Transcript The U.S Economy: Private and Public Sectors

The U.S Economy: Private and
Public Sectors
Chapter 4 (Mc Connell and Brue)
Announcements
• Quiz on Sunday 14th Feb
• Presentation Group 1 on Friday 19th Feb
Chapter Objectives
• Important facts about U.S households and U.S
businesses
• The problem that arises when corporate
owners and their managers have different
interests
• Economic Role of government in the economy
• Categories of government spending and
sources of government revenues
Households as Income Receivers
•
•
•
•
113 Million households in US
Act as suppliers of economic resources
Major spenders in the economy
Income received by households can be
categorized into how it is earned and how it is
divided
Functional Distribution of Income
Indicates how the nations earned income is
apportioned among:
• Wages
• Rents
• Interest
• Profits
Functional Distribution of Income-2005
Income By Function Performed
0
Wages &
Salaries
Rents
Interest
Proprietor’s
Income
Corporate
Profits
National Income Received (Percent)
10
20
30
40
50
60
70
71%
1%
5%
9%
14%
Source: Bureau of Economic Analysis
Personal Distribution of Income-2004
• Indicates how nation’s money income is divided
amongst individual households
0
Income Group (Households)
Lowest
20%
Second
20%
Middle
20%
Fourth
20%
Highest
20%
Personal Income Received (Percent)
10
20
30
40
50
60
3.4%
8.7%
14.7%
23.2%
50.1%
Source: Bureau of the Census
Households as spenders
• Personal Taxes: Personal Income tax takes up
the largest component of personal taxes.
(12%)
• Personal Savings:
-Saving is that part of after tax income that is
not spent (bank accounts, mutual funds)
• Reasons for saving:
-Security and speculation
• Dis-saving
• Personal consumption expenditure (88%)
Households as Spenders
Household Uses of Income-2005
0
Household Income Expended (Percent)
10 20 30 40 50 60 70 80 90
Income Group (Households)
Personal
Taxes
Personal
Saving
12%
0%
Personal
Consumption
88%
Consumption Divided Between…
Composition
of
Consumption
59%
29%
12%
Services
Nondurable
Goods
Durable
Goods
Source: Bureau of Economic Analysis
Review
•
•
•
•
Functional Distribution
Personal Distribution
Saving
Consumer Spending
The Business Population
• Plant: physical establishment that performs
one or more functions in fabricating and
distributing goods and services
• Firm: Business organization that owns and
operates the plant
• Industry: Group of firms that produce the
same, or similar, products
Types of firms
• Multi-plant firms: Several plants performing
the same function
• Vertically integrated: Own plants that perform
different functions in various stages of the
production process
• Conglomerates: Plants that produce products
in several industries
Legal Forms of Businesses
• Sole proprietorship: owned and operated by
one person
• Partnership: 2 or more individuals agree to
own and operate a business together
• Corporation: Legal creation that can acquire
resources, produce and sell products, incur
debts etc. (distinct and separate from
individual stockholders)
Legal Forms of Business
Domestic Output by Business Type
20%
Corporations
8%
Partnerships
72%
Corporations
84%
Partnerships
11%
Sole Proprietorships
Sole Proprietorships
Percentage of Firms
5%
Percentage of Sales
Source: U. S. Census Bureau
Advantages of Corporations
• Most effective form of business to raise capital
• Common Stock: Share in ownership and
dividends declared
• Corporate bond: No ownership , pays the
holder a fixed amount (example of a bond)
• Why do individuals invest in corporations?
• Limited Liability
• Easily expand scope of activities and benefit
• Permanence: Long range planning & growth
The Principal-Agent Problem
• Sole proprietorship and partnerships: owners
have direct control over the assets
• Corporations hire managers
• Principals : Stockholders
• Agents: Managers
• Conflict: Maximum profits and Stock price vs
power , prestige, pay
Review
•
•
•
•
Plant, firm and industry
Legal forms of business
Advantages of corporations
Principal –agent problem
The Public Sector: Governments Role
• Providing the Legal Structure
-Legal framework and services for a market
economy to operate efficiently
-Rights of property ownership , making and
enforcement of contracts
-Increase volume and safety of exchange : better
allocation and specialization of resources
-MC and MB of intervention
The Public Sector: Governments Role
• Maintaining Competition
-Essential for market system ( consumer
sovereignty)
-Monopoly: Charge higher than competitive
price
-Natural Monopolies: Single Seller can achieve
lowest possible costs
-Antitrust laws
The Public Sector: Governments Role
• Redistributing Income
-Market system redistributes income inequitably
-Methods of redistribution:
-Transfer payments
-Market intervention
-Taxation
-Benefits and costs
The Public Sector: Governments Role
• Reallocating Resources
-A market failure occurs when the market:
a)Produces wrong amounts of certain goods
b)fails to allocate resources to production of
certain goods
-Externalities: Occur when some of the cost or
benefit of a good are passed onto someone
other than the buyer or seller
The Public Sector: Governments Role
• Negative Externalities : Production or
consumption costs inflicted on third party
without compensation
-over allocation of resources (supply)
• Solution: internalize cost
-Legislation : forces offenders to bear cost
-Specific taxes: Tax confined to a particular
product
The Public Sector: Governments Role
• Positive Externalities: benefits to other producers
or consumers (examples)
-Demand curve lies farther to left than it would if
all benefits accounted for
-Too little produced, under allocation
-Solutions:
a)Subsidize consumers
b)Subsidize producers
c)Provision of goods via government (usually when
externality is large)
The Public Sector: Governments Role
• Public Goods and Services
-Private goods produced through market system
(rivalry and excludability)
-Public goods
a)Non rivalry: everyone can simultaneously
benefit
b)Non excludabaility : one persons benefit does
not reduce benefit available to others
The Public Sector: Governments Role
• Free Rider Problem: benefit without contributing
to cost
-Government provides for these goods and
finances through taxation
• Quasi Public Goods : Goods and services that can
be produced and delivered in a way that
exclusion is possible e.g. Highways
• Reallocation process:Taxation to reduce demand
and free up resources for production of public
goods
The Public Sector: Governments Role
• Promoting Stability
– Unemployment: Can occur when private
spending is too low. Government can
increase government spending or reduce
taxes
– Inflation: Spenders try to buy more than
economy’s capacity. Government can
decrease government spending or increase
taxes
Review
• Ways of redistribution
• Negative and positive externality
• Public goods
The Circular Flow
Resource
Market
Expenditures
Resources
Goods &
Services
Businesses
Goods &
Services
Government
Net Taxes
Households
Net Taxes
Goods &
Services
Expenditures
Product
Market
Government Finance
• Government Purchases are exhaustive:
products purchased directly absorb resources
and are part of domestic output
• Transfer payments are not exhaustive:
Recipients make no current contribution to
domestic output
Government Finance
35
Percentage of U.S. Output
30
27%
25
Government
Transfer
Payments
31%
5%
12%
22%
19%
20
15
10
Government
Purchases
5
0
1960
2005
Government Finance
GLOBAL PERSPECTIVE
Total Tax Revenue – Selected Nations
Percent of Total Output-2004
10
Sweden
Denmark
Norway
Finland
France
Italy
United Kingdom
Germany
Canada
Australia
United States
Japan
South Korea
20
30
40
50
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
Source: Organization for Economic Cooperation and Development
Federal Finance
Federal Expenditures-2005
Four Stand-Out Areas of Spending
0
10
20
30
Pensions &
Income Security
50
35%
National
Defense
20%
17%
Health
Interest on the
Public Debt
40
7%
Source: U. S. Office of Management and Budget
Federal Tax Revenues-2005
Basic Revenue Sources
0
10
20
Personal
Income Tax
50
37%
Corporate
Income Taxes
All
Other
40
43%
Payroll
Taxes
Excise
Taxes
30
13%
3%
4%
Source: U. S. Office of Management and Budget
Personal Income Tax
• Taxable income (exemptions and deductions)
• Progressive tax : higher percentage of income
paid
• Marginal Tax rate: Tax paid on each additional
unit of taxable income
• Average tax rate : Tax paid /Taxable income
Example
Total Taxable
Income ($)
Marginal Tax Rate
Total Tax on highest Average Tax Rate
income in bracket
on highest income
in bracket
1-15,100
10.0
1510
10
15,101-61,300
15.0
8440
13.8
61,300-123,700
25.0
24,040
19.4
123,700-188,450
28.0
42,170
22.4
188,450-336,550
33.0
91,043
27.1
Over 336,500
35.0
Other forms
• Payroll Taxes: Social Security contributions
• Corporate Taxes: Levied on corporations profit
• Excise Taxes: Tax on commodities and
purchases
• State finances : Sales and excise tax, spent on
education and welfare etc
• Local finances : Property taxes