NATIONAL INCOME, PRODUCTION, AND PRICES

The economic history of the United States is a great success story. In less than 200 years, our country has grown from a few struggling colonies into the world’s richest nation. In the present cen tury alone, our total national output (adjusted to eliminate the effect of price inflation) has risen sixfold.

But it has been a bumpy ride up. There was a major financial crisis irs 1907; a big inflation after World War I; a terrible depression from 1929 to 1939; and another big inflation during and after World War II. We can be proud of our success, but we must face the fact too that our rapid eco nomic growth has been marred by inflationary booms and by depressions.

Economists once took it for granted that our private-enterprise system would automatically restore itself to full-employment prosperity when ever it got far off the track. But no more! Today we have grave doubts that the system is self- stabilizing, and since the 19 30’s the biggest eco nomic issue has been how to devise government policies that will eliminate both depressions and inflations.

Part Two analyzes the determinants of the over-all levels of production, income, and em ployment in our economy. In nontechnical terms, the big problems are: what makes us grow rapidly or slowly, why do we have booms and depressions, and how can we make the economy perform bet ter? The purpose of this first chapter is to provide some of the major analytical concepts we need to understand these problems basically, the con- cepts of the national income accounts.

Some instructors may prefer to use Parts Three and Four on microeconomics and the distribution of income before Part Two on macroeconomics. These Parts are writ- ten to be equally usable in either order.

MEASURES OF NATIONAL PRODUCTION AND INCOME

Modern economics is an empirical science. To understand and regulate the behavior of an enormously complex economy, we need measures of its performance. We need a measure of its total output of goods and services, and a measure of the total income received by all its people. We also need more detailed measures—of how much people have left to spend after paying their taxes, of corporate profits, of family and business saving, and so on.

The “national income accounts” provide these measures. We’ll start with the “gross na- tional product,” the measure of the economy’s total production of goods and services, and work down to some of the more detailed measures. The primary goal is to lay a foundation for explaining why people and businesses receive the incomes they do, and why they spend their incomes as they do. For the combined spending of individuals, businesses, and governments goes far, in our market-oriented economy, to explain why some- times there’s inflation and sometimes unemploy- ment.

To begin, a basic question: What do econ- omists mean by “production”?

Economic Production Defilned

To the economist, production is the creation of any good or service that people are willing to pay for. Raising wheat is production, and so is making the wheat into flour and the flour into bread. It is also production for the local grocer to have the bread on his shelf when you want it, or to deliver the bread to your door. The agricultural, manufacturing, and marketing services all satisfy human wants, and people are willing to pay for them.

In fact, over half the people employed in the United States today are engaged in rendering services rather than in manufacturing or raising anything. Half of what you pay goes for middle- men’s services—the retailer, the wholesaler, the banker, the trucker, and many others. Lots of people object violently to this situation. “There are too many middlemen!” they say. Maybe there are. But if you stop to think about it you’ll run head-on into this question: Are there too many manufacturers, or too many farmers? The real economic test for all producers of goods or ser- vices is whether they satisfy a consumer demand— not how many pounds of physical stuff they produce.

There is nothing moral or ethical about production as the economist defines it. Making and selling cigarettes is production, just like rais- ing and selling food. And getting food from the farmer to you is just as much production as raising the crops. The test of the private-enterprise economy is the test of the market. If an act helps satisfy a want that someone is willing to pay for, that act is production.