Copyright 2008 The McGraw-Hill Companies

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Copyright 2008 The McGraw-Hill Companies

  1. 1. 4 The U.S. Economy: Public and Private Sectors
  2. 2. Chapter Objectives <ul><li>Important Facts About U.S. Households and U.S. Businesses </li></ul><ul><li>Corporate Form Domination in Sales and Profits </li></ul><ul><li>Principle and Agent Issues </li></ul><ul><li>Economic Role of Government in the Economy </li></ul><ul><li>Categories of Government Spending and the Sources of Government Revenues </li></ul>
  3. 3. Households as Income Receivers Functional Distribution of Income-2005 Wages & Salaries Rents Interest Proprietor’s Income Corporate Profits Income By Function Performed National Income Received (Percent) 0 10 20 30 40 50 60 70 71% 1% 5% 9% 14% Source: Bureau of Economic Analysis
  4. 4. Households as Income Receivers Personal Distribution of Income-2004 Lowest 20% Second 20% Middle 20% Fourth 20% Highest 20% Income Group (Households) 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
  5. 5. Households as Spenders Household Uses of Income-2005 Personal Taxes Personal Saving Personal Consumption Income Group (Households) Household Income Expended (Percent) 0 10 20 30 40 50 60 70 80 90 12% 0% 88% 59% Composition of Consumption Services Nondurable Goods Durable Goods 12% 29% Consumption Divided Between… Source: Bureau of Economic Analysis
  6. 6. The Business Population <ul><li>Plant </li></ul><ul><li>Firm </li></ul><ul><li>Industry </li></ul><ul><li>Multiplant Firms </li></ul><ul><li>Vertically Integrated </li></ul><ul><li>Conglomerates </li></ul>
  7. 7. Legal Forms of Business <ul><li>Sole Proprietorship </li></ul><ul><li>Partnership </li></ul><ul><li>Corporation </li></ul>Domestic 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
  8. 8. Legal Forms of Business <ul><li>Corporate Securities </li></ul><ul><ul><li>Stock </li></ul></ul><ul><ul><li>Bond </li></ul></ul><ul><li>Limited Liability </li></ul><ul><li>Hiring of Specialists </li></ul><ul><li>Unlimited Lifetime </li></ul><ul><li>Principal-Agent Problem </li></ul>Advantages of Corporations 4.1
  9. 9. The Public Sector: Government’s Role <ul><li>Providing the Legal Structure </li></ul><ul><li>Maintaining Competition </li></ul><ul><ul><li>Monopoly </li></ul></ul><ul><ul><li>Regulation </li></ul></ul><ul><ul><li>Regulated Monopolies </li></ul></ul><ul><ul><li>Antitrust Laws </li></ul></ul><ul><ul><li>Sherman Act 1890 </li></ul></ul>
  10. 10. The Public Sector: Government’s Role <ul><li>Redistributing Income </li></ul><ul><ul><li>Transfer Payments </li></ul></ul><ul><ul><li>Market Intervention </li></ul></ul><ul><ul><li>Taxation </li></ul></ul><ul><li>Reallocating Resources </li></ul><ul><ul><li>Market Failure </li></ul></ul><ul><ul><ul><li>Externalities or Spillovers </li></ul></ul></ul><ul><ul><ul><li>Negative or Positive Types </li></ul></ul></ul>4.2
  11. 11. The Public Sector: Government’s Role <ul><li>Correcting for Negative Externalities </li></ul><ul><ul><li>Legislation </li></ul></ul><ul><ul><li>Specific Taxes </li></ul></ul><ul><li>Correcting for Positive Externalities </li></ul><ul><ul><li>Subsidize Consumers </li></ul></ul><ul><ul><li>Subsidize Suppliers </li></ul></ul><ul><ul><li>Provide Goods Via Government </li></ul></ul>
  12. 12. The Public Sector: Government’s Role <ul><li>Public Goods and Services </li></ul><ul><li>Private Goods </li></ul><ul><ul><li>Rivalry </li></ul></ul><ul><ul><li>Excludability </li></ul></ul><ul><li>Public Goods </li></ul><ul><ul><li>Nonrivalry </li></ul></ul><ul><ul><li>Nonexcludability </li></ul></ul><ul><ul><li>Free-Rider Problem </li></ul></ul><ul><li>Quasi-Public Goods </li></ul><ul><li>The Reallocation Process </li></ul>
  13. 13. The Public Sector: Government’s Role <ul><li>Promoting Stability </li></ul><ul><ul><li>Unemployment </li></ul></ul><ul><ul><li>Inflation </li></ul></ul><ul><li>Government’s Role: A Qualification </li></ul><ul><ul><li>Political Context </li></ul></ul><ul><ul><li>Overregulation </li></ul></ul><ul><ul><li>Underregulation </li></ul></ul><ul><ul><li>Benefits and Costs </li></ul></ul><ul><ul><li>Not Perfectly Carried Out </li></ul></ul>
  14. 14. The Circular Flow Revisited Resource Market Product Market Businesses Households Costs Money Income Input Factors Resources Goods & Services Revenue Goods & Services Consumption Government Goods & Services Goods & Services Net Taxes Net Taxes Expenditures Expenditures Goods & Services Resources
  15. 15. Government Finance <ul><li>Government Purchases </li></ul><ul><li>Government Transfers </li></ul>35 30 25 20 15 10 5 0 Percentage of U.S. Output 1960 2005 Government Purchases Government Transfer Payments 22% 5% 19% 12% 27% 31%
  16. 16. Government Finance Total Tax Revenue – Selected Nations Percent of Total Output-2004 Sweden Denmark Norway Finland France Italy United Kingdom Germany Canada Australia United States Japan South Korea 10 20 30 40 50 Source: Organization for Economic Cooperation and Development 50.7 49.6 44.9 44.3 43.7 42.2 36.1 34.6 33.0 31.6 25.4 25.3 24.6 GLOBAL PERSPECTIVE
  17. 17. Federal Finance Federal Expenditures-2005 0 10 20 30 40 50 Pensions & Income Security National Defense Health Interest on the Public Debt Source: U. S. Office of Management and Budget 35% 20% 17% 7% Four Stand-Out Areas of Spending
  18. 18. Federal Finance <ul><li>Progressive Tax Rates </li></ul><ul><ul><li>Brackets of Income </li></ul></ul><ul><li>Marginal Tax Rate </li></ul><ul><li>Average Tax Rate </li></ul>Federal Tax Revenues-2005
  19. 19. Federal Finance Federal Tax Revenues-2005 0 10 20 30 40 50 Personal Income Tax Payroll Taxes Corporate Income Taxes Excise Taxes Source: U. S. Office of Management and Budget 43% 37% 3% 4% All Other 13% Basic Revenue Sources
  20. 20. State and Local Finance <ul><li>Primary Revenues </li></ul><ul><ul><li>Sales & Excise Taxes - 48% </li></ul></ul><ul><ul><li>Personal Income Taxes - 34% </li></ul></ul><ul><ul><li>Corporate Income Taxes & License Fees – Most of Balance </li></ul></ul><ul><li>Primary Expenditures </li></ul><ul><ul><li>Education – 35% </li></ul></ul><ul><ul><li>Public Welfare – 28% </li></ul></ul><ul><ul><li>Health & Hospitals – 7% </li></ul></ul><ul><ul><li>Highways – 7% </li></ul></ul><ul><ul><li>Public Safety – 4% </li></ul></ul><ul><ul><li>Other – 19% </li></ul></ul>State Finances
  21. 21. State and Local Finance <ul><li>Primary Revenues </li></ul><ul><ul><li>Property Taxes – 73% </li></ul></ul><ul><ul><li>Sales & Excise Taxes – 17% </li></ul></ul><ul><li>Primary Expenditures </li></ul><ul><ul><li>Education – 44% </li></ul></ul><ul><ul><li>Welfare, Health & Hospitals – 12% </li></ul></ul><ul><ul><li>Public Safety – 11% </li></ul></ul><ul><ul><li>Housing, Parks, & Sewers – 8% </li></ul></ul><ul><ul><li>Streets & Highways – 5% </li></ul></ul>Local Finances
  22. 22. Financing Social Security <ul><li>Demographic Changes </li></ul><ul><li>Severe Long-Run Shortfall in Social Security Funding </li></ul><ul><li>Annual Pay-as-You-Go Plan </li></ul><ul><li>Impact of Baby Boomer Retirements </li></ul><ul><li>2017 Revenues Less Than Payments – Trust Fund Withdrawals </li></ul><ul><li>Trust Fund Exhausted in 2041 </li></ul><ul><li>Possible Benefit Reductions and Tax Revenue Increases </li></ul>Last Word
  23. 23. Financing Social Security <ul><li>Possible Solutions </li></ul><ul><ul><li>Stock & Bond Investments </li></ul></ul><ul><ul><li>Payroll Tax Increases </li></ul></ul><ul><ul><li>Individually Directed Accounts for Annuity Incomes Owned by Government </li></ul></ul><ul><ul><li>Half of Payroll Deduction in Privately Owned and Managed Accounts – Phased in Over Time </li></ul></ul><ul><li>Consensus Solution to be Very Difficult </li></ul>Last Word
  24. 24. Key Terms Page <ul><li>functional distribution of income </li></ul><ul><li>personal distribution of income </li></ul><ul><li>durable goods </li></ul><ul><li>nondurable goods </li></ul><ul><li>services </li></ul><ul><li>plant </li></ul><ul><li>firm </li></ul><ul><li>industry </li></ul><ul><li>sole proprietorship </li></ul><ul><li>partnership </li></ul><ul><li>corporation </li></ul><ul><li>stock </li></ul><ul><li>bond </li></ul><ul><li>limited liability </li></ul><ul><li>principal-agent problem </li></ul><ul><li>monopoly </li></ul><ul><li>externality </li></ul><ul><li>negative externalities </li></ul><ul><li>positive externalities </li></ul><ul><li>public goods </li></ul><ul><li>free-rider problem </li></ul><ul><li>quasi-public goods </li></ul><ul><li>government purchases </li></ul><ul><li>transfer payments </li></ul><ul><li>personal income tax </li></ul><ul><li>marginal tax rate </li></ul><ul><li>average tax rate </li></ul><ul><li>payroll taxes </li></ul><ul><li>corporate income tax </li></ul><ul><li>sales and excise taxes </li></ul><ul><li>property taxes </li></ul>
  25. 25. Next Chapter Preview… Chapter 5!!! The United States in the Global Economy

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