U.S. Economy

Since then, studies by economists have found that NAFTA has benefited all

three nations, although greater competition has resulted in some

factories closing. As a percentage of national income, the benefits from

NAFTA have been greater in Canada and Mexico than in the United States,

because international trade represents a larger part of those economies.

While the United States is the largest trading nation in the world, it

has a very large and prosperous domestic economy; therefore international

trade is a much smaller percentage of the U.S. economy than it is in many

countries with much smaller domestic economies.

D Exchange Rates and the Balance of Payments

Currencies from different nations are traded in the foreign exchange

market, where the price of the U.S. dollar, for instance, rises and falls

against other currencies with changes in supply and demand. When firms in

the United States want to buy goods and services made in France, or when

U.S. tourists visit France, they have to trade dollars for French francs.

That creates a demand for French francs and a supply of dollars in the

foreign exchange market. When people or firms in France want to buy goods

and services made in the United States they supply French francs to the

foreign exchange market and create a demand for U.S. dollars.

Changes in people’s preferences for goods and services from other

countries result in changes in the supply and demand for different

national currencies. Other factors also affect the supply and demand for

a national currency. These include the prices of goods and services in a

country, the country’s national inflation rate, its interest rates, and

its investment opportunities. If people in other countries want to make

investments in the United States, they will demand more dollars. When the

demand for dollars increases faster than the supply of dollars on the

exchange markets, the price of the dollar will rise against other

national currencies. The dollar will fall, or depreciate, against other

currencies when the supply of dollars on the exchange market increases

faster than the demand.

All international transactions made by U.S. citizens, firms, and the

government are recorded in the U.S. annual balance of payments account.

This account has two basic sections. The first is the current account,

which records transactions involving the purchase (imports) and sale

(exports) of goods and services, interest payments paid to and received

from people and firms in other nations, and net transfers (gifts and aid)

paid to other nations. The second section is the capital account, which

records investments in the United States made by people and firms from

other countries, and investments that U.S. citizens and firms make in

other nations.

These two accounts must balance. When the United States runs a deficit on

its current account, often because it imports more that it exports, that

deficit must be offset by a surplus on its capital account. If foreign

investments in the United States do not create a large enough surplus to

cover the deficit on the current account, the U.S. government must

transfer currency and other financial reserves to the governments of the

countries that have the current account surplus. In recent decades, the

United States has usually had annual deficits in its current account,

with most of that deficit offset by a surplus of foreign investments in

the U.S. economy.

Economists offer divergent views on the persistent surpluses in the U.S.

capital account. Some analysts view these surpluses as evidence that the

United States must borrow from foreigners to pay for importing more than

it exports. Other analysts attribute the surpluses to a strong desire by

foreigners to invest their funds in the U.S. economy. Both

interpretations have some validity. But either way, it is clear that

foreign investors have a claim on future production and income generated

in the U.S. economy. Whether that situation is good or bad depends how

the foreign funds are used. If they are used mainly to finance current

consumption, they will prove detrimental to the long-term health of the

U.S. economy. On the other hand, their effect will be positive if they

are used primarily to fund investments that increase future levels of

U.S. output and income.

X CURRENT TRENDS AND ISSUES

In the early decades of the 21st century, many different social, economic

and technological changes in the United States and around the world will

affect the U.S. economy. The population of the United States will become

older and more racially and ethnically diverse. The world population is

expected to continue to grow at a rapid rate, while the U.S. population

will likely grow much more slowly. World trade will almost certainly

continue to expand rapidly if current trade policies and rates of

economic growth are maintained, which in turn will make competition in

the production of many goods and services increasingly global in scope.

Technological progress is likely to continue at least at current rates,

and perhaps faster. How will all of this affect U.S. consumers,

businesses, and government?

Over the next century, average standards of living in the United States

will almost certainly rise, so that on average, people living at the end

of the century are likely to be better off in material terms than people

are today. During the past century, the primary reasons for the increase

in living standards in the United States were technological progress,

business investments in capital goods, and people’s investments in

greater education and training (which were often subsidized by government

programs). There is no evident reason why these same factors will not

continue to be the most important reasons underlying changes in the

standard of living in the United States and other industrialized

economies. A comparatively small number of economists and scientists from

other fields argue that limited supplies of energy or of other natural

resources will eventually slow or stop economic growth. Most, however,

expect those limits to be offset by discoveries of new deposits or new

types of resources, by other technological breakthroughs, and by greater

substitution of other products for the increasingly scarce resources.

Although the U.S. economy will likely remain the world’s largest national

economy for many decades, it is far less certain that U.S. households

will continue to enjoy the highest average standard of living among

industrialized nations. A number of other nations have rapidly caught up

to U.S. levels of income and per capita output over the last five decades

of the 20th century. They did this partly by adopting technologies and

business practices that were first developed in the United States, or by

developing their own technological and managerial innovations. But in

large part, these nations have caught up with the United States because

of their higher rates of savings and investment, and in some cases,

because of their stronger systems for elementary and secondary education

and for training of workers.

Most U.S. workers and families will still be better off as the U.S.

economy grows, even if some other economies are growing faster and

becoming somewhat more prosperous, as measured per capita. Certainly

families in Britain today are far better off materially than they were

150 to 200 years ago, when Britain was the largest and wealthiest economy

in the world, despite the fact that many other nations have since

surpassed the British economy in size and affluence.

A more important problem for the U.S. economy in the next few decades is

the unequal distribution of gains from growth in the economy. In recent

decades, the wealth created by economic growth has not been as evenly

distributed as was the wealth created in earlier periods. Incomes for

highly educated and trained workers have risen faster than average, while

incomes for workers with low levels of education and training have not

increased and have even fallen for some groups of workers, after

adjusting for inflation. Other industrialized market economies have also

experienced rising disparity between high-income and low-income families,

but wages of low-income workers have not actually fallen in real terms in

those countries as they have in the United States.

In most industrialized nations, the demand for highly educated and

trained workers has risen sharply in recent decades. That happened in

part because many kinds of jobs now require higher skill levels, but

other factors were also important. New production methods require workers

to frequently and rapidly change what they do on the job. They also

increase the need for quality products and customer service and the

ability of employees to work in teams. Increased levels of competition,

including competition from foreign producers, have put a higher premium

on producing high quality products.

Several other factors help explain why the relative position of low-

income workers has fallen more in the United States than in other

industrialized Western nations. The growth of college graduates has

slowed in the United States but not in other nations. United States

immigration policies have not been as closely tied to job-market

requirements as immigration policies in many other nations have been.

Also, government assistance programs for low-income families are usually

not as generous in the United States as they are in other industrialized

nations.

Changes in the make-up of the U.S. population are likely to cause income

disparity to grow, at least through the first half of the 21st century.

The U.S. population is growing most rapidly among the groups that are

most likely to have low incomes and experience some form of

discrimination. Children in these groups are less likely to attend

college or to receive other educational opportunities that might help

them acquire higher-paying jobs.

The U.S. population will also be aging during this period. As people born

during the baby boom of 1946 to 1964 reach retirement age, the percentage

of the population that is retired will increase sharply, while the

percentage that is working will fall. The demand for medical care and

long-term care facilities will increase, and the number of people drawing

Social Security benefits will rise sharply. That will increase pressure

on government budgets. Eventually, taxes to pay for these services will

have to be increased, or the level of these services provided by the

government will have to be cut back. Neither of those approaches will be

politically popular.

A few economists have called for radical changes in the Social Security

system to deal with these problems. One suggestion has been to allow

workers to save and invest in private retirement accounts rather than pay

into Social Security. Thus far, those approaches have not been considered

politically feasible or equitable. Current retirees strongly oppose

changing the system, as do people who fear that they will lose future

benefits from a program they have paid taxes to support all their working

lives. Others worry that private accounts will not provide adequate

retirement income for low-income workers, or that the government will

still be called on to support those who make bad investment choices in

their private retirement accounts.

Political and economic events that occur in other parts of the world are

felt sooner and more strongly in the United States than ever before, as a

result of rising levels of international trade and the unique U.S.

position as an economic, military, and political superpower. The 1991

breakup of the Union of Soviet Socialist Republics (USSR)—perhaps the

most dramatic international event to unfold since World War II—has

presented new opportunities for economic trade and cooperation. But it

also has posed new challenges in dealing with the turbulent political and

economic situations that exist in many of the independent nations that

emerged from the breakup . Some fledgling democracies in Africa are

similarly volatile.

Many U.S. firms are eager to sell their products to consumers and firms

in these nations, and U.S. banks and other financial institutions are

eager to lend funds to support investments in these countries, if they

can be reasonably sure that these loans will be repaid. But there are

economic risks to doing business in these countries, including inflation,

low income levels, high crime rates, and frequent government and company

defaults on loans. Also, political upheavals sometimes bring to power

leaders who oppose market reforms.

The greater political and economic unification of nations in the European

Union (EU) offers different kinds of issues. There is much less risk of

inflation, crime, and political upheaval to contend with in this area. On

the other hand, there is more competition to face from well-established

and technologically sophisticated firms, and more concern that the EU

will put trade barriers on products produced in the United States and in

other countries that are not members of the Union. Clearly, the United

States will be concerned with maintaining its trading position with those

nations. It will also look to the EU to act as an ally in settling

international policies in political and economic arenas, such as a peace

initiative in the Middle East and treaties on international trade and

environmental issues.

The United States has other major economic and political interests in the

Middle East, Asia, and around the world. China is likely to become an

even larger trading partner and an increasingly important political power

in the world. Other Asian nations, including Japan, Korea, Indonesia, and

the Philippines, are also important trading partners, and in some cases

strong political and national security allies, too. The same can be said

for Australia and for Canada, which has long been the largest single

trading partner for the United States. Mexico and the other nations of

Central and South America are, similarly, natural trading partners for

the United States, and likely to play an even larger role over the next

century in both economic and political affairs.

It may once have been possible for the United States to practice an

isolationist policy by developing an economy largely cut off from foreign

trade and international relations, but that possibility is no longer

feasible, nor is it advisable. Economic and technological developments

have made the world’s nations increasingly interdependent.

Greater world trade and cooperation offer an enormous range of mutually

beneficial activities. Trading with other countries inevitably increases

opportunities for travel and cultural exchange, as well as business

opportunities. In a very broad sense, nations that buy and sell goods and

services with each other also have a greater stake in other forms of

peaceful cooperation, and in seeing other countries prosper and grow.

On the other hand, global interdependence also raises major

problems—political, economic, and environmental—that require

international solutions. Many of these problems, such as pollution,

global warming, and assistance for developing nations, have been

controversial even when solutions were discussed only at the national

level. Often, controversy increases with the number of nations that must

agree on a solution, but some problems require global remedies. Such

problems will challenge the productive capacity of the U.S. economy and

the wisdom of U.S. citizens and their political leaders.

No nation has ever had the rich supply of resources to face the future

that the U.S. economy has as it enters the 21st century. Despite that, or

perhaps because of it, U.S. consumers, businesses, and political leaders

are still trying to do more than earlier generations of citizens.

XI CHIEF GOODS AND SERVICES OF THE U.S. ECONOMY

The U.S. economy, the largest in the world, produces many different goods

and services. This can be seen more easily by dividing economic

activities into four sectors that produce different kinds of goods and

services. The first sector provides goods that come directly from natural

resources: agriculture, forestry, fishing, and mining. The second sector

includes manufacturing and the generation of electricity. The third

sector, made up of commerce and services, is now the largest part of the

U.S. economy. It encompasses financial services, retail and wholesale

sales, government services, transportation, entertainment, tourism, and

other businesses that provide a wide variety of services to individuals

and businesses. The fourth major economic sector deals with the

recording, processing, and transmission of information, and includes the

communications industry.

A Natural Resource Sector

The United States, more than most countries, enjoys a wide array of

natural resources. Agricultural output in the United States has

historically been among the highest in the world. Rich fishing grounds

and coastal habitats provide abundant seafood. Companies harvest the

nation’s large reserves of timber to use in wood products and housing.

Major mineral resources—including iron ore, lead, and copper, as well as

energy resources such as coal, crude oil, and natural gas—are abundant in

the United States.

A1 Agriculture

The United States contains some of the best cropland in the world.

Cultivated farmland constitutes 19 percent of the land area of the

country and makes the United States the world’s richest agricultural

nation. In part because of the nation’s favorable climate, soil, and

water conditions, farmers produce huge quantities of agricultural

commodities and a variety of crops and livestock.

The United States is the largest producer of corn, soybeans, and sorghum,

and it ranks second in the production of wheat, oats, citrus fruits, and

tobacco. The United States is also a major producer of sugar cane,

potatoes, peanuts, and beet sugar. It ranks fourth in the world in cattle

production and second in hogs. The total annual value of farm output

increased from $55 billion in 1970 to $202 billion in 1996. Farmers in

the United States not only produce enough food to feed the nation’s

population, they also export more farm products than any other nation.

Despite this vast output, the U.S. economy is so large and diversified

that agriculture accounted for only 2 percent of annual GDP and employed

only 3 percent of the workforce in 1998.

During the 20th century, many Americans moved from rural to urban areas

of the United States, resulting in large population decreases in farming

regions. Even though the number of farms has been declining since the

1930s, overall production has increased because of more efficient

operations. Bigger farms, operated as large businesses, have increasingly

replaced small family farms. The owners of larger farms make greater use

of modern machinery and other equipment. By the 1990s, farm operations

were highly mechanized. By applying mechanization, technology, efficient

business practices, and scientific advances in agricultural methods,

larger farms produce great quantities of agricultural output using small

amounts of labor and land.

In 1999 there were 2,194,070 farms in the United States, down from a high

of 6.8 million in 1935. As smaller farms have been consolidated into

larger units, the average farm size in the United States increased from

about 63 hectares (about 155 acres) to 175 hectares (432 acres) by 1999.

Cattle production is widespread throughout the United States. Texas leads

in the production of range cattle, which are allowed to graze freely.

Iowa and Illinois are important for nonrange feeder cattle, which are

cattle that eat feed grain provided by cattle farmers. The Dairy Belt

continues to be concentrated in southern Wisconsin but is also prominent

in the rural landscapes of most northeastern states and fairly common in

other states, too. Hog production tends to be concentrated in Iowa,

Illinois, and surrounding states, where hogs are fattened for market.

Chicken production is widespread, but southern states, including Texas,

Arkansas, and Alabama, dominate.

Corn and soybean production is concentrated heavily in Iowa and Illinois

and is also important in surrounding states, including Missouri, Indiana,

Nebraska, and the southern regions of Minnesota and Wisconsin. Wheat is

another important U.S. crop. Kansas usually leads all states in yearly

wheat production. North Dakota, Montana, Oklahoma, Washington, Idaho,

South Dakota, Colorado, Texas, Minnesota, and Nebraska also are major

wheat producers.

For more than a century and a half, cotton was the predominant cash crop

in the South. Today, however, it is no longer important in some of the

traditional cotton-growing areas east of the Mississippi River. While

some cotton is still produced in the Old South, it has become more

important in the Mississippi Valley, the Panhandle of Texas, and the

Central Valley of California. Cotton is shipped to mills in the eastern

United States and is exported to cotton textile plants in Japan, South

Korea, Indonesia, and Taiwan.

Vegetables are grown widely in the United States. Outside major U.S.

cities, small farms and gardens, known as truck farms, grow vegetables

and some varieties of fruits for urban markets. California is the leading

vegetable producing state; much of its cropland is irrigated.

Most fruits grown in the United States fall in the categories of

midlatitude and citrus fruits. Midlatitude fruits, such as apples, pears,

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