?!?!?!?!!?? threshold?!?!?!?!?!?!!??

POVERTY...THE FORGOTTEN STATEPOVERTY...THE FORGOTTEN STATE

What factors contribute to poverty?What factors contribute to poverty?

Lack of jobsLack of jobsLack of educational Lack of educational opportunitiesopportunitiesChanges in family structureChanges in family structureEconomic shiftsEconomic shiftsRacial and gender discriminationRacial and gender discriminationCulture of povertyCulture of poverty

Who does the government provide a safety net for?

ElderlyDisabledChildren Poor

Welfare ProgramsWelfare Programs

Welfare is a general term that refers to government aid to the poor1930’s- Under Roosevelt the government began welfare programs to reduce the impact of the Great Depression.1960’s- Lyndon Johnson launched the “War on Poverty”1990’s- Clinton transformed welfare program to Temporary Assistance to Needy Families (TANF)

The Four Types of The Four Types of Redistribution ProgramsRedistribution Programs

Cash TransfersDirect payment of

cash to eligible peopleEXAMPLES

•Temporary Assistance to Needy Families (TANF)

•Social Security•Unemployment Insurance•Workers Compensation

EXAMPLES• Food Stamps• Legal Aid• Subsidized Housing

In-Kind BenefitsGoods and services provided by the

government for free or reduced prices

Medical benefitsMedical benefitsHealth insurance is provided to those Health insurance is provided to those that cannot provide it for themselves.that cannot provide it for themselves.

EXAMPLESEXAMPLES• Medicare for the elderly and disabled Medicare for the elderly and disabled • Medicaid for the poorMedicaid for the poor

Education benefitsFederal, state, and local government all

provide money for the poor and disabled to ensure all people receive

educational opportunities.EXAMPLESHead StartSpecial Education ProgramsNeed-Based College Grants

According to the U.S. Census Bureau in 2004:

~32 million Americans (11.8%) live at or below the federal poverty level - an annual income of $17,463 for a family

of four

~33 million Americans live in households that are food insecure,

meaning they are either hungry or at risk of hunger.

                        

              

  

There was never a war on There was never a war on poverty. Maybe there was a poverty. Maybe there was a skirmish on poverty.skirmish on poverty.

~Andrew Cuomo~Andrew Cuomo

US HUD SecretaryUS HUD Secretary

According to the U.S. Census Bureau:

14,812,000 people in the United States are members of working poor

families.

·Of the 23.3 million needy people seeking emergency food assistance in

the U.S., more than 9 million are children.

70% of poor families with children in the U.S. include a person who works.