Macro Ch 4 - 18e - use this one.PPT

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Macro Ch 4 - 18e - use this one.PPT

  1. 1. The U.S. Economy: Private and Public Sectors Chapter 4 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
  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. Household Income <ul><li>Functional distribution of income </li></ul><ul><ul><li>Types of income </li></ul></ul><ul><ul><li>Wage, rent, interest, profit </li></ul></ul><ul><li>Personal distribution of income </li></ul><ul><ul><li>Division among households by quintile </li></ul></ul>4-
  4. 4. Functional Distribution of Income 2007 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-
  5. 5. Personal Distribution of Income 2006 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% 8.6% 14.5% 22.9% 50.5% Source: Bureau of the Census 4-
  6. 6. Households as Spenders <ul><li>Uses of household income? </li></ul><ul><li>Personal taxes (13%) </li></ul><ul><li>Personal saving (1%) </li></ul><ul><li>Personal consumption (86%) </li></ul><ul><ul><li>Durables (11%) </li></ul></ul><ul><ul><li>Nondurables (29%) </li></ul></ul><ul><ul><li>Services (60%) </li></ul></ul>4-
  7. 7. 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>
  8. 8. Domestic Output 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 <ul><li>Sole proprietorship </li></ul><ul><li>Partnership </li></ul><ul><li>Corporation </li></ul>4-
  9. 9. 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>Advantages of Corporations 4.1
  10. 10. Principal-Agent Problem <ul><li>Potential disagreement between agents and principles </li></ul><ul><li>Stockholders are principals </li></ul><ul><li>Executives are agents </li></ul><ul><li>Conflict of interest? </li></ul>4-
  11. 11. The Public Sector <ul><li>Federal, state, and local government </li></ul><ul><li>Role of the government in the economy? </li></ul>4-
  12. 12. 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>
  13. 13. 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
  14. 14. 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>
  15. 15. 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>
  16. 16. 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>
  17. 17. 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
  18. 18. 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 2007 Government Purchases Government Transfer Payments 22% 5% 19% 13% 27% 32% 4-
  19. 19. Government Revenue Sweden Denmark Finland France Italy Germany United Kingdom Canada Australia United States Japan South Korea 10 20 30 40 50 Source: Organization for Economic Cooperation and Development 58 55 51 51 46 43 42 40 35 34 33 32 Total Tax Revenue, Approximate Percentage of GDP, 2007 4-
  20. 20. Federal Expenditures 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 34% 21% 24% 9% Percentage of total expenditure ($2,731 billion), 2007 4-
  21. 21. Federal Tax Revenues 0 10 20 30 40 50 Personal Income Tax Payroll Taxes Corporate Income Taxes Excise Taxes Source: U. S. Office of Management and Budget 45% 34% 3% 4% All Other 14% Sources of total tax revenue ($2,568 billion), 2007 4-
  22. 22. 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
  23. 23. State Finances <ul><li>Primary Revenues </li></ul><ul><ul><li>Sales & Excise Taxes (47%) </li></ul></ul><ul><ul><li>Personal Income Taxes (35%) </li></ul></ul><ul><ul><li>Corporate Income Taxes </li></ul></ul><ul><ul><li>& License Fees (18%) </li></ul></ul>4-
  24. 24. State Finances <ul><li>Primary Expenditures </li></ul><ul><ul><li>Education (36%) </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 (18%) </li></ul></ul>4-
  25. 25. Local Finances <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>4-
  26. 26. 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
  27. 27. 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
  28. 28. 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>
  29. 29. Next Chapter Preview… Chapter 5!!! The United States in the Global Economy

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