Статья: U.S. Economy

Статья: U.S. Economy

United States (Economy)

INTRODUCTION

The U.S. economy is immense. In 1998 it included more than 270 million

consumers and 20 million businesses. U.S. consumers purchased more than $5.5

trillion of goods and services annually, and businesses invested over a

trillion dollars more for factories and equipment. Over 80 percent of the

goods and services purchased by U.S. consumers each year are made in the

United States; the rest are imported from other nations. In addition to

spending by private households and businesses, government agencies at all

levels (federal, state, and local) spend roughly an additional $1.5 trillion

a year. In total, the annual value of all goods and services produced in the

United States, known as the Gross Domestic Product (GDP), was $9.25 trillion

in 1999.

Those levels of production, consumption, and spending make the U.S. economy

by far the largest economy the world has ever known—despite the fact that

some other nations have far more people, land, or other resources. Through

most of the 20th century, U.S. citizens also enjoyed the highest material

standards of living in the world. Some nations have higher per capita (per

person) incomes than the United States. However, these comparisons are based

on international exchange rates, which set the value of a country’s currency

based on a narrow range of goods and services traded between nations. Most

economists agree that the United States has a higher per capita income based

on the total value of goods and services that households consume. American

prosperity has attracted worldwide attention and imitation. There are several

key reasons why the U.S. economy has been so successful and other reasons

why, in the 21st century, it is possible that some other industrialized

nations will surpass the U.S. standard of living. To understand those

historical and possible future events, it is important first to understand

what an economic system is and how that system affects the way people make

decisions about buying, selling, spending, saving, investing, working, and

taking time for leisure activities.

Capital, savings, and investment are taken up in the fourth section, which

explains how the long-term growth of any economy depends upon the

relationship between investments in capital goods (inventories and the

facilities and equipment used to make products) and the level of saving in

that economy. The next section explains the role money and financial markets

play in the economy. Labor markets, the topic of section six, are also

extremely important in the U.S. economy, because most people earn their

incomes by working for wages and salaries. By the same token, for most firms,

labor is the most costly input used in producing the things the firms sell.

The role of government in the U.S. economy is the subject of section seven.

The government performs a number of economic roles that private markets

cannot provide. It also offers some public services that elected officials

believe will be in the best interests of the public. The relationship between

the U.S. economy and the world economy is discussed in section eight. Section

nine looks at current trends and issues that the U.S economy faces at the

start of the 21st century. The final section provides an overview of the

kinds of goods and services produced in the United States.

U.S. ECONOMIC SYSTEM

An economic system refers to the laws and institutions in a nation that

determine who owns economic resources, how people buy and sell those

resources, and how the production process makes use of resources in providing

goods and services. The U.S. economy is made up of individual people,

business and labor organizations, and social institutions. People have many

different economic roles—they function as consumers, workers, savers, and

investors. In the United States, people also vote on public policies and for

the political leaders who set policies that have major economic effects. Some

of the most important organizations in the U.S. economy are businesses that

produce and distribute goods and services to consumers. Labor unions, which

represent some workers in collective bargaining with employers, are another

important kind of economic organization. So, too, are

cooperatives—organizations formed by producers or consumers who band together

to share resources—as well as a wide range of nonprofit organizations,

including many charities and educational organizations, that provide services

to families or groups with special problems or interests.

For the most part, the United States has a market economy in which individual

producers and consumers determine the kinds of goods and services produced

and the prices of those products. The most basic economic institution in

market economies is the system of markets in which goods and services are

bought and sold. That is where consumers buy most of the food, clothing, and

shelter they use, and any number of things that they simply want to have or

that they enjoy doing. Private businesses make and sell most of those goods

and services. These markets work by bringing together buyers and sellers who

establish market prices and output levels for thousands of different goods

and services.

A guiding principle of the U.S. economy, dating back to the colonial period,

has been that individuals own the goods and services they make for themselves

or purchase to consume. Individuals and private businesses also control the

factors of production. They own buildings and equipment, and are free to hire

workers, and acquire things that businesses use to produce goods and

services. Individuals also own the businesses that are established in the

United States. In other economic systems, some or all of the factors of

production are owned communally or by the government.

For the most part, U.S. producers decide which goods and services to make and

offer to sell, and what prices to charge for those products. Goods are

tangible things—things you can touch—that satisfy wants. Examples of goods

are cars, clothing, food, houses, and toys. Services are activities that

people do for themselves or for other people to satisfy their wants. Examples

of services are cutting hair, polishing shoes, teaching school, and providing

police or fire protection.

Producers decide which goods and services to make and sell, and how much to

ask for those products. At the same time, consumers decide what they will

purchase and how much money they are willing to pay for different goods and

services. The interaction between competing producers, who attempt to make

the highest possible profit, and consumers, who try to pay as little as

possible to acquire what they want, ultimately determines the price of goods

and services.

In a market economy, government plays a limited role in economic decision

making. However, the United States does not have a pure market economy, and

the government plays an important role in the national economy. It provides

services and goods that the market cannot provide effectively, such as

national defense, assistance programs for low-income families, and interstate

highways and airports. The government also provides incentives to encourage

the production and consumption of certain types of products, and discourage

the production and consumption of others. It sets general guidelines for

doing business and makes policy decisions that affect the economy as a whole.

The government also establishes safety guidelines that regulate consumer

products, working conditions, and environmental protection.

Factors of Production

The factors of production, which in the United States are controlled by

individuals, fall into four major categories: natural resources, labor,

capital, and entrepreneurship.

Natural Resources

Natural resources, which come directly from the land, air, and sea, can

satisfy people’s wants directly (for example, beautiful mountain scenery or a

clear lake used for fishing and swimming), or they can be used to produce

goods and services that satisfy wants (such as a forest used to make lumber

and furniture).

The United States has many natural resources. They include vast areas of

fertile land for growing crops, extensive coastlines with many natural

harbors, and several large navigable rivers and lakes on which large ships

and barges carry products to and from most regions of the nation. The United

States has a generally moderate climate, and an incredible diversity of

landscapes, plants, and wildlife.

Labor

Labor refers to the routine work that people do in their jobs, whether it is

performing manual labor, managing employees, or providing skilled

professional services. Manual labor usually refers to physical work that

requires little formal education or training, such as shoveling dirt or

moving furniture. Managers include those who supervise other workers.

Examples of skilled professionals include doctors, lawyers, and dentists.

Of the 270 million people living in the United States in 1998, nearly 138

million adults were working or actively looking for work. This is the

nation's labor force, which includes those who work for wages and salaries

and those who file government tax forms for income earned through self-

employment. It does not include homemakers or others who perform unpaid labor

in the home, such as raising, caring for, and educating children; preparing

meals and maintaining the home; and caring for family members who are ill.

Nor, of course, does it count those who do not report income to avoid paying

taxes, in some cases because their work involves illegal activities.

Capital

Capital includes buildings, equipment, and other intermediate products that

businesses use to make other goods or services. For example, an automobile

company builds factories and buys machines to stamp out parts for cars; those

buildings and machines are capital. The value of capital goods being used by

private businesses in the United States in the late 1990s is estimated to be

more than $11 trillion. Roughly half of that is equipment and the other half

buildings or other structures. Businesses have additional capital investments

in their inventories of finished products, raw materials, and partially

completed goods.

Entrepreneurship

Entrepreneurship is an ability some people have to accept risks and combine

factors of production in order to produce goods and services. Entrepreneurs

organize the various components necessary to operate a business. They raise

the necessary financial backing, acquire a physical site for the business,

assemble a team of workers, and manage the overall operation of the

enterprise. They accept the risk of losing the money they spend on the

business in the hope that eventually they will earn a profit. If the business

is successful, they receive all or some share of the profits. If the business

fails, they bear some or all of the losses.

Many people mistakenly believe that anyone who manages a large company is an

entrepreneur. However, many managers at large companies simply carry out

decisions made by higher-ranking executives. These managers are not

entrepreneurs because they do not have final control over the company and

they do not make decisions that involve risking the companies resources. On

the other hand, many of the nation’s entrepreneurs run small businesses,

including restaurants, convenience stores, and farms. These individuals are

true entrepreneurs, because entrepreneurship involves not merely the

organization and management of a business, but also an individual’s

willingness to accept risks in order to make a profit.

Throughout its history, the United States has had many notable entrepreneurs,

including 18th-century statesman, inventor, and publisher Benjamin Franklin,

and early-20th-century figures such as inventor Thomas Edison and automobile

producer Henry Ford. More recently, internationally recognized leaders have

emerged in a number of fields: Bill Gates of Microsoft Corporation and Steve

Jobs of Apple Computer in the computer industry; Sam Walton of Wal-Mart in

retail sales; Herb Kelleher and Rollin King of Southwest Airlines in the

commercial airline business; Ray Kroc of MacDonald’s, Harland Sanders of

Kentucky Fried Chicken (KFC), and Dave Thomas of Wendy’s in fast food; and in

motion pictures, Michael Eisner of the Walt Disney Company as well as a

number of entrepreneurs at smaller independent production studios that

developed during the 1980s and 1990s.

Acquiring the Factors of Production

All four factors of production—natural resources, labor, capital, and

entrepreneurship—are traded in markets where businesses buy these inputs or

productive resources from individuals. These are called factor markets.

Unlike a grocery market, which is a specific physical store where consumers

purchase goods, the markets mentioned above comprise a wide range of

locations, businesses, and individuals involved in the exchange of the goods

and services needed to run a business.

Businesses turn to the factor markets to acquire the means to make goods and

services, which they then try to sell to consumers in product or output

markets. For example, an agricultural firm that grows and sells wheat can buy

or rent land from landowners. The firm may shop for this natural resource by

consulting real estate agents and farmers throughout the Midwest. This same

firm may also hire many kinds of workers. It may find some of its newly hired

workers by recruiting recent graduates of high schools, colleges, or

technical schools. But its market for labor may also include older workers

who have decided to move to a new area, or to find a new job and employer

where they currently live.

Firms often buy new factories and machines from other firms that specialize

in making these kinds of capital goods. That kind of investment often

requires millions of dollars, which is usually financed by loans from banks

or other financial institutions.

Entrepreneurship is perhaps the most difficult resource for a firm to

acquire, but there are many examples of even the largest and most well-

established firms seeking out new presidents and chief executive officers to

lead their companies. Small firms that are just beginning to do business

often succeed or fail based on the entrepreneurial skills of the people

running the business, who in many cases have little or no previous experience

as entrepreneurs.

Markets and the Problem of Scarcity

A basic principle in every economic system—even one as large and wealthy as

the U.S. economy—is that few, if any, individuals ever satisfy all of their

wants for goods and services. That means that when people buy goods and

services in different markets, they will not be able to buy all of the things

they would like to have. In fact, if everyone did have all of the things they

wanted, there would be no reason for anyone to worry about economic problems.

But no nation has ever been able to provide all of the goods and services

that its citizens wanted, and that is true of the U.S. economy as much as any

other.

Scarcity is also the reason why making good economic choices is so important,

because even though it is not possible to satisfy everyone’s wants, all

people are able to satisfy some of their wants. Similarly, every nation is

able to provide some of the things its citizens want. So the basic problem

facing any nation’s economy is how to make sure that the resources available

to the people in the nation are used to satisfy as many as possible of the

wants people care about most.

The U.S. economy, with its system of private ownership, has an extensive set

of markets for final products and for the factors of production. The economy

has been particularly successful in providing material goods and services to

most of its citizens. That is even more striking when results in the U.S.

economy are compared with those of other nations and economic systems.

Nevertheless, most U.S. consumers say they would like to be able to buy and

use more goods and services than they have today. And some U.S. citizens are

calling for significant changes in how the economic system works, or at least

in how the purchasing power and the goods and services in the system are

divided up among different individuals and families.

Not surprisingly, low-income families would like to receive more income, and

often favor higher taxes on upper-income households. But many upper-income

families complain that government already taxes them too much, and some argue

that government is taking over too many things in the economy that were, in

the past, left up to individuals, families, and private firms or charities.

These debates take place because of the problem of scarcity. For individuals

and governments, resources that satisfy a particular want cannot be used to

satisfy other wants. Therefore, deciding to satisfy one want means paying the

cost of not satisfying another. Such choices take place every time the

government decides how to spend its tax revenues.

What Are Markets?

Goods and services are traded in markets. Usually a market is a physical place

where buyers and sellers meet to make exchanges, once they have agreed on a

price for the product. One kind of marketplace is a grocery store, where people

go to buy food and household products. However, many markets are not

confined to specific locations. In a broader sense, markets include all the

places and sources where goods and services are exchanged. For example, the

labor market does not exist in a specific physical building, as does a grocery

market. Instead, the term labor market describes a multitude of

individuals offering their labor for sale as well as all the businesses

searching for employees.

Traders do not always have to meet in person to buy and sell. Markets can

operate via technology, such as a telephone line or a computer site. For

example, stocks and other financial securities have long been traded

electronically or by telephone. It is becoming increasingly common in the

United States for many other kinds of goods and services to be sold this way.

For instance, many people today use the Internet—the worldwide computer-based

network of information systems—to buy airline tickets, make hotel

reservations, and rent a car for their vacation. Other people buy and sell

items ranging from books, clothing, and airline tickets to baseball cards and

other rare collectibles over the Internet. Although these Internet buyers and

sellers may never meet face to face the way buyers and sellers do in more

traditional markets, these markets share certain basic features.

How a Single Market Works

Buyers hope to buy at low prices and will purchase more units of a product at

lower prices than they do at higher prices. Sellers are just the opposite.

They hope to sell at high prices, and typically they will be willing to

produce and sell more units of a product at higher prices than at lower

prices.

The price for a product is determined in the market if prices are allowed to

rise and fall, and are not legally required to be above some minimum price

floor or below some maximum price ceiling. When a product, for

example, a personal computer, reaches the market, consumers learn what

producers want to charge for it and producers learn what consumers are willing

to pay. The interaction of producers and consumers quickly establishes what the

market price for the computer will actually be. Some people who were

considering buying a computer decide that the price is higher than they are

willing to pay. And some producers may determine that consumers are not willing

to pay a price high enough for them profitably to produce and sell this

computer.

But all of the buyers who are willing and able to pay the market price get

the computer, and all of the sellers willing and able to produce it for this

price find buyers. If more consumers want to buy a computer at a specific

market price than there are suppliers are willing to sell at that price—or in

other words, if the quantity demanded is greater than the quantity

supplied—the price for the computer increases. When producers try to sell

more of their computers at a price higher than consumers are willing to buy,

the quantity supplied exceeds the quantity demanded and the price falls.

The price stops rising or falling at the price where the amount consumers are

willing and able to buy is just equal to the amount sellers are willing and

able to produce and sell. This is called the market clearing price. Market

clearing prices for many goods and services change frequently, for reasons

that will be discussed below. But some market prices are stable for long

periods of time, such as the prices of candy bars and sodas sold in vending

machines, and the prices of pizzas and hamburgers. Most buyers of these

products have come to know the general price they will have to pay for these

items. Sellers know what prices they can charge, given what consumers will

pay and considering the competition they face from other sellers of

identical, or very similar, products.

A System of Markets for All Goods and Services

How markets determine price is simple enough to understand for a single good

or service in a single location. But consider what happens when there are

markets for nearly all of the goods and services produced and consumed in an

economy, across the entire country. In that context, this reasonably simple

process of setting market prices allows an economic system as large and

complex as the U.S. economy to operate with great efficiency and a high

degree of freedom for consumers and producers.

Efficiency here means producing what consumers want to buy, at prices that

are as low as they can be for producers to stay in business. And it turns out

this efficiency is directly linked to the freedom that buyers and sellers

have in a market economy. No central authority has to decide how many shirts

or cars or sandwiches to produce each day, or where to produce them, or what

price to charge for them. Instead, consumers spend their money for the

products that give them the most satisfaction, and they try to find the best

deal they can in terms of price, quality, convenience, assurances that

defective products will be replaced or repaired, or other considerations.

What consumers are willing and able to buy tells producers what they should

produce, if they hope to make a profit. Usually consumers have many options

to choose from, because more than one producer offers the same or reasonably

similar products (such as two or more kinds of cars, colas, and carpets).

Producers then compete energetically for the dollars that consumers spend.

Competition among producers determines the best ways to produce a good or

service. For example, in the early 1900s automobiles were made largely by

hand, one at a time. But once Henry Ford discovered how to lower the cost of

producing cars by using assembly lines, other car makers had to adopt the

same production methods or be driven out of business (as many were).

Competition also determines what features and quality standards go into

products. And competition holds down the costs of production because

producers know that consumers compare their prices to the prices charged by

other firms and for other products they might buy. In markets where a large

number of producers compete, inefficient producers will be driven out of the

market.

For example, at one time most towns and cities had independently owned cafes

and drive-in restaurants that sold hamburgers, french fries, and soft drinks.

Some of these businesses are still operating, but many closed down after

larger fast-food chains began opening local franchises all around the nation,

with well-known product standards and relatively low prices. The increased

competition led to prices that were too low for many of the old cafes and

drive-ins to make a profit. The private cafes that did survive were able to

meet that level of efficiency, or they managed to make their products

different enough from the national chains to keep their customers.

Prices for goods and services can only fall so far, however. Even the most

efficient producers have to pay for the natural resources, labor, capital,

and entrepreneurship they use to make and sell products. The market price

cannot stay below the level of those costs for long without driving all of

the producers out of this market. Therefore, if consumers want to buy some

good or service not just today but also in the future, they have to pay a

price at least high enough to cover the costs of producing it, including

enough profit to make it worthwhile for sellers to stay in that market.

Once market prices for various goods and services are set, consumers are free

to choose what to buy, and producers are free to choose what to produce and

sell. They both follow their self-interest and do what makes them as well off

as they can be. When all buyers and sellers do that in an economic system of

competitive markets, the overall economy will also be very efficient and

responsive to individual preferences.

This economic process is extremely decentralized. For example, it is likely

that no one person or government agency knows how many corned beef sandwiches

are sold in any large U.S. city on any given day. Individual sellers decide

how many sandwiches they are likely to sell and arrange to have enough meat

and bread available to meet the demand from their customers.

Consumers usually do not make up their mind about what to eat for lunch or

dinner until they walk into the restaurant, grocery store, or sandwich shop.

But they know they can go to several different places and choose many

different things to eat and drink, while individual sellers know about how

much they are likely to sell on an average business day.

Other businesses sell bread and meat and drinks to the restaurants and

grocers, but they do not really know how many different sandwiches the

different food stores are selling either. They only know how much bread and

meat they need to have on hand to satisfy the orders they get from their

customers.

Each buyer and seller knows his or her small part of the market very well and

makes choices carefully to avoid wasting money and other resources. When

everyone acts this carefully while facing competition from other consumers or

producers, the overall system uses its scarce resources very efficiently.

Efficiency implies two things here: taking into account the preferences and

alternative choices that individual buyers and sellers face, and producing

goods and services at the lowest possible cost.

How and Why Market Prices Change

Another advantage of any competitive market system is a high level of

flexibility and speed in responding to changing economic conditions. In

economies where government agencies and central planners set prices, it often

takes much longer to adjust prices to new conditions. In the last decades of

the 20th century, the U.S. market economy has made these adjustments very

quickly, even compared with other market economies in Western Europe, Canada,

and Japan.

Market prices change whenever something causes a change in demand (the

amount people are willing to buy at different prices) or a change in supply

(the amount producers are willing and able to make and sell at different

prices). see Supply and Demand. Because these changes can occur

rapidly, with little or no advance warning, it is important for both consumers

and producers to understand what can cause prices to rise and fall. Those who

anticipate price changes correctly can often gain financially from their

foresight. Those who do not understand why prices have changed are likely to

feel bewildered and frustrated, and find it more difficult to know how to

respond to changing prices. Market economies are, in fact, sometimes called

price systems. It is important to understand why prices rise and fall to

understand how a market system works.

Changes in Demand

Demand for most products changes whenever there is a significant change in the

level of consumers’ income. In the United States, incomes have risen

substantially over the past 200 years. As that happened, the demand for most

goods and services also increased. There are, however, a few products that

people buy less of as income falls. Examples of these inferior goods

include low quality foods and fabrics.

Demand for a product also changes when the price of a substitute product

changes. For example, if the price for one brand of blue jeans sharply

increases while other brands do not, many consumers will switch to the other

brands, so the demand for those brands will increase. Conversely, if the

price for beef drops, then many people will buy less pork and chicken.

Some products are complements rather than substitutes. Complements are products

that are consumed together, for example cameras and film, or tennis balls and

tennis rackets. When the price of a complementary good rises, the demand for a

product falls. For example, if the price of cameras rises, the demand for film

will fall. On the other hand, if the price of a complementary good falls, the

demand for a product will rise. If the price of tennis rackets falls, for

example, more people will buy rackets and the demand for tennis balls will

increase.

Demand can also increase or decrease as a product goes in or out of style.

When famous athletes or movie stars create a popular new look in clothing or

tennis shoes, demand soars. When something goes out of style, it soon

disappears from stores, and eventually from people’s closets, too.

If people expect the price of something to go up in the future, they start to

buy more of the product now, which increases demand. If they believe the

price is going to fall in the future, they wait to buy and hope they were

right. Sometimes these choices involve very serious decisions and large

amounts of money. For example, people who buy stocks on the stock market are

hoping that prices will rise, while at least some of the people selling those

stocks expect the prices to fall. But not all economic decisions are this

serious. For example, in the 1970s there was a brief episode when toilet

paper disappeared from the shelves of grocery stores, because people were

afraid that there were going to be shortages and rising prices. It turns out

that some of these unfounded fears were based on remarks made by a comedian

on a late-night talk show.

The final factor that affects the demand for most goods and services is the

number of consumers in the market for a product. In cities where population

is rising rapidly, the demand for houses, food, clothing, and entertainment

increases dramatically. In areas where population is falling—as it has in

many small towns where farm populations are shrinking—demand for these goods

and services falls.

Changes in Supply

The supply of most products is also affected by a number of factors. Most

important is the cost of producing products. If the price of natural

resources, labor, capital, or entrepreneurship rises, sellers will make less

profit and will not be as motivated to produce as many units as they were

before the cost of production increased. On the other hand, when production

costs fall, the amount producers are willing and able to sell increases.

Technological change also affects supply. A new invention or discovery can

allow producers to make something that could not be made before. It could

also mean that producers can make more of a product using the same or fewer

inputs. The most dramatic example of technological change in the U.S. economy

over the past few decades has been in the computer industry. In the 1990s,

small computers that people carry to and from work each day were more

powerful and many times less expensive than computers that filled entire

rooms just 20 to 30 years earlier.

Opportunities to make profits by producing different goods and services also

affect the supply of any individual product. Because many producers are

willing to move their resources to completely different markets, profits in

one part of the economy can affect the supply of almost any other product.

For example, if someone running a barbershop decided to sign a contract to

provide and operate the machines that clean runways at a large airport, this

would decrease the supply of haircutting services and increase the supply of

runway sweeping services.

When suppliers believe the price of the good or service they provide is going

to rise in the future, they often wait to sell their product, reducing the

current supply of the product. On the other hand, if they believe that the

price is going to fall in the future, they try to sell more today, increasing

the current supply. We see this behavior by large and small sellers. Examples

include individuals who are thinking about selling a house or car, corn and

wheat farmers deciding whether to sell or store their crops, and corporations

selling manufactured products or reserves of natural resources.

Finally, the number of sellers in a market can also affect the level of

supply. Generally, markets with a larger number of sellers are more

competitive and have a greater supply of the product to be sold than markets

with fewer sellers. But in some cases, the technology of producing a product

makes it more efficient to produce large quantities at just a few production

sites, or perhaps even at just one. For example, it would not make sense to

have two or more water and sewage companies running pipes to every house and

business in a city. And automobiles can be produced at a much lower cost in

large plants than in small ones, because large plants can take greater

advantage of assembly-line production methods.

All these different factors can lead to changes in what consumers demand and

what producers supply. As a result, on any given day prices for some things

will be rising and those for others will be falling. This creates

opportunities for some individuals and firms, and problems for others. For

example, firms producing goods for which the demand and the price are falling

may have to lay off workers or even go out of business. But for the economy

as a whole, allowing prices to rise and fall quickly in response to changes

in any of the market forces that affect supply and demand offers important

advantages. It provides an extremely flexible and decentralized system for

getting goods and services produced and delivered to households while

responding to a vast number of unpredictable changes.

Creative Destruction

Taking advantage of new opportunities while curtailing production of things that

are no longer in demand or no longer competitive was described as the process

of creative destruction by 20th century Austrian-American economist

Joseph Schumpeter. For example, Schumpeter discussed how the United States,

Britain, and other market economies helped many new businesses to grow by

building systems of canals (such as the Erie Canal) during the mid-19th

century. But then the canal systems were replaced or “destroyed” by the

railroads, which in turn saw their role diminished with the rise of national

systems of highways and airports. The same thing happened in the communications

industry in the United States. The Pony Express, which carried mail between

Missouri and California in the early 1860s, went out of business with the

completion of telegraph lines to California. In the 20th century, the telegraph

was replaced by the telephone. Time and time again, one decade’s innovation is

partially replaced or even destroyed by the next round of technological change.

In the modern world, prices change not only as a result of things that happen

in one country, but increasingly because of changes that happen in other

countries, too. International change affects production patterns, wages, and

jobs in the U.S. economy. Sometimes these changes are triggered by something

as simple as weather conditions someplace else in the world that affect the

production of grain, coffee, sugar, or other crops. Sometimes it reflects

political or financial upheavals in Europe, Asia, or other parts of the

world. There have been several examples of such events in the U.S. economy in

the 1990s. Higher coffee prices occurred after poor harvests of coffee beans

in South America, and U.S. banks lost large sums of money following financial

and political crises in places such as Indonesia and Russia.

The ability to respond quickly to an increasingly volatile economic and

political environment is, in many ways, one of the greatest strengths of the

U.S. economic system. But these changes can result in hardships for some

people or even some large segments of the economy. For example, importing

clothing produced in other nations has benefited U.S. consumers by keeping

clothing prices lower. In addition, it has been profitable for the firms that

import and sell this clothing. However, it has also reduced the number of

jobs available in clothing manufacturing for U.S. workers.

Many people think the most important general issue facing the U.S. economy

today is how to balance the benefits of quickly adapting to changing economic

conditions against the costs of abandoning the old ways. It is vital for the

economy to adapt quickly to changing conditions and to focus on producing

goods and services that will meet the most recent demands of the market

place. However, when businesses close because their products no longer meet

the demands of the market, it is important to make retraining or new jobs

available to workers who lost their means of making a living.

PRODUCTION OF GOODS AND SERVICES

Before goods and services can be distributed to households and consumed, they

must be produced by someone, or by some business or organization. In the

United States and other market economies, privately owned firms produce most

goods and services using a variety of techniques. One of the most important

is specialization, in which different firms make different kinds of products

and individual workers perform specific jobs within a company.

Successful firms earn profits for their owners, who accept the risk of losing

money if the products the firms try to sell are not purchased by consumers at

prices high enough to cover the costs of production. In the modern economy,

most firms and workers have found that to be competitive with other firms and

workers they must become very good at producing certain kinds of goods and

services.

Most businesses in the United States also operate under one of three

different legal forms: corporations, partnerships, or sole proprietorships.

Each of these forms has certain advantages and disadvantages. Because of

that, these three types of business organizations often operate in different

kinds of markets. For example, most firms with large amounts of money

invested in factories and equipment are organized as corporations.

Specialization and the Division of Labor

In earlier centuries, especially in frontier areas, families in the United

States were much more self-sufficient, producing for themselves most of the

goods and services they consumed. But as the U.S. population and economy

grew, it became easier for people to buy more and more things in the

marketplace. Once that happened, people faced a choice they still face today:

In terms of time, money, and other things that they could do, is it less

expensive to make something themselves or to let someone else produce it and

buy it from them?

Over the years, most people and businesses realized that they could make

better use of their time and resources by concentrating on one particular

kind of work, rather than trying to produce for themselves all the items they

want to consume. Most people now work in jobs where they do one kind of work;

they are carpenters, bankers, cooks, mechanics, and so forth. Likewise, most

businesses produce only certain kinds of goods or services, such as cars,

tacos, or gardening services. This feature of production is known as

specialization. A high degree of specialization is a key part of the economic

system in the United States and all other industrialized economies. When

businesses specialize, they focus on providing a particular product or type

of product. For instance, some large companies produce only automobiles and

trucks, or even special parts of cars and trucks, such as tires.

At almost all businesses, when goods and services are produced, labor is

divided among workers, with different employees responsible for completing

different tasks. This is known as division of labor. For example, the

individual parts of cars and televisions are made by many different workers

and then put together in an assembly line. Other well-known examples of this

specialization and division of labor are seen in the production of computers

and electrical appliances. But even kitchens in large restaurants have

different chefs for different items, and professional workers such as doctors

and dentists have also become more specialized during the past century.

Advantages of Specialization

By specializing in what they produce, workers become more expert at a

particular part of the production process. As a result, they become more

efficient in these jobs, which lowers the costs of production. Specialization

also makes it possible to develop tools and machines that help workers do

highly specialized tasks. Carpenters use many tools that plumbers and

painters do not. Commercial bakeries have much larger ovens and mixers than

those used by people who only bake bread and pies once a year. And unlike a

household kitchen, a commercial bakery has machines to slice and package

bread. All of these tools and machines help workers and businesses produce

more efficiently, and lower the cost of producing goods and services.

The advantages of specialization have led to the creation of many very large

production facilities in the United States and other industrialized nations.

This trend is especially prevalent in the manufacturing sector. For example,

many automobile factories produce thousands of cars each day, and some

shipyards employ more than 10,000 workers. One open-pit mine in the western

United States has dug a crater so large that it can be seen from space.

When the market for a product is very large, and a company can sell enough goods

or services in that market to support a very large production facility, it will

often choose to produce on a large scale to take advantage of specialization

and division of labor. As long as producing more in larger facilities lowers

the average costs of production, the producer enjoys what are known as

economies of scale.

But bigger is not always better, and eventually almost all producers encounter

diseconomies of scale in which larger plants or production sites become less

efficient and more costly to operate. Usually that happens because monitoring

and managing increasingly larger production facilities becomes more difficult.

That is why most large manufacturers have more than one factory to make their

products, instead of one massive facility where they make everything they

produce. In recent years, many steel companies have found it more efficient to

build and operate smaller steel mills than they once operated.

Specialization and International Trade

Over the past few decades, international trade has led to greater

specialization and competition among producers in the United States and

throughout the world. By selling worldwide, companies in the United States

and in other countries can reach many more customers. Specialization is

ultimately limited by the size of the market for a good or service. In other

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