The Private Sector The term “private sector” is used to connote business firms and households-- domestic as well as foreign

Households âHouseholds “own” economic resources (directly or indirectly through ownership of shares). âHouseholds are sellers in resource or “factor” markets. âHouseholds are buyers in final product markets.

Firms â Firms are buyers in resource or factor markets â Firms are sellers in final product markets â What firms pay out for the use of resources must ultimately accrue as “income” to resource owners.

National Income (NI) National income includes: $ Wages and salaries $ Proprietors’ income $ Rental income of persons $ Corporate profits $ Net interest NI is called “earned income” because it is income received for the sale of resources-- that is, income resulting from the production of goods and services

National Income in 1996

Consumption Household spending for newly-produced goods and services is defined as consumption. We distinguish between 3 categories or types: ñSpending for consumer durables ñSpending for consumer nondurables ñSpending for consumer services.

Source: Economic Report of the President Consumer Spending by Type, 1997 (in billions) Total spending by U.S. households in 1997 was a staggering $5.5 trillion

Forms of Business Organization þPþProprietorship þPþPartnership þCþCorporation

Business Statistics, 1997 Most corporations are small (revenues less than $1 million).The top 17 percent of corporations account for 94 percent of corporate revenue Source: Statistical Abstract of the U.S. There are more than 21 million business enterprises in the U.S.

Business Firms As Spending Units Investment is defined as ïAïAll spending by business firms for newly built equipment and business structures. ïAïAll changes in business inventories of raw materials, semifinished articles, and finished goods. ïAïAll spending by households for newly constructed residential housing

The Simple Circular Flow Assumptions No public sector; hence, no taxes, government spending, or transfer payments. No investment spending No exports or imports

Factor markets Product markets Costs of production Productive factors Sales revenue Land, labor, capital National income Consumption Goods Note: Goods includes consumer services