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The Private Sector
The term “private sector”is used to connote business
firms and households--domestic as well as foreign
Households
Households “own” economic resources (directly or indirectly through ownership of shares).
Households are sellers in resource or “factor” markets.
Households are buyers in final product markets.
Firms
Firms are buyers in resource or factor markets
Firms are sellers in final product markets
What firms pay out for the use of resources must ultimately accrue as “income” to resource owners.
National Income (NI)
National income includes:
$Wages and salaries
$Proprietors’ income
$Rental income of persons
$Corporate profits
$Net interest
NI is called “earned income”because it is income received
for the sale of resources--that is, income resulting from the production of goods and services
National Income in 1996National income by type, 1997
billions of dollars
Source: Economic Report of the President
425.10 / 6.8%
735.90 / 11.8%
146.30 / 2.3%
520.30 / 8.3%
4426.90 / 70.8%
interest
profits
rental income
proprietors' income
wages and salaries
National Income, 1975-97
billions of dollars
Source: Economic Report of the President
Year
1997199519901985198019751970
Nati
onal In
com
e
8000
7000
6000
5000
4000
3000
2000
1000
0
Consumption
Household spending for newly-produced goods and services is defined as consumption. We distinguish between 3 categories or types:
Spending for consumer durables
Spending for consumer nondurables
Spending for consumer services.
Category
Spending in1997
(billions)Percentof Total
Durables $659.4 12
Nondurables 1,592.7 29
Services 3,236.5 59
Source: Economic Report of the President
Consumer Spending by Type, 1997 (in billions)
Total spending byU.S. households
in 1997 was astaggering $5.5
trillion
Consumption Expenditure in the U.S., 1970-97
Source: Economic Report of the President
Year
1997199519901985198019751970
bill
ion
s6000
5000
4000
3000
2000
1000
0
Business Statistics, 1997
Legal Form NumberPercent of Total
Proprietorship 15,848,000 74
Partnership 1,467,000 7
Corporation 3,965,000 19
Most corporations aresmall (revenues lessthan $1 million).The
top 17 percent ofcorporations account for
94 percent of corporate revenue
Source: Statistical Abstract of the U.S.
There are morethan 21 million
business enterprises in the U.S.
Business Firms As Spending Units
Investment is defined as
All spending by business firms for newly built equipment and business structures.
All changes in business inventories of raw materials, semifinished articles, and finished goods.
All spending by households for newly constructed residential housing
Business Fixed Investment, 1982-97
billions of chain-weighted 1992 dollars
Source: Economic Report of the President
Year
199719941991198819851982
bill
ion
s of
19
92
dolla
rs1200
1100
1000
900
800
700
600
500
Components of Business Fixed Investment, 1982-97
billions of chain-weighted 1992 dollars
Source: Economic Report of the President
Year
199719941991198819851982
billions
of
1992 d
ollars
700
600
500
400
300
200
100
0
Structures
Durable equipment
Computers
The Simple Circular Flow
Assumptions
•No public sector; hence, no taxes, government spending, or transfer payments.
•No investment spending
•No exports or imports
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