hyman ch 7

Copyright © 2002 by Thomson Learning, Inc.

Individuals and Government

Chapter 1

Copyright © 2002 Thomson Learning, Inc. Thomson Learning™ is a trademark used herein under license.

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ISBN 0-03-033652-X


Government

Governments are organizations formed to exercise authority over the actions of persons who live together in a society and to provide and finance essential services.


Political Institutions

Political Institutions are rules and generally accepted procedures that evolve for determining what government does and how government outlays are financed.


Examples of Political Institutions

Majority rule Representative government


The Allocation between Private and Government

Resources Private

Food Housing Cars Clothing

Government National Defense Public Schools Police


Figure 1.1 A Production-Possibility Frontier

C

G2

G1

0

B

A

M X2 X1

Gov

ernm

ent G

oods

and

Ser

vice

s pe

r Yea

r

Private Goods and Services per Year


Distribution of Government Goods and Services

Nonmarket rationing: Prices and willingness to pay those prices

are not applicable to goods such as national defense.


The Mixed Economy Markets and Politics

Pure Market Economy Virtually all goods and services are

supplied by for-profit private firms. Supply and demand determine price.


The Mixed Economy Markets and Politics

Mixed Economy Government supplies goods and services Regulates private economic activity Gov. exp = ¼ to ½ GDP Gov. taxes at least ¼ national income Political institutions Compulsory financing


Figure 1.2 Circular Flow in the Mixed Economy

Input

Market

Output Market

Government Households Firms

Subsidies Taxes, fees, charges Government Services

Taxes, fees, charges Government Services

Income Support & Subsidies

Dollars

Resources

Dollars

Goods & Services

Dollars

Goods & Services

Dollars

Resources


Government Expenditures in the United States

Government purchases of labor land capital

Government Transfer Payments Welfare Social Security


Growth in Government Expenditures

Table 1.1 (abbreviated)Year GDP Federal

GovernmentState

and Local Government

Total Government

Percentage of GDPTotal

1930 91.3 2.5 7.5 10.0 10.95

1945 223.0 84.7 8.5 93.2 41.79

1960 527.4 85.8 34.1 119.9 22.73

1975 1635.2 345.4 152.1 497.5 30.42

1999 9256.1 1755.8 863.7 2619.5 28.30


International Comparisons

Country Government Current Expenditures as a Percentage of GDP 2001

Denmark 53.5

France 50.5

Germany 46.2

Canada 40.7

United Kingdom 39.5

Japan 38.2

United States 29.7


Figure 1.3 Total Government Expenditure as a Percentage of GDP 1929-1999

45 40 35 30 25 20 15 10 5 0

1929

19

31

1939

19

45

1955

19

70

1980

19

82

1984

19

86

1988

19

90

1992

19

94

1996

19

98

1999

Perc

enta

ge o

f GD

P

Year


Structure of Federal Government Expenditures

Purchases of Goods and Services Transfer Payments Grants in Aid to State and Local

Governments Net Interest Paid


Table 1.2

Category Percentage of Total Federal Expenditures

Transfer Payments 42.97

Purchases 27.04

Interest 14.97

Grants to State and Local 12.84

Federal Expenditure by Category, 1999

Other 2.18


Figure 1.4 The Distribution of Federal Expenditure, 1966-1999

70

60

50

40

30

20

10

59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 0

Perc

enta

ge o

f Tot

al F

eder

al E

xpen

ditu

re

Transfer Payments

Government Purchases

Net Interest

Grants to State and Local Governments

Year


Social Security23%

All other5%

National Defense16%

Income Security14%

Medicare12%

Net Interest11%

Health9%

Education4%

Transportation3%

Veteran’s Benefits3%

Federal Government Expenditure by Function


The Structure of State and Local Government Expenditure

in the United States Education Civilian Safety Transportation Executive, Legislative, and Judicial Income Security Health and Hospitals Recreational and Cultural Activities


State and Local Government Expenditure

Education42.71%

Civilian Safety16%

Transportation13%

ExecutiveLegislative and

Judicial11%

Income Security5%

Health and Hospitals

3%

Recreational and Cultural Activities

2% Other7%


Financing Government Expenditures in the US

Taxes: Income (Corporate and Personal) Payroll Excise Customs


Federal Revenues

Income Taxes47%

Payroll Taxes35%

Corporate Profits Taxes12%

Excise Taxes4%

Customs Duties1%

Other1%


Sales Taxes27%

Federal Grants20%

Income Taxes17%

Nontaxes3%

Payroll Taxes1%

Corporate Profit Taxes3%

Property Taxes21%

Other8%

State and Local Government Revenues


Implications of a Graying America

Social Security Medicare Medicaid


How Much Government is Enough?

The question of how much government is enough is an important one in any society. It is the tradeoff between public and private goods. When government gets bigger, it comes at the expense of less private consumption.

hyman ch 7

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