macro ch 4 - 18e - use this one.ppt

The U.S. Economy: Private and Public Sectors

Chapter 4

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

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

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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



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Household Income

• Functional distribution of income–Types of income–Wage, rent, interest, profit

• Personal distribution of income–Division among

households by quintile

4-3



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Functional Distribution of Income 2007

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

4-4

Personal Distribution of Income 2006

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%

8.6%

14.5%

22.9%

50.5%Source: Bureau of the Census

4-5

Households as Spenders

• Uses of household income?

• Personal taxes (13%)

• Personal saving (1%)

• Personal consumption (86%)–Durables (11%)

–Nondurables (29%)

–Services (60%)4-6



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The Business Population

• Plant

• Firm

• Industry

• Multiplant Firms

• Vertically Integrated

• Conglomerates

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

• Sole proprietorship• Partnership• Corporation

4-8



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Legal Forms of Business

• Corporate Securities–Stock–Bond

• Limited Liability• Hiring of Specialists• Unlimited Lifetime

Advantages of Corporations

4.1



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Principal-Agent Problem

• Potential disagreement between agents and principles

• Stockholders are principals

• Executives are agents

• Conflict of interest?

4-10

The Public Sector

• Federal, state, and local government

• Role of the government in the economy?

4-11



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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



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• Redistributing Income–Transfer Payments

–Market Intervention

–Taxation

• Reallocating Resources–Market Failure

• Externalities or Spillovers

• Negative or Positive Types 4.2



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• Correcting for Negative Externalities– Legislation

– Specific Taxes

• Correcting for Positive Externalities– Subsidize Consumers

– Subsidize Suppliers

– Provide Goods Via Government



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• Public Goods and Services• Private Goods

– Rivalry– Excludability

• Public Goods– Nonrivalry– Nonexcludability– Free-Rider Problem

• Quasi-Public Goods • The Reallocation Process



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• Promoting Stability– Unemployment– Inflation

• Government’s Role: A Qualification– Political Context– Overregulation– Underregulation– Benefits and Costs– Not Perfectly Carried Out



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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

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 2007

GovernmentPurchases

GovernmentTransfer

Payments

22%

5%

19%

13%

27%

32%

4-18

Government Revenue

SwedenDenmark

FinlandFrance

ItalyGermany

United KingdomCanada

AustraliaUnited States

JapanSouth Korea

10 20 30 40 50

Source: Organization for Economic Cooperation and Development

5855

5151

464342

40

3534

3332

Total Tax Revenue, Approximate Percentage of GDP, 2007

4-19

Federal Expenditures

0 10 20 30 40 50

Pensions &Income Security

NationalDefense

Health

Interest on thePublic Debt

Source: U. S. Office of Management and Budget

34%

21%

24%

9%

Percentage of total expenditure ($2,731 billion), 2007

4-20

Federal Tax Revenues

0 10 20 30 40 50

PersonalIncome Tax

PayrollTaxes

CorporateIncome Taxes

ExciseTaxes

Source: U. S. Office of Management and Budget

45%

34%

3%

4%All

Other

14%

Sources of total tax revenue ($2,568 billion), 2007

4-21



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Federal FinanceFederal Tax Revenues-2005

• Progressive Tax Rates–Brackets of Income

• Marginal Tax Rate

• Average Tax Rate

State Finances

Primary Revenues• Sales & Excise Taxes (47%)• Personal Income Taxes (35%)• Corporate Income Taxes

& License Fees (18%)

4-23

State Finances

Primary Expenditures• Education (36%)• Public Welfare (28%)• Health & Hospitals (7%)• Highways (7%)• Public Safety (4%)• Other (18%)

4-24

Local Finances

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%

4-25



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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



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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



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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



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The United States in the Global Economy

macro ch 4 - 18e - use this one.ppt

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