GED Social Studies Practice Test: The Economic Structure of The United States

The United States is a capitalist society. There is private ownership and control of the means of production. However, we do not have pure laissez-faire (no regulation) capitalism in the U.S [see Chapter 13]. There is a sizeable amount of government regulation of the U.S. economy. Most nations of the world today practice some form of capitalism. The only truly command economies [see Chapter 13] are found in a few authoritarian nations, such as North Korea and Cuba. The Soviet Union, which dissolved in 1991, was a command economy, as were its satellite nations. While the People’s Republic of China is still, on paper, a command economy [and a communist society], it is actually a market economy and has the world’s second-largest economy.

When talking about the economy of the United States, we are in the realm of macroeconomics, the study of large economic systems. We are not looking at individual households or businesses; we’re studying large market sectors, the role of the state and federal governments in economic activity, and society as a whole.

Measuring the Size of an Economy

So how does one measure the size of an economy? The total value (in this case, in dollars) of all of the goods and services produced in a nation in a calendar year is called the Gross Domestic Product (GDP). The GDP of the U.S. in 2014 is estimated to be $17.5 trillion (that’s one thousand billion) dollars. The next-largest economy is the People’s Republic of China, with a GDP of $10 trillion. Rounding out the top three is Japan, with a GDP of $4.8 trillion. It’s generally believed that the nation with the smallest GDP is Tuvalu, a tiny island nation in the Pacific Ocean that relies almost exclusively on tourism.

Another way of measuring wealth is by taking the GDP of a nation and dividing it by the number of people in that nation. That number is per-capita income (“capita” means ‘head’) of a nation. Thus, it’s possible for a nation to have a high GDP but a low per-capita income, because the population is so large. Keep this in mind: two-thirds of the world’s population live in just five nations.

The United States has about 314 million people. When you divide the U.S. GDP by this number, you come up with a figure of $51,749. That means (on paper, at least), everyone in the U.S. has $51,749. But per-capita income is just a statistical model used to measure wealth and poverty. Lots of people have much more, and many more have a lot less. Averages can be deceiving.

The size of the GDP is one measure of an economy’s health, but another important statistic is the rate of growth of GDP. Of course, in rough economic times, the economy may shrink (think of the Great Depression). In the chart below, we see the percent of change in the GDP from 1960 to the present. As you can see, there have been periods when the GDP has shrunk. The most dramatic drop over the past 50 years occurred in 2007, when the Great Recession (more on that later) began.

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So What’s the U.S. Economy Made Up Of, Anyway?

Before jumping into this subject, there are two things to remember: there’s private-sector spending and then there’s government spending (the federal government’s budget is over $3 trillion). Government spending (federal and state governments) is included when calculating the GDP. In the chart below, you can see how the private sector GDP breaks down. Over three-quarters of the value of the U.S. economy comes from services (that could be everything from the dry cleaners to law firms to health care). Whereas the U.S. was once a manufacturing and agricultural powerhouse, today we are the leaders in providing services, and manufacturing and agriculture are but a small slice of the economy. Much manufacturing has moved to other countries (where the cost of producing goods is cheaper).

The U.S. had about 27 million businesses in 2012, employing 116 million people (excluding agriculture).

Healthcare is a major expenditure in the services sector of the United States (which, despite the Affordable Care Act) does not have a truly national healthcare program. According to data from the World Bank, the U.S. spent  17.9% of the U.S. GDP on healthcare in 2012 [compare that with countries that have national healthcare systems, such as the United Kingdom (9.4%) and Switzerland (11.3%)].

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Now, let’s imagine an American home that has the national per-capita income of $51,749 per year. There are 115.2 million households in the U.S. How is that money spent?

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Housing (think rent or mortgage payments) and transportation (think cars and commuting) make up 58.9% of that household’s expenditures. Add in food, clothing, healthcare, and entertainment, and you can see just how hard it is for most families in America to save money for college, retirement, or a rainy day.

Let us delve further into the GDP. While spending by consumers is the major part of the GDP (about 70%), investment by businesses (in plants, equipment, raw materials, capital goods) accounts for about 17%. Wages and salaries are considered consumption (because people earn money and then spend it).

Government spending (state and federal) accounts for about one-fifth of the total GDP. Remember, the government collects taxes from people and businesses (you don’t have to like it; you just have to pay it), but also pays out money through programs such as Social Security, Medicare, Medicaid, and unemployment insurance.

The sheer size of the U.S. economy is boggling. Americans spend about $54 billion on cosmetics and beauty products each year. In 2014, it’s estimated that Americans will spend $59 billion on pet products. If you can think of a good or industry, it’s probably part of the GDP. So, a few billion here, a few billion there — on everything from almonds to zebra-stripe sleepwear — and it’s not too hard to see how we get to $17 trillion!

 

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