Components of the U.S. Economy

Instructor: David Wood

David has taught Honors Physics, AP Physics, IB Physics and general science courses. He has a Masters in Education, and a Bachelors in Physics.

What is the US economy and how does it work? Learn what parts make it up, and contribute towards the size of the economy. Test your new knowledge with a short quiz.

What is the US Economy?

Have you ever bought something a store? Or sold something on eBay? Or got any kind of job? If so, you've been involved in the economy. The economy is a system that encompasses the production, trade, and use of goods and services in a particular area. We measure the size of an economy using something called gross domestic product (or GDP). GDP is the sum total of all goods and services produced in a country in a year measured in the local currency.

So what makes up a GDP of the USA? What contributes the most to the US economy? In this lesson were going to go through a few of the components that make up the economy of the US.

Businesses and Financial Institutions

Businesses and financial institutions are a big part of the economy. Businesses purchase materials and goods, which then get made into new items to sell - everything from televisions to welcome mats to houses. Financial institutions, such as banks and credit unions, give loans to those businesses, and allow people to invest in them, making money on the interest and fees. The movement of money from company to company allows businesses to produce goods and services, and this is a major part of the economy. During the financial crisis of 2008 banks were bailed out by the governments, in part because of how important they are to the economy.

The New York stock exchange
The New York stock exchange

Consumers and Labor

When talking about the economy, the focus is often on businesses, financial institutions, and possibly government. But what about the people who buy the products that businesses make? Without customers to buy the products and services that businesses are selling, those businesses would go bankrupt in no time at all. The people who purchase items and services from businesses are called consumers, and they play an important role in making sure the economy keeps working.

And what about the workers who work for those businesses and financial institutions? There are everything from professionals who help banks invest in the stock market, to IT experts, to people who clean the offices. All of these people, collectively called labor, are responsible for the business being able to produce value for the US economy at all. Without them, those businesses would not exist.

Workers are at the heart of the economy
Workers are at the heart of the economy

Government

You might think that private business is almost all of the economy, but the government stimulates the economy as well. But while private business is the majority, the government plays a much bigger role than most people realize. In 2014, 18% of the GDP of the USA came from government spending: a total of $3.176 trillion at all levels ($1.2 trillion federal). That's almost a fifth of the GDP!

During a recession, the smart thing for government to do is to spend more. And when the economy is booming, the smart thing for government to do is spend less. Unfortunately, most governments around the world (the US included) do the opposite for political and psychological reasons.

The capitol building, part of the federal government
The capitol building, part of the federal government

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