Texas Economics

ECONOMICS TOPIC 2 LESSON 6

Supporting Economic Growth

ESSENTIAL QUESTION

Who benefits from the free market economy?

TRACKING THE ECONOMY

Even in our free enterprise system, government intervenes to influence macroeconomic trends. Macroeconomics is the study of economic behavior and decision-making in a nation’s whole economy. By contrast, microeconomics is the study of economic behavior and decision-making in small units, such as households and firms. (The prefix macro means “large,” while micro means “small.”)

GDP as a Measure of the Business Cycle

One measure of a nation’s economic health is gross domestic product (GDP), the total value of all final goods and services produced in a country in a given year. 

BUSINESS CYCLE

In a period of macroeconomic expansion, or growth, a country produces more than it did before, and GDP goes up. In a period of contraction, or decline, the country produces less, and GDP goes down. The alternating pattern of periodic expansion and contraction is called a business cycle.

Forecasting the Business Cycle

Changes in business cycles take place because individuals and businesses, acting in their own self-interest, make decisions about factors such as prices, production, and consumption. Business owners who think consumers are going to spend more in the future may increase production and hire more workers. If enough employers take these steps, the economy grows. On the other hand, concern about rising prices might lead consumers to buy fewer goods. If this decrease in consumer spending is widespread and lasts long enough, suppliers might be forced to cut production and to lay off workers.

FORECASTING THE BUSINESS CYCLE

In Washington, D.C., government economists track where the country is in the business cycle and try to predict what will happen in the future. Public officials use this information to decide what actions to take, if any. Many businesses also make use of the government’s economic data.

Multiple Choice

Why do U.S. economic policies seek to achieve the goal of maximum employment?

• High employment is a signal to producers to lower prices on goods and services.

• The Constitution guarantees a job to Americans who are willing and able to work.

• When more people work, the economy is more productive and the standard of living rises.

• The more people who are employed, the more secure the financial markets will be.

Encouraging Economic Strength

Because the market is vulnerable to business cycles, the government tries to create public policies that promote economic strength. 

Maximum Employment

One aim of government economic policy is to ensure jobs for everyone who is able to work. In the United States, many economists consider an unemployment rate from 4 percent to 6 percent to be evidence of a healthy economy. If the unemployment rate rises higher than that, government officials may take various steps to encourage job growth.

A Growing Economy

Part of the American Dream has always been for each generation to enjoy a higher standard of living than previous generations. For that to happen, the economy must grow to provide additional goods and services. An increasing GDP is a sign of such growth. (

Stability

The government also seeks to keep the economy stable. Consumers, producers, and investors need to feel confident that economic conditions will not fluctuate unpredictably. If this confidence wavers, economic growth may slow or even stop.

Open Ended

This traditional measure of standard of living does not include many measures that might affect people’s quality of life. Identify Central Issues How might levels of education, poverty, income inequality, and health impact standard of living?

Secure Financial Markets

Another sign of economic stability is the security of financial institutions, such as banks or the stock market.

Open Ended

Analyze Graphs How would you characterize GDP growth from 1910 to 2012?

Multiple Choice

Support Ideas With Examples Which of these might indicate that the national economy is stable?

• Prices for groceries and other daily needs go down from year to year.

• Prices for groceries and other daily needs stay about the same from year to year.

• Prices for groceries and other daily needs go up from year to year.

• Prices for groceries and other daily needs are tightly regulated.

Productivity and the Role of Technology

Technological Progress

Improved technology is a key factor in boosting productivity. Technological progress has long enabled the economy of the United States to operate more efficiently, increasing GDP and giving American businesses a competitive advantage in the world.

obsolescence

Innovation often leads to obsolescence, as older products and processes become out-of-date. Workers, too, may be subject to obsolescence. One example is telephone operators who lost their jobs due to computerized dialing systems. 

Encouraging Innovation

To help maintain the country’s technological advantage, the government promotes innovation and invention. Federal agencies fund scores of research and development projects at universities. The Morrill Acts of 1862 and 1890 created land-grant colleges that received federal land and money to pursue the study of “agriculture and the mechanical arts.” Land-grant schools from the Massachusetts Institute of Technology to Texas A&M University have been powerhouses of innovation.

Open Ended

The government has long fostered scientific research, such as the work being carried on in this lab at Texas A&M University. Express Ideas Clearly Why do you think the government feels such research is worth supporting?

Copyright and patents

The government also encourages innovation by granting patents and copyrights. A patent gives the inventor of a new product the exclusive right to produce and sell it for 20 years. A copyright grants an author exclusive rights to publish and sell his or her creative works. P

The American Work Ethic

While government incentives may encourage innovation, economic growth cannot occur without individual effort.

The work ethic Smith refers to is a commitment to the value of hard work. It not only means working hard, but also caring about the quality of one’s work. 

Multiple Choice

Check Understanding How does improved technology allow the economy to operate more efficiently?

• It enables people to work fewer hours.

• It ensures that all of the nation’s resources will be used.

• It ensures that all of the nation’s workers are employed.

• It helps to make better use of the nation’s limited resources.

Open Ended

Who benefits from the free market economy?