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5 - 1Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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The U. S. EconomyPrivate and Public Sectors
5C H A P T E R
5 - 2Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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WAGES RENT INTEREST PROFIT/LOSS
PERSONAL DISTRIBUTION
SHOWS ALLOCATION OF INCOME AMONG INDIVIDUAL
HOUSEHOLDS
FUNCTIONAL DISTRIBUTION
HOUSEHOLDS AS INCOME RECEIVERS
5 - 3Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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WAGES $5,642 Billion 71%
PROPRIETOR’S 717 Billion 9%INCOME
CORPORATE 967 Billion 12%PROFITS
INTEREST 571 Billion 7%
RENTS 139 Billion 2%
FUNCTIONAL DISTRIBUTION
2000 DATA
HOUSEHOLDS AS INCOME RECEIVERS
5 - 4Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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PERSONAL DISTRIBUTIONPersonal Income (Percent)
3.6%
8.9%
14.9%
23.2%
49.4%
Lowest 20% Income Group
Second 20% Income Group
Middle 20% Income Group
1999 DATA
Fourth 20% Income Group
Highest 20% Income Group
HOUSEHOLDS AS INCOME RECEIVERS
5 - 5Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
PreviousSlide
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2000 DATA
0% to personal saving
WHERE DOES OUR INCOME GO?
HOUSEHOLDS AS SPENDERS
$6Billion
5 - 6Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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2000 DATA
0% to personal taxes16%
WHERE DOES OUR INCOME GO?
HOUSEHOLDS AS SPENDERS
$6Billion
$1,293Billion
5 - 7Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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2000 DATA
0% to personal consumption16% 84%
WHERE DOES OUR INCOME GO?
HOUSEHOLDS AS SPENDERS
$6Billion
$7,003Billion
$1,293Billion
5 - 8Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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HOUSEHOLDS AS SPENDERS
COMPOSITION OF CONSUMEREXPENDITURES, 2000
Services$3,925 billion
(58%)
Nondurable Goods$2,015 billion
(30%)
Durable Goods$820 billion
(12%)
5 - 9Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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THE BUSINESS POPULATION
•Plant•Firm
•Multiplant Firms•Vertical Integration•Conglomerates
•Industry
5 - 10Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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THE BUSINESS POPULATIONBusiness Shares of Domestic Output
Corporations20%
Partnerships7%
SoleProprietorships
73%
Partnerships 6%
Sole Proprietorships 5%
Corporations89%
Percentage of Firms Percentage of Sales
5 - 11Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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LEGAL FORMS OF BUSINESSES
Sole Proprietorship
•Easy to Organize•Proprietor is Own “Boss”
Advantages
Disadvantages•Limited Resources•No Help With Decision Making•Unlimited Liability
5 - 12Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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LEGAL FORMS OF BUSINESSES
Partnership
•Easy to Organize•More Management Skills•Greater Resources Available
Advantages
Disadvantages•Difficulty Making Decisions•Possibly Limited Financial Resources•Partnership Continuity Problems•Unlimited Liability
5 - 13Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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LEGAL FORMS OF BUSINESSESCorporation
•Most Effective Raising Capital - Stocks, Bonds
•Limited Liability•Easy Expansion of Size & Scope•Infinite Life
Advantages
Disadvantages•Corporate Regulations & Legal Expenses•Some Unscrupulous Practices•Double Taxation•Separation of Ownership & Control
5 - 14Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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LEGAL FORMS OF BUSINESSES
Hybrid Structures•Limited-Liability Company (LLC)
•S-CorporationPrincipal-Agent Problem
5 - 15Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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PUBLIC SECTOR: GOVERNMENT’S ROLE
Providing the Legal StructureMaintaining Competition
•Monopoly•Regulation•Antitrust•Regulated Monopolies
Redistributing Income•Transfer Payments•Market Intervention•Taxation
5 - 16Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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Reallocating Resources•Market Failure•Spillovers or Externalities
•Spillover Costs•Legislation•Specific Taxes
•Spillover Benefits•Subsidize Consumers•Subsidize Suppliers•Government Provision
PUBLIC SECTOR: GOVERNMENT’S ROLE
5 - 17Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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Reallocating Resources•Market Failure•Spillovers or Externalities
•Private Goods - Divisible•Exclusion Principle
•Public Goods and Services•Indivisible•Exclusion Principle – Not Applicable•Free-Rider Problem
•Quasi-Public Goods
PUBLIC SECTOR: GOVERNMENT’S ROLE
5 - 18Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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GLOBAL PERSPECTIVEGovernment Employment as a PercentageOf Total Employment, Selected Nations
Percent of Total Employment, 1999
Source: Organization for Economic Cooperation and Development
Sweden
Denmark
France
Canada
Italy
Germany
Switzerland
Netherlands
United States
Japan
5 10 15 20 25 30 35
5 - 19Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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Promoting Stability•Unemployment•Inflation
Circular Flow RevisitedAdding the Government
Sector
PUBLIC SECTOR: GOVERNMENT’S ROLE
5 - 20Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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BUSINESSES HOUSEHOLDS
RESOURCES INPUTS
$ COSTS $ INCOMES
PRODUCTMARKET
GOODS &SERVICES
GOODS &SERVICES
$ CONSUMPTION$ REVENUE
GOVERNMENT
RESOURCEMARKET
NET TAXES FLOWTO GOVERNMENTFROM BUSINESSES
GOVERNMENTGOODS & SERVICES
FLOW TO BUSINESSES
PUBLIC SECTOR: GOVERNMENT’S ROLE
5 - 21Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
PreviousSlide
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BUSINESSES HOUSEHOLDS
RESOURCES INPUTS
$ COSTS $ INCOMES
PRODUCTMARKET
GOODS &SERVICES
GOODS &SERVICES
$ CONSUMPTION$ REVENUE
GOVERNMENT
RESOURCEMARKET
NET TAXES FLOWTO GOVERNMENT
FROM HOUSEHOLDS
GOODS & SERVICESFLOW TO HOUSEHOLDS
FROM GOVERNMENT
PUBLIC SECTOR: GOVERNMENT’S ROLE
5 - 22Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
PreviousSlide
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BUSINESSES HOUSEHOLDS
RESOURCES INPUTS
$ COSTS $ INCOMES
PRODUCTMARKET
GOODS &SERVICES
GOODS &SERVICES
$ CONSUMPTION$ REVENUE
GOVERNMENT
EXPENDITURESFLOW TO
ACQUIRE RESOURCES
RESOURCEMARKET
RESOURCESFLOW TO
GOVERNMENT
PUBLIC SECTOR: GOVERNMENT’S ROLE
5 - 23Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
PreviousSlide
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BUSINESSES HOUSEHOLDS
RESOURCES INPUTS
$ COSTS $ INCOMES
PRODUCTMARKET
GOODS &SERVICES
GOODS &SERVICES
$ CONSUMPTION$ REVENUE
GOVERNMENT
RESOURCEMARKET
GOVERNMENTEXPENDITURES
FLOW TOPRODUCT MARKET
GOODS & SERVICESFLOW TO
GOVERNMENT
PUBLIC SECTOR: GOVERNMENT’S ROLE
5 - 24Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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GOVERNMENT FINANCE
Purchases & Transfers
•Transfer PaymentsNonexhaustive
•Government PurchasesExhaustive
353025201510 5 0 1960 2000
Per
cent
of
U.S
. Out
put
10%~~
17%~~
5%~~
22%~~
2000 Data
5 - 25Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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FEDERAL FINANCEFederal Expenditures
Pensions and Income Security
Pensions &Income Security
39% NationalDefense
16%
Health19%
All Other12%
Interest14%
National DefenseHealthInterest on the Public Debt
1999 Data
5 - 26Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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Personal Income Tax•Marginal Tax Rate•Average Tax Rate
FEDERAL FINANCEFederal Tax Revenues
PersonalIncome Tax
48%
1999 Data
5 - 27Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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FEDERAL FINANCEFederal Tax Revenues
PersonalIncome Tax
48%
PayrollTaxes34%
Personal Income TaxPayroll Tax
1999 Data
5 - 28Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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Personal Income TaxPayroll TaxCorporate Income TaxesCorporate Income Taxes
FEDERAL FINANCEFederal Tax Revenues
PersonalIncome Tax
48%
PayrollTaxes34%
CorporateIncome Tax
10% 1999 Data
5 - 29Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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FEDERAL FINANCEFederal Tax Revenues
PersonalIncome Tax
48%
PayrollTaxes34%
CorporateIncome Tax
10%
All Other4%
Excise Taxes4%
Personal Income TaxPayroll TaxCorporate Income TaxesCorporate Income TaxesSales and Excise Taxes
1999 Data
5 - 30Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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Highways
STATE AND LOCAL FINANCE
State ExpendituresEducationPublic WelfareHealth and Hospitals
Public SafetyEducation
36%Health &Hospitals
8%Public
Welfare25%Public Safety
5%All Other
18%
Highways8%
1998 Data
5 - 31Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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Property Taxes & Other TaxesLicenses and Others
STATE AND LOCAL FINANCE
State Revenues
Corporate Income Tax
Sales and Excise TaxPersonal Income Tax
Sales &Excise Taxes
48%Personal
Income Tax34%
CorporateIncome Tax
7%Licenses & Others
6%
Property Taxes& Other Taxes
5%
1998 Data
5 - 32Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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Public SafetyHighways
STATE AND LOCAL FINANCE
Local ExpendituresEducation
Education43%
Public Safety10%
Housing &Sewerage
8%All Other
21%
Welfare, Health,and Hospitals
13%
Housing and Sewerage
Welfare, Health, Hospitals
1996 DataHighways5%
5 - 33Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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STATE AND LOCAL FINANCE
Local Revenues
Property Taxes74%
Personal & CorporateIncome Taxes
6%All Other
4%
Sales &ExciseTaxes16%
Personal & Corporate Income Taxes
Sales and Excise TaxesProperty Taxes
1996 Data
5 - 34Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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FISCAL FEDERALISM
Shortfall in Tax CollectionsFederal Transfers & GrantsState Grants to Local Governments
Chapter Conclusions
functional distribution of income
personal distribution of income
durable goods
non-durable goods
services
plant
firm
industry
sole proprietorship
partnership
corporations
stocks
bonds
limited liability
double taxation
principal-agent problem
monopoly
spillover costs
spillover benefits
exclusion principle
public goods
free-rider problem
quasi-public goods
government purchases
transfer payments
personal income tax
marginal tax rate
average tax rateaverage tax rate
payroll taxespayroll taxes
corporate income taxcorporate income tax
sales & excise taxessales & excise taxes
property taxesproperty taxes
fiscal federalismfiscal federalismCopyright McGraw-Hill/Irwin 2002BACK END
5 - 36Copyright McGraw-Hill/Irwin, 2002
Households as Income Receivers
Households as Spenders
The Business Population
Legal Forms of Business
Public Sector: Government’s Role
Government Finance
State & Local Finance
Key Terms
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Next:
The United Statesin the
Global Economy
Chapter 6
