United States Economy

A

2

Specialization and International Trade

Over the past few decades, foreign 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 words, larger markets always allow for greater levels of specialization. For example, in small towns with few customers to serve, there is often only one clothing store that carries a small selection of many different kinds of clothing. In large cities with a million or more potential customers, there are much larger clothing stores with many more choices of items and styles, and even some stores that sell only hats, gloves, or some other particular kind of clothing.

International trade is a dramatic way of expanding the size of a firm’s market. In markets where transportation costs are low compared with the selling price of a product, it has become possible for producers to compete globally to take full advantage of highly specialized production. But international trade also means that businesses must compete more efficiently against firms from all around the world. That competition also makes them try to take advantage of greater specialization and the division of labor.

In many cases, products are produced and sold by firms from two or more countries that have large production and employment levels in the same industry. Often, however, these firms still specialize in the kinds of products they produce. For example, though many small cars and small pickup trucks are made in Japan and sent to the United States, large pickups and four-wheel drive sport utility vehicles are often exported from the United States to Japan and other nations. Similarly, the United States exports large commercial passenger jets to most countries, but imports many small jets from Canada, Brazil, and other nations. While this may seem strange at first glance, it allows greater specialization in production for particular kinds of products.

Transportation costs can also help explain the pattern of international production and trade. It often makes sense to produce goods close to the markets where they will be sold, or close to where the resources used in the production process are found or made. In recent years, the availability of a skilled and hard-working labor force has become more important to producers in many different industries, so new factories are often located in areas with large numbers of well-trained workers and good schools that provide a future supply of well-educated workers.

---

---

B

Production Patterns: Past, Present, and Future

Several dramatic changes in production patterns occurred in the United States during the 20th century. First, most employment shifted from farming in rural areas to industrial jobs in cities and suburbs. Then, during the second half of the century, production and employment patterns changed again as a result of technological advances, increased levels of world trade, and a rapid increase in the demand for services.

Technological changes in the transportation, communications, and computer industries created entirely new kinds of jobs and businesses, and altered the kinds of skills workers were expected to have in many others. World trade led to increased specialization and competition, as businesses adapted to meet the demands of international competition.

Perhaps the greatest change in the U.S. economy came with the nation’s growing prosperity in the years following World War II (1939-1945). This prosperity resulted in a population with more money to spend on services and leisure activities. More people began dining out at restaurants, taking vacations to far-off locations, and going to movies and other forms of entertainment. As family incomes increased, a wealthier population became more willing to pay others for services.

As a result of these developments, the closing decades of the 20th century saw a dramatic increase in service industries in the United States. In 1940 about 33 percent of U.S. employees worked in manufacturing, and about 49 percent worked in service-producing industries. By the early 2000s only 17 percent worked in goods-producing industries, and 83 percent worked in service-producing industries. This change was driven by powerful market forces, including technological change and increased levels of world trade, competition, and income.

Some observers worried that this growth of employment in service-producing industries would result in declining living standards for most U.S. workers, but in fact most of this growth has occurred in industries where job skill requirements and wages have risen or at least remained high. That is less surprising when you consider that this employment includes business and repair services, entertainment and recreation occupations, and professional and related services (including health care, education, and legal services). United States consumers and families are, on average, financially better off today than they were 50 or 100 years ago, and they have more leisure time, which is one of the reasons why the demand for services has increased so rapidly.

During the 20th century, businesses and their workers had to adjust to many changes in the kinds of goods and services people demanded. These changes naturally led to changes in where jobs were available, and in what kinds of education, training, and skills employees were expected to have. As the base of employment in the United States has changed from predominantly agriculture to manufacturing to services, individuals, firms, and communities have faced often-difficult adjustments. Many workers lost jobs in traditional occupations and had to seek employment in jobs that required completely different sets of skills. Standards of living declined in some communities whose economies centered on farming or around large factories that shut down. In recent decades, populations have decreased in some states where agriculture provides a significant number of jobs. While high-technology industries in places such as California’s Silicon Valley were booming and attracting larger populations, traditional manufacturing industries in other parts of the country were closing their doors.

C

Public Policies to “Protect” Firms and Workers

Historically in the United States, the government has rarely stepped in to protect individual businesses from changing levels of demand or competition. There have been some notable exceptions, including the federal government’s guarantee of $1.5 billion in loans to the Chrysler Corporation, the nation’s third-largest automobile manufacturer, when it faced bankruptcy in 1980. Another exception occurred in 2008 when the Federal Reserve System and the Department of the Treasury rescued a number of major banks and the world’s largest insurance firm as a financial crisis brought on by a rapid decline in housing prices and risky investments in mortgage securities and derivatives resulted in the worst financial crisis since the Great Depression. See also Banking.

Although direct financial assistance to corporations has been rare, the government has provided subsidies or partial protection from international competition to a large number of industries. Economic analysis of these programs rarely finds such subsidies and protection to be a good idea for the nation as a whole, though naturally the companies and workers who receive the support are better off. But usually these programs result in higher prices for consumers, higher taxes, and they hurt other U.S. businesses and workers.

For example, in the 1980s the U.S. government negotiated limits on Japanese car imports, and the price of new Japanese cars sold in the United States increased by an average of $2,000. The price of new U.S. cars also rose on average by about $1,000. Although the import limits did save some jobs in the U.S. automobile industry, the total cost of saving the jobs was several times higher than what workers earned from these jobs. When fewer dollars are sent to Japan to buy new automobiles, the Japanese companies and consumers also have fewer dollars to spend on U.S. exports to Japan, such as grain, music cassettes and CDs, and commercial passenger jets. So the protection from Japanese car imports hurt firms and workers in U.S. export industries. Still other U.S. firms and workers were hurt because some U.S. consumers spent more for cars and had less to spend on other goods and services.

It is simply not possible to subsidize and protect everyone in the U.S. economy from changes in consumer demands and technology, or from international trade and competition. And while most people agree that the government should subsidize the production of certain types of goods required for national defense, such as electronic navigation and surveillance systems, economists warn against the futility of trying to protect large numbers of firms and workers from change and competition. Typically such support cannot be sustained over the long run, when the cost of protection and subsidies begins to mount up, except in cases where producers and workers represent a strong special interest group with enough political clout to maintain their special protection or subsidies.

When the special protection or support is removed, the adjustments that producers and workers often have to make then can be much more severe than they would have been when the government programs were first adopted. That has happened when price support programs for milk and other agricultural products were phased out, and when policies that subsidized U.S. oil production and limited imports of oil were dropped in the 1970s, during the worldwide oil shortage.

For these reasons, if public assistance is provided to a particular industry, economists are likely to favor only temporary payments to cover some of the costs of relocation and retraining of workers. That policy limits the cost of such assistance and leaves workers and firms free to move their resources into whatever opportunities they believe will work best for them.

Most producers in the United States and other market economies must face competition every day. If they are successful, they stand to earn large returns. But they also risk the possibility of failure and large losses. The lure of profits and the risk of losses are both part of what makes production in a market economy efficient and responsive to consumer demands.

IV

Corporations and Other Types of Businesses

Three major types of firms carry out the production of goods and services in the U.S. economy: sole proprietorships, partnerships, and corporations. In 2004 the U.S. economy included about 21 million proprietorships, excluding farms; 2.5 million partnerships; and about 5.6 million corporations. The corporations, however, produce far more goods and services than the proprietorships and partnerships combined.

A

Proprietorships and Partnerships

Sole proprietorships are typically owned and operated by one person or family. The owner is personally responsible for all debts incurred by the business, but the owner gets to keep any profits the firm earns, after paying taxes. The owner’s liability or responsibility for paying debts incurred by the business is considered unlimited. That is, any individual or organization that is owed money by the business can claim all of the business owner’s assets (such as personal savings and belongings), except those protected under bankruptcy laws.

Normally when the person who owns or operates a proprietorship retires or dies, the business is either sold to someone else, or simply closes down after any creditors are paid. Many small retail businesses are operated as sole proprietorships, often by people who also work part-time or even full-time in other jobs. Some farms are operated as sole proprietorships, though today corporations own many of the nation’s farms.

Partnerships are like sole proprietorships except that there are two or more owners who have agreed to divide, in some proportion, the risks taken and the profits earned by the firm. Legally, the partners still face unlimited liability and may have their personal property and savings claimed to pay off the business’s debts. There are fewer partnerships than corporations or sole proprietorships in the United States, but historically partnerships were widely used by certain professionals, such as lawyers, architects, doctors, and dentists. During the 1980s and 1990s, however, the number of partnerships in the U.S. economy grew far more slowly than the number of sole proprietorships and corporations. Even many of the professions that once operated predominantly as partnerships have found it important to take advantage of the special features of corporations.

	More from Encarta
	•  Important Notice: MSN Encarta to be discontinued. Learn more. •  Presidential Myths Quiz •  Coffee break: Recharge your brain