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5 - 1Copyright McGraw-Hill/Irwin, 2005
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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The U. S. Economy:Private and Public Sectors
5C H A P T E R
5 - 2Copyright McGraw-Hill/Irwin, 2005
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, 2005
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 $5,977 Billion 72%
PROPRIETOR’S 757 Billion 9%INCOME
CORPORATE 787 Billion 9%PROFITS
INTEREST 684 Billion 8%
RENTS 142 Billion 2%
FUNCTIONAL DISTRIBUTION
2002 DATA
HOUSEHOLDS AS INCOME RECEIVERS
5 - 4Copyright McGraw-Hill/Irwin, 2005
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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PERSONAL DISTRIBUTIONPersonal Income (Percent)
3.5%
8.7%
14.6%
23.0%
50.2%
Lowest 20% Income Group
Second 20% Income Group
Middle 20% Income Group
2002 DATA
Fourth 20% Income Group
Highest 20% Income Group
HOUSEHOLDS AS INCOME RECEIVERS
5 - 5Copyright McGraw-Hill/Irwin, 2005
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
NextSlide
EndEndShowShow
2002 DATA
3% to personal saving
WHERE DOES OUR INCOME GO?
HOUSEHOLDS AS SPENDERS
$291Billion
5 - 6Copyright McGraw-Hill/Irwin, 2005
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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2002 DATA
3% to personal taxes13%
WHERE DOES OUR INCOME GO?
HOUSEHOLDS AS SPENDERS
$291Billion
$1,114Billion
5 - 7Copyright McGraw-Hill/Irwin, 2005
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
NextSlide
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2002 DATA
3% to personal consumption13% 84%
WHERE DOES OUR INCOME GO?
HOUSEHOLDS AS SPENDERS
$291Billion
$7,304Billion
$1,114Billion
5 - 8Copyright McGraw-Hill/Irwin, 2005
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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HOUSEHOLDS AS SPENDERS
COMPOSITION OF CONSUMEREXPENDITURES, 2002
Services$4,317 billion
(59%)
Nondurable Goods$2,115 billion
(29%)
Durable Goods$872 billion
(12%)
5 - 9Copyright McGraw-Hill/Irwin, 2005
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, 2005
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%
Partnerships8%
SoleProprietorships
72%
Partnerships 9%
Sole Proprietorships 4%
Corporations87%
Percentage of Firms Percentage of Sales
5 - 11Copyright McGraw-Hill/Irwin, 2005
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, 2005
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, 2005
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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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, 2005
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, 2005
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, 2005
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, 2005
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
NextSlide
EndEndShowShow
Reallocating Resources•Market Failure•Spillovers or Externalities
•Private Goods - Rivalry•Excludability
•Public Goods and Services•Nonrivalry•Nonexcludability•Free-Rider Problem
•Quasi-Public Goods
PUBLIC SECTOR: GOVERNMENT’S ROLE
5 - 18Copyright McGraw-Hill/Irwin, 2005
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
NextSlide
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Promoting Stability•Unemployment•Inflation
Circular Flow RevisitedAdding the Government
Sector
PUBLIC SECTOR: GOVERNMENT’S ROLE
5 - 19Copyright McGraw-Hill/Irwin, 2005
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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EndEndShowShow
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 - 20Copyright McGraw-Hill/Irwin, 2005
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
NextSlide
EndEndShowShow
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 - 21Copyright McGraw-Hill/Irwin, 2005
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
NextSlide
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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 - 22Copyright McGraw-Hill/Irwin, 2005
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
NextSlide
EndEndShowShow
PUBLIC SECTOR: GOVERNMENT’S ROLE
BUSINESSES HOUSEHOLDS
RESOURCES INPUTS
$ COSTS $ INCOMES
PRODUCTMARKET
GOODS &SERVICES
GOODS &SERVICES
$ CONSUMPTION$ REVENUE
GOVERNMENT
RESOURCEMARKET
GOVERNMENTEXPENDITURES
FLOW TOPRODUCT MARKET
GOODS & SERVICESFLOW TO
GOVERNMENT
5 - 23Copyright McGraw-Hill/Irwin, 2005
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 2002
Per
cen
t o
f U
.S.
Ou
tpu
t
12%~
18%~
5%~
22%~
2002 Data
5 - 24Copyright McGraw-Hill/Irwin, 2005
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 SecurityNational DefenseHealthInterest on Public Debt
Pensions &Income Security
38% NationalDefense
17%
Health21%
All Other15%
Interest9%
2002 Data
TotalExpenditures$2,011 Billion
5 - 25Copyright McGraw-Hill/Irwin, 2005
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
46%
Personal Income Tax•Marginal Tax Rate•Average Tax Rate
2002 Data
5 - 26Copyright McGraw-Hill/Irwin, 2005
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
46%
PayrollTaxes38%Corporate
Income Tax8%
All Other4%
Excise Taxes4%
Personal Income TaxPayroll TaxCorporate Income TaxesExcise Taxes
2002 Data
TotalTax Revenues$1,853 Billion
5 - 27Copyright McGraw-Hill/Irwin, 2005
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
State RevenuesSales & Excise Taxes ~ 47%State Income Taxes ~ 36%Corporate Income TaxesLicense FeesLotteriesIntergovernmental
Grants ~22%State Owned Utilities/Stores
5 - 28Copyright McGraw-Hill/Irwin, 2005
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
State ExpendituresEducation ~ 36%
Public Welfare ~ 25%
Health and Hospitals ~ 8%
Highways ~ 8%
Public Safety ~ 5%
5 - 29Copyright McGraw-Hill/Irwin, 2005
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 RevenuesProperty Taxes 72%Sales & Excise Taxes 17%
Education
44%Welfare, Health, and
Hospitals
12%Public Safety
11%Housing, Parks, and
Sewerage
8%Highways
5%
Local Expenditures
5 - 30Copyright McGraw-Hill/Irwin, 2005
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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STATE AND LOCAL FINANCE
Local RevenuesProperty Taxes 72%Sales & Excise Taxes 17%
Education
44%Welfare, Health, and
Hospitals
12%Public Safety
11%Housing, Parks, and
Sewerage
8%Highways
5%
Local ExpendituresSources ofProprietary
Incomes
5 - 31Copyright McGraw-Hill/Irwin, 2005
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 TRANSFERS
Intergovernmental Grants
Federal Transfers & Grants
State Grants to Local
Governments
functional distribution of income
personal distribution of income
durable goods
non-durable goods
services
plant
firm
industry
sole proprietorship
partnership
corporation
stocks
bonds
limited liability
double taxation
principal-agent problem
monopoly
spillover costs
spillover benefits
public goods
free-rider problem
quasi-public goods
government purchases
transfer payments
personal income tax
marginal tax rate
average tax rate
payroll taxespayroll taxes
corporate income taxcorporate income tax
sales & excise taxessales & excise taxes
property taxesproperty taxes
Copyright McGraw-Hill/Irwin 2005BACK END
5 - 33Copyright McGraw-Hill/Irwin, 2005
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
