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Chapter 4 notes

Chapter 4 notes - The U.S Economy Private and Public...

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The U.S. Economy: Private and Public Sectors CHAPTER FOUR THE U.S. ECONOMY: PRIVATE AND PUBLIC SECTORS LECTURE NOTES I. Learning objectives – In this chapter students will learn: A. Important facts about U.S. households and U.S. businesses. B. Why the corporate form of business organization dominates sales and profits. C. The problem that arises when corporate owners (principals) and their managers (agents) have different interests. D. About the economic role of government in the economy. E. The categories of government spending and the sources of government revenues. II. Households as Income Receivers A. Functional distribution of income is shown in Figure 4.1. 1. Wages and salaries are 71 percent of the total. 2. Proprietors’ income (income to self-employed business owners, doctors, lawyers, etc.) is under 10 percent of total. (This is a combination of wage and profit income.) 3. Capitalist income—corporation profits, rent, interest—is about one-fifth of total. (Note: rent can be negative because of the depreciation charged against rental income.) B. Personal distribution of income is shown in Figure 4.2. (This figure is based on PI— Personal Income.) 1. It is often described by dividing the population into quintiles or five numerically equal parts, sorted by income levels. 2. Proportions of total income going to each quintile are then compared. 3. Comparison shows unequal distribution of income. For example, see how many times greater the share of income going to the top quintile is relative to the bottom fifth. (Key Question 2) III. Households As Spenders (Figure 4.3) (Figure is based on household Income) A. Use Figure 4.3 or most recent data from Survey of Current Business, January issue of current year, to describe the following. B. How do households dispose of their income? 1. Personal taxes, of which Federal personal income tax is the major component, comprise about 12%. 2. Saving (dissaving if spending exceeds income) is the smallest fraction of personal income disposition, around 0% in 2005. ( Negative $34 billion – caused in part by significant home equity borrowing to finance consumption) 3. Most of household income goes to consumer spending (Figure 4.3). There are several categories of spending categories (Figure 4.4): 59
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The U.S. Economy: Private and Public Sectors a. Durable goods are those with expected lives of three or more years. b. Nondurable goods include things such as food and clothing. c. Services are today more than one-half of all consumer spending, which demonstrates that ours is a service-oriented economy. IV. The Business Population A. Related definitions: 1. Plant: physical establishment where production or distribution takes place (factory, farm, store). 2. Firm: business organization that owns and operates the plants. (The legal entity.) 3. Industry: a group of related firms, producing the same or similar products.
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Chapter 4 notes - The U.S Economy Private and Public...

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