Chapter 2/The Economy: Myth and Reality
CHAPTER 2
THE ECONOMY: MYTH AND REALITY
Chapter 2 introduces students to some of the key characteristics of the U.S. economy. This
chapter also defines the meaning of input and output, and how businesses, people, and the
government interact in the economy. The chapter will help students refine some of what they
already know, using economic language.
CHAPTER OUTLINE
THE AMERICAN ECONOMY: A THUMBNAIL SKETCH
An economic system factors in production (inputs) to produce the goods and services that
people, businesses, and the government buy (output). This output may be sold domestically,
or to foreigners.
Outputs produced domestically (within the United States) and sold abroad are known as
exports. Outputs produced abroad and sold domestically (in the United States) are known as
imports.
Gross Domestic Product (GDP) is a measure of the economy’s output. The U.S. economy is
the biggest national economy in the world.
THE INPUTS: LABOR AND CAPITAL
Workers participate in a variety of tasks in the U.S. economy. Like other industrialized
countries, the U.S. economy employs more people in service-related industries.
Labor is the time and effort a person provides in the production of a good or service. Capital
includes machines, equipment, and buildings used in the production of output.
National income measures how much is paid to the factors of production.
Chapter 2/The Economy: Myth and Reality
THE OUTPUTS: WHAT DOES AMERICA PRODUCE?
Most of the output produced within the U.S. economy is sold to U.S. consumers. The
remainder of output goes to nonconsumption uses, including those items purchased by the
government and businesses.
THE CENTRAL ROLE OF BUSINESS FIRMS
Businesses hire people, purchase or rent capital, and oversee the production of the goods and
services consumers want to buy.
WHAT’S MISSING FROM THE PICTURE? GOVERNMENT
The U.S. government plays many roles in the economy:
The government is a referee—it enforces laws and establishes order.
The government is a business regulator—it imposes restrictions on businesses on society’s
CONCLUSION: IT’S A MIXED ECONOMY
The U.S. economy includes both free-market and government-controlled sectors.
MARGIN DEFINITIONS
Factors of Production or Inputs: labor, machinery, buildings, and natural resources used to
make outputs.
Outputs: goods and services that consumers and others want to acquire.
Gross domestic product (GDP): a measure of the size of the economy—the total amount it
produces in a year.
Open economy: an economy in which exports and imports constitute a large share of GDP.
Closed economy: an economy in which exports and imports constitute a small share of GDP.
Chapter 2/The Economy: Myth and Reality
MAJOR IDEAS
1. An economic system is made up of people, businesses, and the government. These three
parties interact in a variety of ways through markets.
2. The key characteristics of the U.S. economy are the following:
a) The United States is a private-enterprise economy where most goods and services are
exchanged in free markets.
b) The U.S. economy is relatively closed, as exports and imports account for a relatively
small share of GDP.
ON TEACHING THE CHAPTER
The material in Chapter 2 shows students how an economic system works, highlighting the U.S.
economy. It identifies how people, businesses, and the government participate in the economic
system in several ways through inputs, outputs, and markets. This chapter helps the student to
use the language of economics to explain everyday phenomena. Some instructors may prefer to
skim over this material; others may prefer to cover it in more detail.
This chapter is likely to spark discussion and questions among the students because it reveals
quantitative information about the structure of the U.S. economy. The instructor can demonstrate
how statistics are used to explain features of the economy, highlighting the differences between
dollars versus percentages, between individual versus economy-wide statistics, and in how to
interpret different statistical diagrams in the text. This will not only help students in later
Chapter 2/The Economy: Myth and Reality
DISCUSSION QUESTIONS
Instructors who want to spend some time with this chapter can ask discussion questions that
relate to any or all of the statistical information presented in the text. Students may be most
interested in questions that come from today’s newspaper. The questions here elaborate on points
mentioned in the text.
1. The U.S. economy is primarily a private-enterprise economy. What are some of the goods
and services provided by the U.S. government? Why might the government provide these
goods and services more effectively than a private business? What are some of the
drawbacks to the government providing these goods and services?
Suggested Answer: National defense, law and order maintenance, free education, basic
research, poverty-alleviation programs, health and public welfare programs,
2. The text argues that the U.S. economy is relatively closed because imports and exports
account for a relatively small share of U.S. production and spending. As trade becomes a
larger share of U.S. production, how might this affect what is produced in the United
States versus abroad? How might this affect the types of jobs American workers are
employed in?
Suggested Answer: Students can discuss the advantages and disadvantages of free
international trade. Share of export goods in the total goods produced will increase as
3. What are the costs of economic recessions in both a microeconomic sense and a
macroeconomic sense? How might recessions affect people employed in different types
of jobs?
Suggested Answer: A recession may involve simultaneous declines in the overall
4. Consider how different groups in the economy are employed in different jobs. Why might
teenagers be employed in low-wage jobs? Why has the percentage of teenagers in the
labor force declined since the mid-1970s?
Suggested Answer: The text section “The Inputs: Labor and Capital” provides some
insights. Students can elaborate on factors that influence the demand for labor such as
Chapter 2/The Economy: Myth and Reality
5. According to the text, unemployment is higher in Europe than it is in the United States.
How might government policy influence the unemployment rate?
Suggested Answer: Students should discuss policies, especially fiscal policies, intended
to combat unemployment. Unemployment is mainly due to lack of effective demand. The
6. There are many different types of businesses that produce within the United States. With
the increase in international trade and rise of multinational corporations, many of the
finished products we buy are put together using parts and labor from many different
countries. What makes a product an “American” product? Where it is actually produced?
Or the labor that produces it? Where do the parts come from? Consider the information
from “Is That an American Company?”
Suggested Answer: Students should discuss the integration of world economies in the era
of globalization and multinational corporations, which are corporations that have their
7. The government plays many different roles in the economy. Which do you believe is
most important to ensuring the economy functions well? Which is most important for
ensuring the well-being of all individuals in society?
PROBLEMS
The Study Guide contains several excellent problems that can be used to reinforce the student’s
understanding of graphs.