David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

CHAPTER 1 Economics and the economy
Most output is service
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At the start of the twenty-first century, in advanced countries, agriculture comprises about 1 per
cent of national output and industry less than 25 per cent. The rest is services, which include
banking, transport, entertainment, communications, tourism, and public services (defence, police, education,
health). In countries such as China and India, agriculture remains a higher share of GDP and services are not
yet fully developed. Everywhere, services are the fastest growing part of output and of exports. Success in
exporting banking, fashion and entertainment helps make the UK the second-largest exporter of services in
the world.
In developed countries, services have for a long time been the largest component of national output. But until
recently most international trade was trade in goods. The internet has changed all that. Accounting services
can be outsourced to India and the advice of Indian accountants is as rapidly received by email in the UK as
face to face in India.
% of national output UK USA France China India
Agriculture 1 1 2 13 19
Industry 26 22 22 46 28
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Services
77 76 41 54
73
Source: World Bonk, World Development Indicators. © 20 10 The World Bonk Group. All rights reserved.
Economic issues
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Trying to understand what economics is about by studying definitions is like trying to learn to swim by
reading an instruction manual. Formal analysis makes sense only once you have some practical experience.
In this section we discuss two examples of how society allocates scarce resources between competing uses.
In each case we see the importance of the questions what, how and for whom to produce.
The 2007 financial crisis
The crisis that started in the United States in 2007 is considered the worst economic crisis since the 1929
Great Depression. Because of the crisis many economies entered a recession. A recession is a period of
time in which the amount of goods and services produced by an economy (called the gross domestic
product or GDP) declines. Recessions are not uncommon; indeed, economies over time experience cyclical
periods of recession followed by periods in which economic activity rises.
Figure 1.1 reports the growth rate of the GDP for the US economy from 1985 to 2010. It shows that in the
last 15 years there have been several periods in which the US economy faced a negative growth rate of
output; however, none to the extent of the recession that began in 2007.
The situation started with a financial crisis in the US market for sub-prime mortgages. Sub-prime mortgages
are those given to people who want to buy a house but have a poor credit record and a relatively high
probability of eventually not being able to repay their loan.
Why lend money to people who are such a high credit risk? The reason was the constantly increasing price
of houses before 2007, as shown in Figure 1.2. With the price of houses increasing, the risk of losing on a
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