The Three Fundamental Questions What gets produced, and in what quantities? How are these goods...

The Three Fundamental Questions

• What gets produced, and in what quantities?• How are these goods produced?• For whom are these goods produced ?

We can’t have it all; thus we must

decide

•If you buy a new car, you won’t be able to afford a new TV set.

•If you attend college, you give up income you could have earned by working full-time.

•If a farmer opts to grow soybeans, the land will not be available to grow cotton.

•If resources are allocated to manufacture military aircraft, then those resources will not be available to manufacture civilian aircraft.

•If state politicians allocate more state revenues for prison construction, then less money is left over for teacher salaries.

Congress has made supplemental appropriations for

the Iraq effort of $110 billion since June of 2003 year. We should

ask the question: what could we have for $110 billion?

•628 Boeing 7E7 Aircraft

• Construct three (3) 700 mile bullet trains (includes the cost of inner-city land acquisition).

•4,075 “high quality” educational facilities to accommodate 1,000 students.

•Write a $379 check to every U.S. citizen.

•Fund 1,000 universities the size of Arkansas State for one year.

What we produce

Output of the United States, 2002

13.4%61.5%

Gov. goods, services

Exports

Investment goodsConsumption goods

Economic Functions of Government

• Administration of justice

• Provision of “public goods”

• Correcting for “externalities” such as air pollution.

• Redistribution of income

27%19%

Property Taxes

Sales taxes

Individual incvometaxes

Corporate incometaxes

State and Local Government Revenues by Source, 2001

Source: Economic Report of the President

3% 7%Sales taxes

Individual incometaxes

Alcohol andTobacco taxes

State of Arkansas Revenues by Source, 2003

Source: www.state.ar.us/dfa

“Other” includes spending for libraries, hospitals, health, employment security, water transport and terminals, police and fire, solid waste management, parking, corrections, parks and recreation, housing, and other items.

42%Education

Highways

Public Welfare

State and Local Government Expenditures, 2001

50%17%

5%Criminal Justice

General Education

Higher Education

Health/HumanServices

State of Arkansas Expenditures, 2003

Source: www.state.ar.us/dfa

8%Individual incometaxes

Payroll taxes

Federal Revenues by Source, 2003

Category Amount (Millions) Percent of TotalSocial Security 406,625 22.7National Defense 290,636 16.2Interest on National Debt 220,314 12.3Income Security 251,286 14.0Medicare 202,513 11.3Health 154,227 8.6Education & Training 63,397 3.5Veterans' Benefits 46,796 2.6Transportation 46,709 2.6Agriculture 31,988 1.8International Affairs 17,078 1.0

Major Categories of Federal Spending, 2000

www.census.gov

Federal Revenues by Source in 2000

www.census.gov

Miscellaneous

Customs duties

Estate & Gift taxes

Excise taxes

Payroll taxes

Corporate taxes

Income taxes

Capital

Entrepreneurship

Economic resourcesare also called

“factors of production,”since they furnish the

physical and intellectualmeans to produce and distribute

goods and services

The Economic Resources

“Free gifts of nature”

Land or natural resources

Labor or “Human Resources”

Capital“Manmade instruments of production.”

Types of capital

•Private, tangible capitalExamples: Aircraft and trucks used by Federal Express; Nuclear Plants “owned” by Entergy; Plants “owned” by Case Equipment Co.

•Public, tangible capital or “infrastructure”Examples: Bridges and viaducts; Water collection and filtration systems; navigable waterways; Mass transit systems; Airports.

•Human capital, defined as “the skills and training of the labor force.”Examples: Network engineers and webmasters; Accountants; Chemists; Machinists; Nurses; Pilots.

Entrepreneurship Entrepreneurship is the human resource that organizes land, labor and capital.

•Entrepreneurs identify profitable business opportunities and mobilize and coordinate resources to take advantage.

•Sam Walton, Michael Dell, Martha Stewart, and Bill Gates are examples of highly successful entrepreneurs.

Income received by owners of economic resources

•Rent: Income paid for the use of land.

•Wages (and salaries): income paid for the services of labor.

•Interest: income paid for the use of capital.

•Profit (or loss): Income earned by an entrepreneur for running a business.

The functional distribution of income refers to the division of

factor payments between wages, rent, profits, and

interest

The Functional Distribution of Income

United States, 2002

Source: www.bea.gov

Profits

Interest

Occupation Mean Annual Income ($)

Chief Executives $113,700Lawyers 88,280Judges 86,760Engineering Professors 65,640Postmasters 44,260Brickmasons 40,280Elementary Teachers 39,700Occupational Therapists 34,340Butchers 24,120

Source: Bureau of Labor Statistics 1999 Occupational Survey

The personal distribution of income describes the

distribution of income among households or individuals

Personal Distribution of Income in the U.S.

Source: Bureau of the Census, Current Population Report, 2001, Table A2

20001970

Quintile

Lowest

Send lowest

Middle

Second highest

Highest

Top 5 percent

Income Ratios for Full-Time, Year-Round Workers, U.S.A.

Ratio of 90th to 10th percentile

Source: Bureau of the Census, Historical Income Table IE-2

2001199519901985198019751970

Average Wages of Men Compared to HS Grads

Percent Difference in Weekly Wages for Selected Years

Source: Finis Welch (1999, Table 4, p. 7)

1993-971988-921977-811967-77

HS Dropouts, White

HS Dropouts, Black

1-3 YRS Coll., White

1-3 YRS Coll., Black

Coll. Grad., White

College Grad., Black

Out of school for less than 10 years

A market is an institutionin which buyers and

sellers exchange goodsand services for

a medium of exchange--money

The Circular Flow Model

Households

GoodsMarkets

FactorMarkets

Resources

Rent, wages, interest, profit received

Rent, wages, interest, profit paid

Resources

Expenditure on goods and services

Revenue from the sale of goods and services

Goods and services bought

Goods and services supplied

Governments in the Circular Flow Model

Households

GoodsMarkets

FactorMarkets

Rent, wages, interest, profit received

Rent, wages, interest, profit paid

Expenditure on goods and services

Expenditures on goods and services

Expenditure on Goods and servicesGovernments

Transfers

The Three Fundamental Questions What gets produced, and in what quantities? How are these goods...

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