Changes in Supply

The supply of most products is also affected by a number of factors. Most important is the cost of producing products. If the price of natural resources, labor, capital, or entrepreneurship rises, sellers will make less profit and will not be as motivated to produce as many units as they were before the cost of production increased. On the other hand, when production costs fall, the amount producers are willing and able to sell increases.

Technological change also affects supply. A new invention or discovery can allow producers to make something that could not be made before. It could also mean that producers can make more of a product using the same or fewer inputs. The most dramatic example of technological change in the U.S. economy over the past few decades has been in the computer industry. In the 1990s, small computers that people carry to and from work each day were more powerful and many times less expensive than computers that filled entire rooms just 20 to 30 years earlier.

Opportunities to make profits by producing different goods and services also affect the supply of any individual product. Because many producers are willing to move their resources to completely different markets, profits in one part of the economy can affect the supply of almost any other product. For example, if someone running a barbershop decided to sign a contract to provide and operate the machines that clean runways at a large airport, this would decrease the supply of haircutting services and increase the supply of runway sweeping services.

When suppliers believe the price of the good or service they provide is going to rise in the future, they often wait to sell their product, reducing the current supply of the product. On the other hand, if they believe that the price is going to fall in the future, they try to sell more today, increasing the current supply. We see this behavior by large and small sellers. Examples include individuals who are thinking about selling a house or car, corn and wheat farmers deciding whether to sell or store their crops, and corporations selling manufactured products or reserves of natural resources.

Finally, the number of sellers in a market can also affect the level of supply. Generally, markets with a larger number of sellers are more competitive and have a greater supply of the product to be sold than markets with fewer sellers. But in some cases, the technology of producing a product makes it more efficient to produce large quantities at just a few production sites, or perhaps even at just one. For example, it would not make sense to have two or more water and sewage companies running pipes to every house and business in a city. And automobiles can be produced at a much lower cost in large plants than in small ones, because large plants can take greater advantage of assembly-line production methods.

All these different factors can lead to changes in what consumers demand and what producers supply. As a result, on any given day prices for some things will be rising and those for others will be falling. This creates opportunities for some individuals and firms, and problems for others. For example, firms producing goods for which the demand and the price are falling may have to lay off workers or even go out of business. But for the economy as a whole, allowing prices to rise and fall quickly in response to changes in any of the market forces that affect supply and demand offers important advantages. It provides an extremely flexible and decentralized system for getting goods and services produced and delivered to households while responding to a vast number of unpredictable changes.

PRODUCTION OF GOODS AND SERVICES

PRODUCTION OF GOODS AND SERVICES
Before goods and services can be distributed to households and consumed, they must be produced by someone, or by some business or organization. In the United States and other market economies, privately owned firms produce most goods and services using a variety of techniques. One of the most important is specialization, in which different firms make different kinds of products and individual workers perform specific jobs within a company.

Successful firms earn profits for their owners, who accept the risk of losing money if the products the firms try to sell are not purchased by consumers at prices high enough to cover the costs of production. In the modern economy, most firms and workers have found that to be competitive with other firms and workers they must become very good at producing certain kinds of goods and services.

Most businesses in the United States also operate under one of three different legal forms: corporations, partnerships, or sole proprietorships. Each of these forms has certain advantages and disadvantages. Because of that, these three types of business organizations often operate in different kinds of markets. For example, most firms with large amounts of money invested in factories and equipment are organized as corporations.

Specialization and the Division of Labor
In earlier centuries, especially in frontier areas, families in the United States were much more self-sufficient, producing for themselves most of the goods and services they consumed. But as the U.S. population and economy grew, it became easier for people to buy more and more things in the marketplace. Once that happened, people faced a choice they still face today: In terms of time, money, and other things that they could do, is it less expensive to make something themselves or to let someone else produce it and buy it from them?

Over the years, most people and businesses realized that they could make better use of their time and resources by concentrating on one particular kind of work, rather than trying to produce for themselves all the items they want to consume. Most people now work in jobs where they do one kind of work; they are carpenters, bankers, cooks, mechanics, and so forth. Likewise, most businesses produce only certain kinds of goods or services, such as cars, tacos, or gardening services. This feature of production is known as specialization. A high degree of specialization is a key part of the economic system in the United States and all other industrialized economies. When businesses specialize, they focus on providing a particular product or type of product. For instance, some large companies produce only automobiles and trucks, or even special parts of cars and trucks, such as tires.



At almost all businesses, when goods and services are produced, labor is divided among workers, with different employees responsible for completing different tasks. This is known as division of labor. For example, the individual parts of cars and televisions are made by many different workers and then put together in an assembly line. Other well-known examples of this specialization and division of labor are seen in the production of computers and electrical appliances. But even kitchens in large restaurants have different chefs for different items, and professional workers such as doctors and dentists have also become more specialized during the past century.

Separation of Ownership and Control

Separation of Ownership and Control
The advantages of limited liability and of an unlimited number of years to operate have made corporations the dominant form of business for large-scale enterprises in the United States. However, there is one major drawback to this form of business. With sole proprietorships, the owners of the business are usually the same people who manage and operate the business. But in large corporations, corporate officers manage the business on behalf of the stockholders. This separation of management and ownership creates a potential conflict of interest. In particular, managers may care about their salaries, fringe benefits, or the size of their offices and support staffs, or perhaps even the overall size of the business they are running, more than they care about the stockholders’ profits.

The top managers of a corporation are appointed or dismissed by a corporation’s board of directors, which represents stockholders’ interests. However, in practice, the board of directors is often made up of people who were nominated by the top managers of the company. Members of the board of directors are elected by a majority of voting stockholders, but most stockholders vote for the nominees recommended by the current board members. Stockholders can also vote by proxy—a process in which they authorize someone else, usually the current board, to decide how to vote for them.

There are, however, two strong forces that encourage the managers of a corporation to act in stockholders’ interests. One is competition. Direct competition from other firms that sell in the same markets forces a corporation’s managers to make sound business decisions if they want the business to remain competitive and profitable. The second is the threat that if the corporation does not use its resources efficiently, it will be taken over by a more efficient company that wants control of those resources. If a corporation becomes financially unsound or is taken over by a competing company, the top managers of the firm face the prospect of being replaced. As a result, corporate managers will often act in the best interests of a corporation’s stockholders in order to preserve their own jobs and incomes.

In practice, the most common way for a takeover to occur is for one company to purchase the stock of another company, or for the two companies to merge by legal agreement under some new management structure. Stock purchases are more common in what are called hostile takeovers, where the company that is being taken over is fighting to remain independent. Mergers are more common in friendly takeovers, where two companies mutually agree that it makes sense for the companies to combine. In 1996 there were over $556.3 billion worth of mergers and acquisitions in the U.S. economy. Examples of mergers include the purchase of Lotus Development Corporation, a computer software company, by computer manufacturer International Business Machines Corporation (IBM) and the acquisition of Miramax Films by entertainment and media giant Walt Disney Company.

Takeovers by other firms became commonplace in the closing decades of the 20th century, and some research indicates that these takeovers made firms operate more efficiently and profitably. Those outcomes have been good news for shareholders and for consumers. In the long run, takeovers can help protect a firm’s workers, too, because their jobs will be more secure if the firm is operating efficiently. But initially takeovers often result in job losses, which force many workers to relocate, retrain, or in some cases retire sooner than they had planned. Such workforce reductions happen because if a firm was not operating efficiently, it was probably either operating in markets where it could not compete effectively, or it was using too many workers and other inputs to produce the goods and services it was selling. Sometimes corporate mergers can result in job losses because management combines and streamlines departments within the newly merged companies. Although this streamlining leads to greater efficiency, it often results in fewer jobs. In many cases, some workers are likely to be laid off and face a period of unemployment until they can find work with another firm.

How Corporations Raise Funds for Investment

By investing in new issues of a company’s stock, shareholders provide the funds for a company to begin new or expanded operations. However, most stock sales do not involve new issues of stock. Instead, when someone who owns stock decides to sell some or all of their shares, that stock is typically traded on one of the national stock exchanges, which are specialized markets for buying and selling stocks. In those transactions, the person who sells the stock—not the corporation whose stock is traded—receives the funds from that sale.

An existing corporation that wants to secure funds to expand its operations has three options. It can issue new shares of stock, using the process described earlier. That option will reduce the share of the business that current stockholders own, so a majority of the current stockholders have to approve the issue of new shares of stock. New issues are often approved because if the expansion proves to be profitable, the current stockholders are likely to benefit from higher stock prices and increased dividends. Dividends are corporate profits that some companies periodically pay out to shareholders.

The second way for a corporation to secure funds is by borrowing money from banks, from other financial institutions, or from individuals. To do this the corporation often issues bonds, which are legal obligations to repay the amount of money borrowed, plus interest, at a designated time. If a corporation goes out of business, it is legally required to pay off any bonds it has issued before any money is returned to stockholders. That means that stocks are riskier investments than bonds. On the other hand, all a bondholder will ever receive is the amount of money specified in the bond. Stockholders can enjoy much larger returns, if the corporation is profitable.

The final way for a corporation to pay for new investments is by reinvesting some of the profits it has earned. After paying taxes, profits are either paid out to stockholders as dividends or held as retained earnings to use in running and expanding the business. Those retained earnings come from the profits that belong to the stockholders, so reinvesting some of those profits increases the value of what the stockholders own and have risked in the business, which is known as stockholders’ equity. On the other hand, if the corporation incurs losses, the value of what the stockholders own in the business goes down, so stockholders’ equity decreases.

Entrepreneurs and Profits
Entrepreneurs raise money to invest in new enterprises that produce goods and services for consumers to buy—if consumers want these products more than other things they can buy. Entrepreneurs often make decisions on which businesses to pursue based on consumer demands. Making decisions to move resources into more profitable markets, and accepting the risk of losses if they make bad decisions—or fail to produce products that stand the test of competition—is the key role of entrepreneurs in the U.S. economy.

Profits are the financial incentives that lead business owners to risk their resources making goods and services for consumers to buy. But there are no guarantees that consumers will pay prices high enough to cover a firm’s costs of production, so there is an inherent risk that a firm will lose money and not make profits. Even during good years for most businesses, about 70,000 businesses fail in the United States. In years when business conditions are poor, the number approaches 100,000 failures a year. And even among the largest 500 U.S. industrial corporations, a few of these firms lose money in any given year.
Entrepreneurs invest money in firms with the expectation of making a profit. Therefore, if the profits a company earns are not high enough, entrepreneurs will not continue to invest in that firm. Instead, they will invest in other companies that they hope will be more profitable. Or if they want to reduce their risk, they can put their money into savings accounts where banks guarantee a minimum return. They can also invest in other kinds of financial securities (such as government or corporate bonds) that are riskier than savings accounts, but less risky than investments in most businesses. Generally, the riskier the investment, the higher the return investors will require to invest their money

CAPITAL, SAVINGS, AND INVESTMENT

CAPITAL, SAVINGS, AND INVESTMENT
In the United States and in other market economies, financial firms and markets channel savings into capital investments. Financial markets, and the economy as a whole, work much better when the value of the dollar is stable, experiencing neither rapid inflation nor deflation. In the United States, the Federal Reserve System functions as the central banking institution. It has the primary responsibility to keep the right amount of money circulating in the economy.

Investments are one of the most important ways that economies are able to grow over time. Investments allow businesses to purchase factories, machines, and other capital goods, which in turn increase the production of goods and services and thus the standard of living of those who live in the economy. That is especially true when capital goods incorporate recently developed technologies that allow new goods and services to be produced, or existing goods and services to be produced more efficiently with fewer resources.

Investing in capital goods has a cost, however. For investment to take place, some resources that could have been used to produce goods and services for consumption today must be used, instead, to make the capital goods. People must save and reduce their current consumption to allow this investment to take place. In the U.S. economy, these are usually not the same people or organizations that use those funds to buy capital goods. Banks and other financial institutions in the economy play a key role by providing incentives for some people to save, and then lend those funds to firms and other people who are investing in capital goods.

Interest rates are the price someone pays to borrow money. Savings institutions pay interest to people who deposit funds with the institution, and borrowers pay interest on their loans. Like any other price in a market economy, supply and demand determine the interest rate. The demand for money depends on how much money people and organizations want to have to meet their everyday expenses, how much they want to save to protect themselves against times when their income may fall or their expenses may rise, and how much they want to borrow to invest. The supply of money is largely controlled by a nation’s central bank—which in the United States is the Federal Reserve System. The Federal Reserve increases or decreases the money supply to try to keep the right amount of money in the economy. Too much money leads to inflation. Too little results in high interest rates that make it more expensive to invest and may lead to a slowdown in the national economy, with rising levels of unemployment.

Providing Funds for Investments in Capital
To take advantage of specialization and economies of scale, firms must build large production facilities that can cost hundreds of millions of dollars. The firms that build these plants raise some funds with new issues of stock, as described above. But firms also borrow huge sums of money every year to undertake these capital investments. When they do that, they compete with government agencies that are borrowing money to finance construction projects and other public spending programs, and with households that are borrowing money to finance the purchase of housing, automobiles, and other goods and services.

Savings play an important role in the lending process. For any of this borrowing to take place, banks and other lenders must have funds to lend out. They obtain these funds from people or organizations that are willing to deposit money in accounts at the bank, including savings accounts. If everyone spent all of the income they earned each year, there would be no funds available for banks to lend out.

Among the three major sectors of the U.S. economy—households, businesses, and government—only households are net savers. In other words, households save more money than they borrow. Conversely, businesses and government are net borrowers. A few businesses may save more than they invest in business ventures. However, overall, businesses in the United States, like businesses in virtually all countries, invest far more than they save. Many companies borrow funds to finance their investments. And while some local and state governments occasionally run budget surpluses, overall the government sector is also a large net borrower in the U.S. economy. The government borrows money by issuing various forms of bonds. Like corporate bonds, government bonds are contractual obligations to repay what is borrowed, plus some specified rate of interest, at a specified time.

Matching Borrowers and Lenders in Financial Markets
Households save money for several reasons: to provide a cushion against bad times, as when wage earners or others in the household become sick, injured, or disabled; to pay for large expenditures such as houses, cars, and vacations; to set aside money for retirement; or to invest. Banks and other financial institutions compete for households’ savings deposits by paying interest to the savers. Then banks lend those funds out to borrowers at a higher rate of interest than they pay to savers. The difference between the interest rates charged to borrowers and paid to savers is the main way that banks earn profits.

Of course banks must also be careful to lend the money to people and firms that are creditworthy—meaning they will be able to repay the loans. The creditworthiness of the borrower is one reason why some kinds of loans have higher rates of interest than others do. Short-term loans made to people or businesses with a long history of stable income and employment, and who have assets that can be pledged as collateral that will become the bank’s property if a loan is not repaid, will receive the lowest interest rates. For example, well-established firms such as AT&T often pay what is called the bank’s prime rate—the lowest available rate for business loans—when they borrow money. New, start-up companies pay higher rates because there is a greater risk they will default on the loan or even go out of business.

Other kinds of loans also have greater risks of default, so banks and other lenders charge different rates of interest. Mortgage loans are backed by the collateral of the property the loan was used to purchase. If someone does not pay his or her mortgage, the bank has the right to sell the property that was pledged as collateral and to collect the proceeds as payment for what it is owed. That means the bank’s risks are lower, so interest rates on these loans are typically lower, too. The money that is loaned to people who do not pay off the balances on their credit cards every month represents a greater risk to banks, because no collateral is provided. Because the bank does not hold any title to the consumer’s property for these loans, it charges a higher interest rate than it charges on mortgages. The higher rate allows the bank to collect enough money overall so that it can cover its losses when some of these riskier loans are not repaid.

If a bank makes too many loans that are not repaid, it will go out of business. The effects of bank failures on depositors and the overall economy can be very severe, especially if many banks fail at the same time and the deposits are not insured. In the United States, the most famous example of this kind of financial disaster occurred during the Great Depression of the 1930s, when a large number of banks failed. Many other businesses also closed and many people lost both their jobs and savings.

Bank failures are fairly rare events in the U.S. economy. Banks do not want to lose money or go out of business, and they try to avoid making loans to individuals and businesses who will be unable to repay them. In addition, a number of safeguards protect U.S. financial institutions and their customers against failures. The Federal Deposit Insurance Corporation (FDIC) insures most bank and savings and loan deposits up to $100,000. Government examiners conduct regular inspections of banks and other financial institutions to try to ensure that these firms are operating safely and responsibly.

A Money and the Value of Money

MONEY AND FINANCIAL MARKETS
A Money and the Value of Money

Money is anything generally accepted as final payment for goods and services. Throughout history many things have been used around the world as money, including gold, silver, tobacco, cattle, and rare feathers or animal skins. In the U.S. economy today, there are three basic forms of money: currency (dollar bills), coins, and checks drawn on deposits at banks and other financial firms that offer checking services. Most of the time, when households, businesses, and government agencies pay their bills they use checks, but for smaller purchases they also use currency or coins.

People can change the type of the money they hold by withdrawing funds from their checking account to receive currency or coins, or by depositing currency and coins in their checking accounts. But the money that people have in their checking accounts is really just the balance in that account, and most of those balances are never converted to currency or coins. Most people deposit their paychecks and then write checks to pay most of their bills. They only convert a small part of their pay to currency and coins. Strange as it seems, therefore, most money in the U.S. economy is just the dollar amount written on checks or showing in checking account balances. Sometimes, economists also count money in savings accounts in broader measures of the U.S. money supply, because it is easy and inexpensive to move money from savings accounts to checking accounts





Most people are surprised to learn that when banks make loans, the loans create new money in the economy. As we’ve seen, banks earn profits by lending out some of the money that people have deposited. A bank can make loans safely because on most days, the amount some customers are depositing in the bank is about the same amount that other customers are withdrawing. A bank with many customers holding a lot of deposits can lend out a lot of money and earn interest on those loans. But of course when that happens, the bank does not subtract the amount it has loaned out from the accounts of the people who deposited funds in savings and checking accounts. Instead, these depositors still have the money in their accounts, but now the people and firms to whom the bank has loaned money also have that money in their accounts to spend. That means the total amount of money in the economy has increased. This process is called fractional reserve banking, because after making loans the bank retains only a fraction of its deposits as reserves. The bank really could not pay all of its depositors without calling in the loans it has made. It also means that money is created when banks make loans but destroyed when loans are paid off.
At one time the dollar, like most other national currencies, was backed by a specified quantity of gold or silver held by the federal government. At that time, people could redeem their dollars for gold or silver. But in practice paper currency is much easier to carry around than large amounts of gold or silver. Therefore, most people have preferred to hold paper money or checking balances, as long as paper currency and checks are accepted as payment for goods and services and maintain their value in terms of the amount of goods and services they can buy.

Eventually governments around the world also found it expensive to hold and guard large quantities of gold or silver. As foreign trade grew, governments found it especially difficult to transfer gold and silver to other countries that decided to redeem paper money acquired through international trade. They, too, changed to using paper currencies and writing checks against deposits in accounts. In 1971 the United States suspended the international payment of gold for U.S. currency. This action effectively ended the gold standard, the name for this official link between the dollar and the price of gold. Since then, there has been no official link between the dollar and a set price for gold, or to the amount of gold or other precious metals held by the U.S. government.

The real value of the dollar today depends only on the amount of goods and services a dollar can purchase. That purchasing power depends primarily on the relationship between the number of dollars people are holding as currency and in their checking and savings accounts, and the quantity of goods and services that are produced in the economy each year. If the number of dollars increases much more rapidly than the quantity of goods and services produced each year, or if people start spending the dollars they hold more rapidly, the result is likely to be inflation. Inflation is an increase in the average price of all goods and services. In other words, it is a decrease in the value of what each dollar can buy.

The Federal Reserve System and Monetary Policy

Governments often attempt to reduce inflation by controlling the supply of money. Consequently, organizations that control how much money is issued in an economy play a major role in how the economy performs, in terms of prices, output and employment levels, and economic growth. In the United States, that organization is the nation’s central bank, the Federal Reserve System. The system’s name comes from the fact that the Federal Reserve has the legal authority to make banks hold some of their deposits as reserves, which means the banks cannot lend out those deposits. These reserve funds are held in the Federal Reserve Bank. The Federal Reserve also acts as the banker for the federal government, but the government does not own the Federal Reserve. It is actually owned by the nation’s banks, which by law must join the Federal Reserve System and observe its regulations.

There are 12 regional Federal Reserve banks. These banks are not commercial banks. They do not accept savings deposits from or provide loans to individuals or businesses. Instead, the Federal Reserve functions as a central bank for other banks and for the federal government. In that role the Federal Reserve System performs several important functions in the national economy. First, the branches of the Federal Reserve distribute paper currency in their regions. Dollar bills are actually Federal Reserve notes. You can look at a dollar bill of any denomination and see the number for the regional Federal Reserve Bank where the bill was originally issued. But of course the dollar is a national currency, so a bill issued by any regional Federal Reserve Bank is good anyplace in the country. The distribution of currency occurs as commercial banks convert some of their reserve balances at the Federal Reserve System into currency, and then provide that currency to bank depositors who decide to hold some of their money balances as currency rather than deposits in checking accounts. The U.S. Treasury prints new currency for the Federal Reserve System. The bills are introduced into circulation when commercial banks use their reserves to buy currency from the Federal Reserve Bank.

Second, the regional Federal Reserve banks transfer funds for checks that are deposited by a bank in one part of the country, but were written by someone who has a checking account with a bank in another part of the country. Millions of checks are processed this way every business day. Third, the regional Federal Reserve Banks collect and analyze data on the economic performance of their regions, and provide that information and their analysis of it to the national Federal Reserve System. Each of the 12 regions served by the Federal Reserve banks has its own economic characteristics. Some of these regional economies are concerned more with agricultural issues than others; some with different types of manufacturing and industries; some with international trade; and some with financial markets and firms. After reviewing the reports from all different parts of the country, the national Federal Reserve System then adopts policies that have major effects on the entire U.S. economy.

By far the most important function of the Federal Reserve System is controlling the nation’s money supply and the overall availability of credit in the economy. If the Federal Reserve System wants to put more money in the economy, it does not ask the Treasury to print more dollar bills. Remember, much more money is held in checking and savings accounts than as currency, and it is through those deposit accounts that the Federal Reserve System most directly controls the money supply. The Federal Reserve affects deposit accounts in one of three ways.

First, it can allow banks to hold a smaller percentage of their deposits as reserves at the Federal Reserve System. A lower reserve requirement allows banks to make more loans and earn more money from the interest paid on those loans. Banks making more loans increase the money supply. Conversely, a higher reserve requirement reduces the amount of loans banks can make, which reduces or tightens the money supply.

The second way the Federal Reserve System can put more money into the economy is by lowering the rate it charges banks when they borrow money from the Federal Reserve System. This particular interest rate is known as the discount rate. When the discount rate goes down, it is more likely that banks will borrow money from the Federal Reserve System, to cover their reserve requirements and support more loans to borrowers. Once again, those loans will increase the nation’s money supply. Therefore, a decrease in the discount rate can increase the money supply, while an increase in the discount rate can decrease the money supply.

(WTO) and Its Predecessors

World Trade Organization (WTO) and Its Predecessors
As World War II drew to a close, leaders in the United States and other Western nations began working to promote freer trade for the post-war world. They set up the International Monetary Fund (IMF) in 1944 to stabilize exchange rates across member nations. The Marshall Plan, developed by U.S. general and economist George Marshall, promoted free trade. It gave U.S. aid to European nations rebuilding after the war, provided those nations reduced tariffs and other trade barriers.

In 1947 the United States and many of its allies signed the General Agreement on Tariffs and Trade (GATT), which was especially successful in reducing tariffs over the next five decades. In 1995 the member nations of the GATT founded the World Trade Organization (WTO), which set even greater obligations on member countries to follow the rules established under GATT. It also established procedures and organizations to deal with disputes among member nations about the trading policies adopted by individual nations.

In 1992 the United States also signed the North American Free Trade Agreement (NAFTA) with its closest neighbors and major trading partners, Canada and Mexico. The provisions of this agreement took effect in 1994. 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.

Exchange Rates

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.

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.

Stock (business)

INTRODUCTION
Stock (business), in business and finance, a share of ownership in a corporation. Shares in a corporation can be bought and sold, usually on a public stock exchange. Consequently, the owner of shares can realize a profit or capital gain if the stock is sold at a price above what the owner originally paid for it.

Some companies enable stockholders to share in the profits of the company. These payments of corporate profits to stockholders are called dividends. In addition to having a claim on company profits, stockholders are entitled to share in the sale of the company if it is dissolved. They may also vote in person or by proxy on a variety of corporate matters, including the most important matter of who should run the corporation. When the company issues new stock, stockholders have priority to buy a certain number of shares before they are offered for public sale. Stockholders also receive periodic reports, usually quarterly, that provide information regarding the corporation’s business performance. Stocks generally are negotiable, which means stockholders have the right to assign or transfer their shares to another individual.

A stockholder is considered a business owner and has the protection of limited liability under United States laws. Limited liability means that a stockholder is not personally liable for the debts of the corporation. The most a stockholder can lose if the company fails is the amount of his or her investment—what he or she originally paid for the stock. This arrangement differs from that of other forms of business organization, which are known as sole proprietorships and partnerships. These business owners are personally liable for the debts of their businesses.