2. 5 - 1 Copyright 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 Previous Slide Next Slide End Show The U. S. Economy: Private and Public Sectors 5 C H A P T E R

3. 5 - 2 Copyright 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 Previous Slide Next Slide End Show WAGES RENT INTEREST PROFIT/LOSS PERSONAL DISTRIBUTION SHOWS ALLOCATION OF INCOME AMONG INDIVIDUAL HOUSEHOLDS FUNCTIONAL DISTRIBUTION HOUSEHOLDS AS INCOME RECEIVERS

4. 5 - 3 Copyright 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 Previous Slide Next Slide End Show WAGES$5,977 Billion72% PROPRIETOR’S757 Billion9% INCOME CORPORATE787 Billion9% PROFITS INTEREST684 Billion8% RENTS142 Billion2% FUNCTIONAL DISTRIBUTION 2002 DATA HOUSEHOLDS AS INCOME RECEIVERS

5. 5 - 4 Copyright 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 Previous Slide Next Slide End Show PERSONAL DISTRIBUTION Personal 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

6. 5 - 5 Copyright 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 Previous Slide Next Slide End Show 2002 DATA 3%to personal saving WHERE DOES OUR INCOME GO? HOUSEHOLDS AS SPENDERS $291 Billion

7. 5 - 6 Copyright 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 Previous Slide Next Slide End Show 2002 DATA 3%to personal taxes 13% WHERE DOES OUR INCOME GO? HOUSEHOLDS AS SPENDERS $291 Billion $1,114 Billion

8. 5 - 7 Copyright 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 Previous Slide Next Slide End Show 2002 DATA 3%to personal consumption 13% 84% WHERE DOES OUR INCOME GO? HOUSEHOLDS AS SPENDERS $291 Billion $7,304 Billion $1,114 Billion

9. 5 - 8 Copyright 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 Previous Slide Next Slide End Show HOUSEHOLDS AS SPENDERS COMPOSITION OF CONSUMER EXPENDITURES, 2002 Services $4,317 billion (59%) Nondurable Goods $2,115 billion (29%) Durable Goods $872 billion (12%)

10. 5 - 9 Copyright 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 Previous Slide Next Slide End Show THE BUSINESS POPULATION Plant Firm Multiplant Firms Vertical Integration Conglomerates Industry

11. 5 - 10 Copyright 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 Previous Slide Next Slide End Show THE BUSINESS POPULATION Business Shares of Domestic Output Corporations 20% Partnerships 8% Sole Proprietorships 72% Partnerships 9% Sole Proprietorships 4% Corporations 87% Percentage of FirmsPercentage of Sales

12. 5 - 11 Copyright 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 Previous Slide Next Slide End Show LEGAL FORMS OF BUSINESSES Sole Proprietorship Easy to Organize Proprietor is Own “Boss” Advantages Disadvantages Limited Resources No Help With Decision Making Unlimited Liability

13. 5 - 12 Copyright 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 Previous Slide Next Slide End Show 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

14. 5 - 13 Copyright 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 Previous Slide Next Slide End Show LEGAL FORMS OF BUSINESSES Corporation 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

15. 5 - 14 Copyright 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 Previous Slide Next Slide End Show LEGAL FORMS OF BUSINESSES Hybrid Structures Limited-Liability Company (LLC) S-Corporation Principal-Agent Problem

16. 5 - 15 Copyright 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 Previous Slide Next Slide End Show PUBLIC SECTOR: GOVERNMENT’S ROLE Providing the Legal Structure Maintaining Competition Monopoly Regulation Antitrust Regulated Monopolies Redistributing Income Transfer Payments Market Intervention Taxation

17. 5 - 16 Copyright 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 Previous Slide Next Slide End Show 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

18. 5 - 17 Copyright 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 Previous Slide Next Slide End Show 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

19. 5 - 18 Copyright 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 Previous Slide Next Slide End Show Promoting Stability Unemployment Inflation Circular Flow Revisited Adding the Government Sector PUBLIC SECTOR: GOVERNMENT’S ROLE

20. 5 - 19 Copyright 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 Previous Slide Next Slide End Show BUSINESSES HOUSEHOLDS RESOURCESINPUTS $ COSTS$ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION$ REVENUE GOVERNMENT RESOURCE MARKET NET TAXES FLOW TO GOVERNMENT FROM BUSINESSES GOVERNMENT GOODS & SERVICES FLOW TO BUSINESSES PUBLIC SECTOR: GOVERNMENT’S ROLE

21. 5 - 20 Copyright 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 Previous Slide Next Slide End Show BUSINESSES HOUSEHOLDS RESOURCESINPUTS $ COSTS$ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION$ REVENUE GOVERNMENT RESOURCE MARKET NET TAXES FLOW TO GOVERNMENT FROM HOUSEHOLDS GOODS & SERVICES FLOW TO HOUSEHOLDS FROM GOVERNMENT PUBLIC SECTOR: GOVERNMENT’S ROLE

22. 5 - 21 Copyright 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 Previous Slide Next Slide End Show BUSINESSES HOUSEHOLDS RESOURCESINPUTS $ COSTS$ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION$ REVENUE GOVERNMENT EXPENDITURES FLOW TO ACQUIRE RESOURCES RESOURCE MARKET RESOURCES FLOW TO GOVERNMENT PUBLIC SECTOR: GOVERNMENT’S ROLE

23. 5 - 22 Copyright 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 Previous Slide Next Slide End Show PUBLIC SECTOR: GOVERNMENT’S ROLE BUSINESSES HOUSEHOLDS RESOURCESINPUTS $ COSTS$ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION$ REVENUE GOVERNMENT RESOURCE MARKET GOVERNMENT EXPENDITURES FLOW TO PRODUCT MARKET GOODS & SERVICES FLOW TO GOVERNMENT

24. 5 - 23 Copyright 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 Previous Slide Next Slide End Show GOVERNMENT FINANCE Purchases & Transfers Transfer Payments Nonexhaustive Government Purchases Exhaustive 35 30 25 20 15 10 5 0 19602002 Percent of U.S. Output 12% ~ 18% ~ 5% ~ 22% ~ 2002 Data

25. 5 - 24 Copyright 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 Previous Slide Next Slide End Show FEDERAL FINANCE Federal Expenditures Pensions and Income Security National Defense Health Interest on Public Debt Pensions & Income Security 38% National Defense 17% Health 21% All Other 15% Interest 9% 2002 Data Total Expenditures $2,011 Billion

26. 5 - 25 Copyright 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 Previous Slide Next Slide End Show FEDERAL FINANCE Federal Tax Revenues Personal Income Tax 46% Personal Income Tax Marginal Tax Rate Average Tax Rate 2002 Data

27. 5 - 26 Copyright 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 Previous Slide Next Slide End Show FEDERAL FINANCE Federal Tax Revenues Personal Income Tax 46% Payroll Taxes 38% Corporate Income Tax 8% All Other 4% Excise Taxes 4% Personal Income Tax Payroll Tax Corporate Income Taxes Excise Taxes 2002 Data Total Tax Revenues $1,853 Billion

28. 5 - 27 Copyright 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 Previous Slide Next Slide End Show STATE AND LOCAL FINANCE State Revenues Sales & Excise Taxes ~ 47% State Income Taxes ~ 36% Corporate Income Taxes License Fees Lotteries Intergovernmental Grants ~ 22% State Owned Utilities/Stores

29. 5 - 28 Copyright 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 Previous Slide Next Slide End Show STATE AND LOCAL FINANCE State Expenditures Education ~ 36% Public Welfare ~ 25% Health and Hospitals ~ 8% Highways ~ 8% Public Safety ~ 5%

30. 5 - 29 Copyright 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 Previous Slide Next Slide End Show STATE AND LOCAL FINANCE Local Revenues Property Taxes 72% Sales & Excise Taxes 17% Education 44% Welfare, Health, and Hospitals 12% Public Safety11% Housing, Parks, and Sewerage8% Highways5% Local Expenditures

31. 5 - 30 Copyright 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 Previous Slide Next Slide End Show STATE AND LOCAL FINANCE Local Revenues Property Taxes 72% Sales & Excise Taxes 17% Education 44% Welfare, Health, and Hospitals 12% Public Safety11% Housing, Parks, and Sewerage8% Highways5% Local Expenditures Sources of Proprietary Incomes

32. 5 - 31 Copyright 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 Previous Slide Next Slide End Show FISCAL TRANSFERS Intergovernmental Grants Federal Transfers & Grants State Grants to Local Governments

33. functional distribution of income functional distribution of income personal distribution of income personal distribution of income durable goods durable goods non-durable goods non-durable goods services plant firm industry sole proprietorship sole proprietorship partnership corporation stocks bonds limited liability limited liability double taxation double taxation principal-agent problem principal-agent problem monopoly spillover costs spillover costs spillover benefits spillover benefits public goods public goods free-rider problem free-rider problem quasi-public goods quasi-public goods government purchases government purchases transfer payments transfer payments personal income tax personal income tax marginal tax rate marginal tax rate average tax rate average tax rate payroll taxes payroll taxes corporate income tax corporate income tax sales & excise taxes sales & excise taxes property taxes property taxes Copyright McGraw-Hill/Irwin 2005 BACKEND

34. 5 - 33 Copyright 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 Previous Slide Next Slide End Show Next: The United States in the Global Economy Chapter 6