Chapter 4 Presentation 1

The US Economy: Private and Public Sectors

Private v. Public Sector

• Private Sector = households and businesses

• Public Sector = Government

Functional Distribution of Income

• Indicates how the nation’s earned income is divided among wages, rents, interest, and profits

• Ex- wages are paid to labor• Rents and interest are paid to

resource owners• Profits paid to business owners

Households as Income Receivers

Functional Distribution of Income-2005

Wages & Salaries

Rents

Interest

Proprietor’sIncome

CorporateProfits

Inco

me

By

Fu

nct

ion

Per

form

edNational Income Received (Percent)

0 10 20 30 40 50 60 70

71%

1%

5%

9%

14%Source: Bureau of Economic Analysis

Personal Distribution of Income

• Show how the nation’s money income is divided among individual households

Households as Income Receivers

Personal Distribution of Income-2004

Lowest20%

Second20%

Middle20%

Fourth20%

Highest20%

Inco

me

Gro

up

(H

ou

seh

old

s)Personal Income Received (Percent)

0 10 20 30 40 50 60

3.4%

8.7%

14.7%

23.2%

50.1%Source: Bureau of the Census

Households as Spenders

• Households can dispose of their income in 3 ways:

• 1. Taxes

• 2. Personal Savings

• 3. Personal Consumption

Personal Taxes

• In 2005, US households paid $1210 billion in taxes out of incomes of $9912 B (12%)

• In 1941, Americans only paid 3% of total income on taxes

Personal Savings

• Savings are the part of after-tax income that is not spent

• ***income that goes into bank accounts, stocks, bonds, mutual funds, etc.

• On avg. Americans save 3% of income

Personal Consumption

• $$ spent on goods and services• 12% on durable goods-goods that are

expected to last > 3 yrs (cars, furniture)• 29% on nondurable goods- last < 3 yrs

(clothing, food)• 59% on services- work done by

lawyers, barbers etc.

Plant

• A physical establishment- factory, farms, mines, store or warehouse- makes and/or distributes G/S

Firm

• A business organization that owns and operates plants

• Some firms operate 1 plant and others operate several

Industry

• A group of firms that produce the same, or similar products

Vertical and Horizontal Integration

• Vertical- own all the means of producing the product

• Ex- Shell owns the mines, refineries, trucks and gas stations

• Horizontal- attempting to take over competitive firms

• Ex- Cingular and AT&T

Conglomerates

• Firms that have plants that produce products in several different industries

• Ex- Pfizer makes medicines (Lipitor), chewing gum (Trident/Dentyne), and Razors (Schick)

Legal Forms of Businesses

• 1. Sole Proprietorship- owned and operated by 1 person

• 2. Partnership- 2 or more owners w/ shared financial investment and risks

• 3. Corporations- a legal entity (“person”) chartered by state or local governments that is separate from the owners

Legal Forms of Business

Domestic Output by Business Type

Percentage of Firms Percentage of Sales

Sole Proprietorships

Partnerships

Corporations

Sole Proprietorships

Partnerships

Corporations

72%

8%

20%

5%

11%

84%

Source: U. S. Census Bureau

Advantages of Corporations

• 1. Easy to raise funds-through sale of stocks (shares of ownership in the company) and bonds (a loan to the company w/ future repayment & interest)

• 2. Limited Liability- cannot sue the individual owners, only the company

• 3. Ease of expansion

• 4. Ability to hire specialists