Transcript Figure 1.1 A Production

Chapter 1
Individuals and
Government
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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.
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Political Institutions
 Political Institutions are rules and
generally accepted procedures that
evolve for determining what government
does and how government outlays are
financed.
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Examples of Political
Institutions
 Majority rule
 Representative government
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The Allocation between
Private and Government
Resources
 Private
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Food
Housing
Cars
Clothing
 Government
 National Defense
 Public Schools
 Police
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Government Goods and
Services per Year
Figure 1.1 A Production-Possibility Frontier
C
G2
G1
B
A
X2
X1
M
0
Private Goods and Services per Year
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Distribution of Government
Goods and Services
 Nonmarket rationing:
 Prices and willingness to pay those prices
are not applicable to goods such as
national defense.
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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.
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Figure 1.2 Circular Flow in the Mixed Economy
Goods & Services
Output
Market
Dollars
Households
Income Support
& Subsidies
Taxes, fees, charges
Government Services
Dollars
Resources
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Goods & Services
Dollars
Government
Input
Market
Subsidies
Taxes, fees, charges
Government Services
Dollars
Resources
Firms
Government Expenditures in
the United States
 Government purchases of
 labor
 land
 capital
 Government Transfer Payments
 Welfare
 Social Security
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Growth in Government
Expenditures
Table 1.1 (abbreviated)
Year
GDP
Federal
Government
State
and Local
Government
Total
Government
Percentage
of GDP
Total
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
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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
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Figure 1.3 Total Government Expenditure as a
Percentage of GDP 1929-1999
Percentage of GDP
45
40
35
30
25
20
15
10
5
0
Year
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Structure of Federal
Government Expenditures
 Purchases of Goods and Services
 Transfer Payments
 Grants in Aid to State and Local
Governments
 Net Interest Paid
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Federal Expenditure by
Category, 1999
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
Other
2.18
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Percentage of Total Federal Expenditure
Figure 1.4 The Distribution of Federal Expenditure, 19661999
70
Government Purchases
60
50
Transfer Payments
40
30
Grants to State and
Local Governments
20
10
Net Interest
0
59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99
Year
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Federal Government Expenditure by
Function
All other
5%
Veteran’s Benefits
3%
Transportation
3%
Education
4%
Social Security
23%
Health
9%
Net Interest
11%
Medicare
12%
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National Defense
16%
Income Security
14%
The Structure of State and
Local Government Expenditure
in the United States
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Education
Civilian Safety
Transportation
Executive, Legislative, and Judicial
Income Security
Health and Hospitals
Recreational and Cultural Activities
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State and Local Government Expenditure
Recreational and
Cultural Activities
2%
Other
7%
Health and
Hospitals
3%
Income Security
5%
Education
42.71%
Executive
Legislative and
Judicial
11%
Transportation
13%
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Civilian Safety
16%
Financing Government
Expenditures in the US
 Taxes:
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
Income (Corporate and Personal)
Payroll
Excise
Customs
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Federal Revenues
Customs Duties
1%
Excise Taxes
4%
Corporate Profits Taxes
12%
Payroll Taxes
35%
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Other
1%
Income Taxes
47%
State and Local Government Revenues
Other
8%
Sales Taxes
27%
Property Taxes
21%
Corporate Profit Taxes
3%
Payroll Taxes
1%
Nontaxes
3%
Federal Grants
20%
Income Taxes
17%
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Implications of a
Graying America
 Social Security
 Medicare
 Medicaid
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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.
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