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Copyright 2008 The McGraw-Hill Companies4-1
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
Key Terms
End Show
4The U.S. Economy: Public and Private Sectors
Copyright 2008 The McGraw-Hill Companies4-2
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
Key Terms
End Show
Chapter Objectives• Important Facts About U.S.
Households and U.S. Businesses
• Corporate Form Domination in Sales and Profits
• Principle and Agent Issues• Economic Role of Government
in the Economy• Categories of Government
Spending and the Sources of Government Revenues
Copyright 2008 The McGraw-Hill Companies4-3
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
Key Terms
End Show
Households as Income Receivers
Functional Distribution of Income-2005
Wages & Salaries
Rents
Interest
Proprietor’sIncome
CorporateProfits
Inco
me
By
Fu
nct
ion
Per
form
edNational Income Received (Percent)
0 10 20 30 40 50 60 70
71%
1%
5%
9%
14%Source: Bureau of Economic Analysis
Copyright 2008 The McGraw-Hill Companies4-4
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
Key Terms
End Show
Households as Income Receivers
Personal Distribution of Income-2004
Lowest20%
Second20%
Middle20%
Fourth20%
Highest20%
Inco
me
Gro
up
(H
ou
seh
old
s)Personal Income Received (Percent)
0 10 20 30 40 50 60
3.4%
8.7%
14.7%
23.2%
50.1%Source: Bureau of the Census
Copyright 2008 The McGraw-Hill Companies4-5
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
Key Terms
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Households as SpendersHousehold Uses of Income-2005
PersonalTaxes
PersonalSaving
PersonalConsumption
Inco
me
Gro
up
(H
ou
seh
old
s)Household Income Expended (Percent)
0 10 20 30 40 50 60 70 80 90
12%
0%
88%
59%Composition
ofConsumption
Services NondurableGoods
DurableGoods
12%29%
Consumption Divided Between…
Source: Bureau of Economic Analysis
Copyright 2008 The McGraw-Hill Companies4-6
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
Key Terms
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The Business Population
• Plant
• Firm
• Industry
• Multiplant Firms
• Vertically Integrated
• Conglomerates
Copyright 2008 The McGraw-Hill Companies4-7
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
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Legal Forms of Business•Sole Proprietorship•Partnership•CorporationDomestic Output by Business Type
Percentage of Firms Percentage of Sales
Sole Proprietorships
Partnerships
Corporations
Sole Proprietorships
Partnerships
Corporations
72%
8%
20%
5%
11%
84%
Source: U. S. Census Bureau
Copyright 2008 The McGraw-Hill Companies4-8
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
Key Terms
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Legal Forms of Business
• Corporate Securities–Stock–Bond
• Limited Liability• Hiring of Specialists• Unlimited Lifetime• Principal-Agent Problem
Advantages of Corporations
4.1
Copyright 2008 The McGraw-Hill Companies4-9
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
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The Public Sector: Government’s Role
• Providing the Legal Structure
• Maintaining Competition–Monopoly
–Regulation
–Regulated Monopolies
–Antitrust Laws
–Sherman Act 1890
Copyright 2008 The McGraw-Hill Companies4-10
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
Key Terms
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The Public Sector: Government’s Role
• Redistributing Income–Transfer Payments
–Market Intervention
–Taxation
• Reallocating Resources–Market Failure
• Externalities or Spillovers
• Negative or Positive Types 4.2
Copyright 2008 The McGraw-Hill Companies4-11
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
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The Public Sector: Government’s Role
• Correcting for Negative Externalities– Legislation
– Specific Taxes
• Correcting for Positive Externalities– Subsidize Consumers
– Subsidize Suppliers
– Provide Goods Via Government
Copyright 2008 The McGraw-Hill Companies4-12
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
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The Public Sector: Government’s Role
• Public Goods and Services• Private Goods
– Rivalry– Excludability
• Public Goods– Nonrivalry– Nonexcludability– Free-Rider Problem
• Quasi-Public Goods • The Reallocation Process
Copyright 2008 The McGraw-Hill Companies4-13
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
Key Terms
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The Public Sector: Government’s Role
• Promoting Stability– Unemployment– Inflation
• Government’s Role: A Qualification– Political Context– Overregulation– Underregulation– Benefits and Costs– Not Perfectly Carried Out
Copyright 2008 The McGraw-Hill Companies4-14
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
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The Circular Flow Revisited
ResourceMarket
ProductMarket
Businesses HouseholdsGovernment
Goods & Services
Goods & Services
Net Taxes Net Taxes
Expenditures
Expenditures Goods & Services
Resources
Copyright 2008 The McGraw-Hill Companies4-15
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
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Government Finance• Government Purchases• Government Transfers
35
30
25
20
15
10
5
0
Per
cen
tag
e o
f U
.S. O
utp
ut
1960 2005
GovernmentPurchases
GovernmentTransfer
Payments
22%
5%
19%
12%
27%
31%
Copyright 2008 The McGraw-Hill Companies4-16
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
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Government FinanceGLOBAL PERSPECTIVE
Total Tax Revenue – Selected NationsPercent of Total Output-2004
SwedenDenmark
NorwayFinlandFrance
ItalyUnited Kingdom
GermanyCanada
AustraliaUnited States
JapanSouth Korea
10 20 30 40 50
Source: Organization for Economic Cooperation and Development
50.749.6
44.944.343.742.2
36.134.6
33.031.6
25.425.324.6
Copyright 2008 The McGraw-Hill Companies4-17
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
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Federal FinanceFederal Expenditures-2005
0 10 20 30 40 50
Pensions &Income Security
NationalDefense
Health
Interest on thePublic Debt
Source: U. S. Office of Management and Budget
35%
20%
17%
7%
Four Stand-Out Areas of Spending
Copyright 2008 The McGraw-Hill Companies4-18
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
Key Terms
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Federal FinanceFederal Tax Revenues-2005
• Progressive Tax Rates–Brackets of Income
• Marginal Tax Rate
• Average Tax Rate
Copyright 2008 The McGraw-Hill Companies4-19
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
Key Terms
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Federal FinanceFederal Tax Revenues-2005
0 10 20 30 40 50
PersonalIncome Tax
PayrollTaxes
CorporateIncome Taxes
ExciseTaxes
Source: U. S. Office of Management and Budget
43%
37%
3%
4%All
Other
13%
Basic Revenue Sources
Copyright 2008 The McGraw-Hill Companies4-20
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
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State and Local Finance
• Primary Revenues– Sales & Excise Taxes - 48%– Personal Income Taxes - 34%– Corporate Income Taxes & License
Fees – Most of Balance• Primary Expenditures
– Education – 35%– Public Welfare – 28%– Health & Hospitals – 7%– Highways – 7%– Public Safety – 4%– Other – 19%
State Finances
Copyright 2008 The McGraw-Hill Companies4-21
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
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State and Local Finance
• Primary Revenues– Property Taxes – 73%– Sales & Excise Taxes – 17%
• Primary Expenditures– Education – 44%– Welfare, Health & Hospitals –
12%– Public Safety – 11%– Housing, Parks, & Sewers – 8%– Streets & Highways – 5%
Local Finances
Copyright 2008 The McGraw-Hill Companies4-22
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
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Financing Social SecurityLast
Word
• Demographic Changes• Severe Long-Run Shortfall in
Social Security Funding• Annual Pay-as-You-Go Plan• Impact of Baby Boomer
Retirements• 2017 Revenues Less Than
Payments – Trust Fund Withdrawals
• Trust Fund Exhausted in 2041• Possible Benefit Reductions and
Tax Revenue Increases
Copyright 2008 The McGraw-Hill Companies4-23
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
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Financing Social SecurityLast
Word
• Possible Solutions– Stock & Bond Investments– Payroll Tax Increases– Individually Directed Accounts
for Annuity Incomes Owned by Government
– Half of Payroll Deduction in Privately Owned and Managed Accounts – Phased in Over Time
• Consensus Solution to be Very Difficult
Copyright 2008 The McGraw-Hill Companies4-24
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
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Key Terms Page• functional distributio
n of income• personal distribution
of income• durable goods• nondurable goods• services• plant• firm• industry• sole proprietorship• partnership• corporation• stock• bond• limited liability
• principal-agent problem• monopoly• externality• negative externalities• positive externalities• public goods• free-rider problem• quasi-public goods• government purchases• transfer payments• personal income tax• marginal tax rate• average tax rate• payroll taxes• corporate income tax• sales and excise taxes• property taxes
Copyright 2008 The McGraw-Hill Companies4-25
Households as Income ReceiversHouseholds as SpendersBusiness PopulationLegal Forms of BusinessThe Public Sector: Government’s RoleCircular Flow RevisitedGovernment FinanceFederal FinanceState and Local FinanceLast Word
Key Terms
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The United States in the Global Economy
