1. Private and Public Sectors
Households
Functional Distribution of Income
Personal Distribution of Income

2. Functional Distribution
Wages and salaries: 70%
Proprietor’s Income: 5-10 %
Combines wage and profit income for self employed
Capitalist Income: 20% of Income
Corporate profit, rent, interest

3. Personal distribution of Income
Percentage of total income earned by income level. Usually shown as quintiles (20%) groupings.
The following chart show the inequality of distribution of income flowing from the unequal distribution of economic abilities and opportunities.

5. Household as spenders Most household spending is personal consumption.
Durable goods spending
Non-durable goods spending
Services spending
Personal Taxes account for some personal spending
Saving or (dissaving) accounts for the rest

6. Business Plant: physical location of production
Firm: business org. that owns plant. This is a legal entity
Industry: a group of related firms
Types of multiplant firms:
Horizontally integrated
Vertically integrated

7. Legal Forms of Business
Sole Proprietorship
Partnerships
Corporations
Hybrids
Each has advantages and disadvantages

8. Public Sector Provides legal structure
Improves allocation of resources by supplying money, product quality, ownership rights, etal
Intervention broadens competition and specialization
Appropriate intervention is where the MB and MC of govt regulation are equal

9. Other government roles
Maintain competition
Redistributes income through transfer payments, modifying prices, taxation
Reallocates resources:
Spillovers and Externalities
Corrects for spillover costs
Adjusts for spillover benefits

10. Other roles continued Provides for quasi-public goods and services
Provides for public goods and services
Promotes economic stability through changes in taxation and spending (fiscal policy) and/or through the money supply and interest rates (monetary policy)

11. Govt Finance Govt. Expend. On goods, services, and transfer payments
4 Main areas of expenditures are noted:
A. income security
B. national defense
C. health
D. interest on national debt

12. Taxation Federal: Personal Income Tax (PIT) Marginal and Progressive
Corporate Income Tax (CIT)
Payroll Taxes (Social Security, Medicare)
Excise Taxes

13. State and Local
State revenues are primarily sales and secondly income taxes
State spending is greatest on public welfare, education, highways, and health care
Local revenues are primarily property taxes and in some cases sales taxes,
Local spending is greatest on education and health care.

14. GDP You must know the definition of GDP You must know the GDP equation
You must know what is not included in GDP
Remember GDP can be seen as Expenditure or as Income
The AP exam will most likely use only the Expenditure approach to GDP

15. GDP Expenditure Approach
C= Personal Consumption
Ig= Gross Private Investment in Capital Goods
G= Government purchase of Goods and Services
Xn= Exports minus Imports
GDP= C + Ig + G + Xn

16. Consumption
Includes the purchase of all durable goods, non-durable goods, and services by households or individuals in an economy.
Consumption accounts for approximately 70% of total GDP in the United States
Underconsumption or lack of spending is considered to be a major factor in creating unemployment (recession) in an economy.

17. Gross Private Investment
INCLUDES: All final purchases of machinery, equipment, and tools by business
All construction including residential homes
Changes in business inventory*
Gross Private Investment minus depreciation (consumption of fixed capital) equals Net Private Investment. If depreciation or CFC exceeds Ig then the economies’ productive capacity declines. If CFC is less than Ig the economies’ productive capacity increases.
*If output exceeds current sales inventory builds. If sales outpace output inventory will be a negative portion of Ig.

18. Government Expenditures
This should be read as GOVERNMENT PURCHASES of GOODS and SERVICES.
This (G) includes all levels of government in the US. Federal, state, and local
Includes all direct purchases particularly labor
Excludes transfer payments (social security, unemployment, welfare, food stamps, VA payments etc,) because these payments do NOT reflect current output (production)*
*However, these payments usually end up in C

19. Net Exports
All spending on goods made in the US MUST be included in GDP regardless of where they are purchased. Also many goods purchased in the US are NOT produced here and should not be included in US GDP. Therefore, we must include in GDP those things made here that are sold abroad and exclude those things purchased here that are produced abroad. The economic names for these are
EXPORTS-THOSE THINGS MADE HERE SOLD ABROAD
IMPORTS-THOSE THINGS SOLD HERE MADE ABROAD
ERGO: Exports (X) – Imports (I) = Xn

20. Nominal Vs. Real All GDP must be adjusted for inflation or deflation.
In order to do this one must apply a GDP deflator.
In this class the normal deflator will be the Consumer Price Index.

21. Nominal vs. Real
To deflate or inflate GDP a base year must be chosen. The price index for that year is always equal to 1.00 x 100 or 100.
From the base year one can then determine the true value of GDP for any given year by dividing the price index for that year into the nominal GDP monetary figure

22. THE Consumer Price Index
The index is a market basket of all goods and services purchased by a normal urban household.
These prices are checked periodically and the basket itself is changed as times change
The GDP price index (which is normally not used in beginning classes) is more formal and is adjusted yearly to account for change in the composition of output.

23. INSTABILITIES
Capitalism is an inherently unstable economic systems because it is based on the decisions of individuals who have the freedom to change what they do when they want. This introduces instabilities into the system.
The TWO main types of instability in capitalism are
UNEMPLOYMENT and
INFLATION

24. Growth and the Business Cycle
Economic growth can be defined two ways: as an increase in real GDP over time, or and increase in real GDP per capita.
The second is the one usually used as it is more sensitive to living standards than the first.
Growth is important because it lessens the burden of scarcity
Using the RULE of 70 one can determine the amount of time it would take real GDP or real GDP per capita to double.
Main sources of growth are increases in resources and increases in the productive use of resources. About 2/3 of US growth comes from increases in productivity.

25. Some Caveats to Growth as an Indicator
Does not measure improvements in quality
Does not measure increased or decrease leisure time
Does not take into account environmental effects or allocative needs of the population

26. The Business Cycle
The economy experiences a cyclical movement over time.
This is the BUSINESS CYCLE
It is divided into 4 phases which are:
PEAK
RECESSION
TROUGH
RECOVERY

27. BUSINESS CYCLES AND CAUSATION
Major innovation may trigger new investment and/or consumption spending
Lack of innovation may do the opposite
Change in productivity either positively or negatively may help to incur a cycle
Levels of aggregate spending (AD) particularly in the volatile investment (Ig) may also be causative.