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Government Printing Office, various years).




1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009

expressed as a share of GDP. Thus, the Netherlands is considered an extremely open
An economy is called rela-
economy because it imports and exports about two thirds of its GDP. (See Table 1.) By this
tively open if its exports
and imports constitute a criterion, the United States stands out as among the most closed economies among the
large share of its GDP. advanced, industrial nations. We export and import a smaller share of GDP than nearly
all of the countries listed in the table.
An economy is considered
relatively closed if they
constitute a small share.
A Growing Economy . . .
The next salient fact about the U.S. economy is its growth; it gets bigger almost every year
(see Figure 2). Gross domestic product in 2007 was nearly $14 trillion; as noted earlier,
that™s over $45,000 per American. Measured in dollars of constant purchasing power, 1 the
U.S. GDP was almost 5 times as large in 2007 as it was in 1959. Of course, there were many
more people in America in 2007 than there were 48 years earlier. But even correcting for
population growth, America™s real GDP per capita was about 2.8 times higher in 2007 than
in 1959. That™s still not a bad performance: Living standards nearly tripled in 48 years.
Looking back further, the purchasing power of the average American increased nearly
A recession is a period of
600 percent over the entire 20th century! That™s a remarkable number. To get an idea of
time during which the total
what it means, just think how much poorer your family would become if it started out
output of the economy
with an average U.S. income and then, suddenly, six dollars out of seven were taken
away. Most Americans at the end of the 19th century could
TA BL E 1 not afford vacations, the men had one good suit of clothing
Openness of Various National Economies, 2007 which they listed in their wills, and they wrote with ink that
Analysis; for all other countries, Central Intelligence

Agency, The World Factbook, https://www.cia.gov/

was kept in inkwells (and that froze every winter).
SOURCE: For United States, Bureau of Economic

Netherlands 67%
But with Bumps along the Growth Path
Germany 41
China 37
Although the cumulative growth performance depicted in
Canada 36
accessed February 2008.

Mexico 35 Figure 2 is impressive, America™s economic growth has been
Russia 25
quite irregular. We have experienced alternating periods of
United Kingdom 20
good and bad times, which are called economic fluctuations or
United States 14
sometimes just business cycles. In some years”five since
Japan 12
1959, to be exact”GDP actually declined. Such periods of
NOTE: Openness calculated as the average of imports and exports as a
declining economic activity are called recessions.
percentage of GDP.

This concept is called real GDP.

Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Licensed to:
Chapter 2 25
The Economy: Myth and Reality

F I GU R E 2
Real Gross Domestic Product (GDP) Since 1959
SOURCE: Economic Report of the President (Washington,

DC: U.S. Government Printing Office, various years).

Billions of Dollars per Year






1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009

NOTE: Real (inflation-adjusted) GDP figures are in 2000 dollars.

The bumps along the American economy™s historic growth path are barely visible in
Figure 2. But they stand out more clearly in Figure 3, which displays the same data in a
different way. Here we plot not the level of real GDP each year but, rather, its growth rate”
the percentage change from one year to the next. Now the booms and busts that delight
and distress people”and swing elections”stand out clearly. From 1983 to 1984, for ex-
ample, real GDP grew by over 7 percent, which helped ensure Ronald Reagan™s landslide
reelection. But from 1990 to 1991, real GDP actually fell slightly, which helped Bill Clinton
defeat (the first) George Bush.
One important consequence of these ups and downs in economic growth is that unem-
ployment varies considerably from one year to the next (see Figure 4 on the next page).
During the Great Depression of the 1930s, unemployment ran as high as 25 percent of the
workforce. But it fell to barely over 1 percent during World War II. Just within the past few
years, the national unemployment rate has been as high as 6.3 percent (in June 2003) and as
low as 3.8 percent (in April 2000). In human terms, that 2.5 percentage point difference rep-
resents nearly four million jobless workers. Understanding why joblessness varies so dra-
matically, and what we can do about it, is another major reason for studying economics.

F I GU R E 3
The Growth Rate of Real Gross Domestic Product (GDP) in the United States
Since 1959

SOURCE: Economic Report of the President (Washington, DC: U.S. Government Printing

1960s record
Annual Change in Real GDP (percent)

6 Boom of
1980s Boom of
5 1990s




1 2001
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Office, various years)

“1 1973-74 1990-91
recession recession
“2 1981-82

NOTE: Growth rates are for 1959“1960, 1960“1961, and so on.

Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Licensed to:
Part 1
26 Getting Acquainted with Economics

F I GU R E 4
The Unemployment Rate in the United States since 1929

Printing Office, various years); and Bureau of the Census, Historical Statistics of

SOURCE: Economic Report of the President (Washington, DC: U.S. Government

the United States, Colonial Times to 1970 (Washington, DC: U.S. Government
Percentage of Civilian Workers
Who Are Unemployed


1973-75 1980s
10 recession boom 1990s
World 1960s boom
War II boom

Printing Office, 1975).

1929 1939 1949 1959 1969 1979 1989 1999 2009

Let™s now return to the analogy of an economy as a machine turning inputs into outputs.
The most important input is human labor: the men and women who run the machines,
work behind the desks, and serve you in stores.

Unemployment Rates in Europe
For roughly the first quarter-century after World War II, unem-
ployment rates in the industrialized countries of Europe were
significantly lower than those in the United States. Then, in
the mid-1970s, rates of joblessness in Europe leaped, with
double digits becoming common. And they have been higher
than U.S. unemployment rates more or less ever since. Where
employment is concerned, the U.S. economy has become the
envy of Europe”with the exception of the United Kingdom.
Put on a comparable basis by the U.S. Bureau of Labor Statis-
SOURCE: © Joel Stettenheim/CORBIS


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