5Lecture - LECTURE 5 Today is Tuesday, February 1, 2011....

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LECTURE 5 Today is Tuesday, February 1, 2011. CIRCULAR-FLOW DIAGRAM OF THE U.S. ECONOMY We shall find it convenient to divide the U.S. economy into two sectors. There are a number of ways that we could do this: the foreign sector and the domestic sector; the public sector (government) and the private sector; the present economy and the future economy. But for purposes of demonstrating how the free-market allocates resources in the U.S., we need to divide the economy into the Household Sector and the Business Sector . HOUSEHOLDS The Household Sector is made up of individuals that live in households. The sector is made up of “consumers”. We do not call the sector the “Consumer Sector” because we assume that it is the household that makes economic decisions. Households decide whether to purchase a new car or lease one; what to have for dinner; where to go on summer vacation, and so on. Some of you live in one-person households, and you make these decisions on your own. Families of four or five individuals, somehow, make these decisions as well, but pretty much as a group (i.e., the household.) The reason we need to separate households from the other sectors of the economy is this: HOUSEHOLDS OWN ALL (100 PERCENT) OF THE PRODUCTIVE RESOURCES THAT EXIST IN THE U.S. ECONOMY AND THAT ARE USED TO PRODUCE ECONOMIC GOODS. All privately owned productive land is owned by individuals in a household somewhere. All the productive capital in use in the economy is owned by individuals in households. All labor used in production in the economy is “owned” by the laborers living in households. 1 Some public lands, such as Yellowstone National Park, are “owned” by all the citizens of the U.S. Sometimes some public lands are used for private production, such as 1 A slave is “a person who is the legal property of another and is forced to obey them.” (O.E.D. ) Slavery has existed throughout the entire history of the human species, somewhere in the world, including today. Western civilization made slavery illegal, for the most part, in the 1800’s. The purpose of slavery was economic: the ownership of the labor resource of one person by another. Spartacus led a slave revolt against Rome in 73 B.C. which was put down when he was executed in 71 B.C. The Apostle Paul, in his letter to the Colossians in 60 A.D., said “Servants, obey . . . your masters . . . “, as well as “Masters, give unto your servants that which is just and equal . . . .” The Pyramids in Egypt, along with a lot of other things that people go and visit each year, were made with slave labor.
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lumbering and mining in some National Parks, and sometimes public lands totally are taken out of production to keep them pristine. Sometimes students correctly note that “General Motors owns some land, and some machinery, in addition to other items of capital.” This is true. However, General Motors, in its entirety, is owned by individuals in households: the stockholders . 2
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This note was uploaded on 03/23/2011 for the course ECN 212 taught by Professor Nancy during the Spring '07 term at ASU.

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5Lecture - LECTURE 5 Today is Tuesday, February 1, 2011....

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