Chapter 4A - Chapter 4 The U.S. Economy: Private and Public...

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Unformatted text preview: Chapter 4 The U.S. Economy: Private and Public Sectors Households as Income Receivers / Spenders The functional distribution of income shows how income is apportioned among wages, rents, interests, and profits; the personal distribution of income shows how income is divided among families. Wages / salaries are the major source of functional distribution of income. The personal distribution of income reveals considerable inequality. Households as Income Receivers / Spenders (cont.) Nearly 90% of household income is consumed; the rest is saved or paid in taxes. Consumers spending is directed to durable goods, nondurable goods, and services, with nearly 60% going to services. The Business Population / Legal Forms of Businesses A plant is a physical establishment that contributes to the production of G/S; a firm is a business organization that owns and operates plants; plants may be arranged horizontally, be vertically integrated, and / or take on a conglomerate form. The 3 basic legal forms of business are the sole proprietorship, the partnership, and the corporation. While sole proprietorships make up 72% of all firms, corporations account for 84% total sales. The Business Population / Legal Forms of Businesses (cont.) The major advantages of corporations are their ability to raise financial capital, the limited liability they bestow on owners, and their continuing life beyond the life of their owners / managers. The principal-agent problem is the conflict of interest that may occur when agents pursue their own objectives to the detriment of the principals' goals. The Public Sector: Government's Role Gov't enhances the operation of the market system by providing an appropriate legal foundation and promoting competition. Transfer payments, direct market intervention, and taxation are among the ways in which gov't can lessen income inequality. The Public Sector: Government's Role (cont.) Gov't provides certain public goods for which there is nonrivalry in consumption and nonexcludability of benefits; gov't also provides many quasi-public goods because of their large external benefits. To try to stabilize the economy, the gov't can adjust its spending and tax revenues and the nation's central bank can take monetary actions that lower or increase interest rates. Circular Flow / Gov't, Federal, State, and Local Finance Gov't purchases account for about 19% of US output; the addition of transfer payments increases government spending to about 31% of domestic output. Income security and nat'l defense are the main categories of federal spending; personal income, payroll, and corporate income taxes are the primary sources of federal revenue. Circular Flow / Gov't, Federal, State, and Local Finance (cont.) States rely on sales and excise taxes for revenue; their spending is largely for education and public welfare. Education is the main expenditure for local gov't, most of whose revenue comes from property taxes. Summary The functional distribution of income shows how society's total income is divided among wages, rents, interests, and profit; the personal distribution of income shows how total income is divided among individual households. Households use all their income to pay personal taxes, for saving and to buy consumer goods. Nearly 60% of their consumption expenditures are for services. Summary Sole proprietorships are firms owned and usually operated by single individuals. Partnerships are firms owned and usually operated by just a handful of individuals. Corporations the dominant for of business organization are legal entities, distinct and separate from the individuals who own them. They often have thousands, or even millions, of owners the stockholders. Summary Corporations finance their operations and purchases of new plant and equipment partly through the issuance of stocks and bonds. Stocks are ownerships shares of a corp, and bonds are promises to repay a loan, usually at a set rate of interest. A principal-agent problem may occur in corps when the agents (managers) hired to represent the interest of the principals (stockholders) pursue their own objectives to the detriment of the objectives of the principles. Summary Gov't improves the operation of the MKT system by (a) providing an appropriate legal and social framework and (b) acting to maintain competition. Gov't alters the distribution of income through the tax-transfer system and through market intervention. Summary Externalities, or spillovers, cause the EQ output of certain goods to vary from the socially efficient output. Negative externalities result in an overallocation of resources, which can be corrected by legislation or by specific taxes. Positive externalities are accompanied by an underallocation of resources, which can be corrected by gov't subsidies to consumers or producers. Summary Only gov't is willing to provid public goods, which can be consumed by all simultaneously (nonrivalry) and entail benefits from which nonpaying consumers (free riders) cannot be excluded (nonexcludability). Because doing so is not profitable, private firms will not produce public goods. Quasi-public goods have some of the characteristics of public goods and some of the characteristics of private goods. ...
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