2. 5 - 1 Copyright McGraw-Hill/Irwin, 2002 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, 2002 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, 2002 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$5,642 Billion71% PROPRIETOR’S717 Billion9% INCOME CORPORATE967 Billion12% PROFITS INTEREST571 Billion7% RENTS139 Billion2% FUNCTIONAL DISTRIBUTION 2000 DATA HOUSEHOLDS AS INCOME RECEIVERS

5. 5 - 4 Copyright McGraw-Hill/Irwin, 2002 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) 3.6% 8.9% 14.9% 23.2% 49.4% Lowest 20% Income Group Second 20% Income Group Middle 20% Income Group 1999 DATA Fourth 20% Income Group Highest 20% Income Group HOUSEHOLDS AS INCOME RECEIVERS

6. 5 - 5 Copyright McGraw-Hill/Irwin, 2002 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 2000 DATA 0%to personal saving WHERE DOES OUR INCOME GO? HOUSEHOLDS AS SPENDERS $6 Billion

7. 5 - 6 Copyright McGraw-Hill/Irwin, 2002 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 2000 DATA 0%to personal taxes 16% WHERE DOES OUR INCOME GO? HOUSEHOLDS AS SPENDERS $6 Billion $1,293 Billion

8. 5 - 7 Copyright McGraw-Hill/Irwin, 2002 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 2000 DATA 0%to personal consumption 16% 84% WHERE DOES OUR INCOME GO? HOUSEHOLDS AS SPENDERS $6 Billion $7,003 Billion $1,293 Billion

9. 5 - 8 Copyright McGraw-Hill/Irwin, 2002 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, 2000 Services $3,925 billion (58%) Nondurable Goods $2,015 billion (30%) Durable Goods $820 billion (12%)

10. 5 - 9 Copyright McGraw-Hill/Irwin, 2002 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, 2002 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 7% Sole Proprietorships 73% Partnerships 6% Sole Proprietorships 5% Corporations 89% Percentage of FirmsPercentage of Sales

12. 5 - 11 Copyright McGraw-Hill/Irwin, 2002 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, 2002 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, 2002 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, 2002 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, 2002 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, 2002 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, 2002 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 - Divisible Exclusion Principle Public Goods and Services Indivisible Exclusion Principle – Not Applicable Free-Rider Problem Quasi-Public Goods PUBLIC SECTOR: GOVERNMENT’S ROLE

19. 5 - 18 Copyright McGraw-Hill/Irwin, 2002 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 GLOBAL PERSPECTIVE Government Employment as a Percentage Of Total Employment, Selected Nations Percent of Total Employment, 1999 Source: Organization for Economic Cooperation and Development Sweden Denmark France Canada Italy Germany Switzerland Netherlands United States Japan 5 10 15 20 25 30 35

20. 5 - 19 Copyright McGraw-Hill/Irwin, 2002 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

21. 5 - 20 Copyright McGraw-Hill/Irwin, 2002 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

22. 5 - 21 Copyright McGraw-Hill/Irwin, 2002 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

23. 5 - 22 Copyright McGraw-Hill/Irwin, 2002 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

24. 5 - 23 Copyright McGraw-Hill/Irwin, 2002 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 GOVERNMENT EXPENDITURES FLOW TO PRODUCT MARKET GOODS & SERVICES FLOW TO GOVERNMENT PUBLIC SECTOR: GOVERNMENT’S ROLE

25. 5 - 24 Copyright McGraw-Hill/Irwin, 2002 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 19602000 Percent of U.S. Output 10% ~ ~ 17% ~ ~ 5% ~ ~ 22% ~ ~ 2000 Data

26. 5 - 25 Copyright McGraw-Hill/Irwin, 2002 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 Pensions & Income Security 39% National Defense 16% Health 19% All Other 12% Interest 14% National Defense Health Interest on the Public Debt 1999 Data

27. 5 - 26 Copyright McGraw-Hill/Irwin, 2002 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 Income Tax Marginal Tax Rate Average Tax Rate FEDERAL FINANCE Federal Tax Revenues Personal Income Tax 48% 1999 Data

28. 5 - 27 Copyright McGraw-Hill/Irwin, 2002 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 48% Payroll Taxes 34% Personal Income Tax Payroll Tax 1999 Data

29. 5 - 28 Copyright McGraw-Hill/Irwin, 2002 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 Income Tax Payroll Tax Corporate Income Taxes FEDERAL FINANCE Federal Tax Revenues Personal Income Tax 48% Payroll Taxes 34% Corporate Income Tax 10% 1999 Data

30. 5 - 29 Copyright McGraw-Hill/Irwin, 2002 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 48% Payroll Taxes 34% Corporate Income Tax 10% All Other 4% Excise Taxes 4% Personal Income Tax Payroll Tax Corporate Income Taxes Sales and Excise Taxes 1999 Data

31. 5 - 30 Copyright McGraw-Hill/Irwin, 2002 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 Highways STATE AND LOCAL FINANCE State Expenditures Education Public Welfare Health and Hospitals Public Safety Education 36% Health & Hospitals 8% Public Welfare 25% Public Safety 5% All Other 18% Highways 8% 1998 Data

32. 5 - 31 Copyright McGraw-Hill/Irwin, 2002 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 Property Taxes & Other Taxes Licenses and Others STATE AND LOCAL FINANCE State Revenues Corporate Income Tax Sales and Excise Tax Personal Income Tax Sales & Excise Taxes 48% Personal Income Tax 34% Corporate Income Tax 7% Licenses & Others 6% Property Taxes & Other Taxes 5% 1998 Data

33. 5 - 32 Copyright McGraw-Hill/Irwin, 2002 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 Safety Highways STATE AND LOCAL FINANCE Local Expenditures Education 43% Public Safety 10% Housing & Sewerage 8% All Other 21% Welfare, Health, and Hospitals 13% Housing and Sewerage Welfare, Health, Hospitals 1996 Data Highways 5%

34. 5 - 33 Copyright McGraw-Hill/Irwin, 2002 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 74% Personal & Corporate Income Taxes 6% All Other 4% Sales & Excise Taxes 16% Personal & Corporate Income Taxes Sales and Excise Taxes Property Taxes 1996 Data

35. 5 - 34 Copyright McGraw-Hill/Irwin, 2002 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 FEDERALISM Shortfall in Tax Collections Federal Transfers & Grants State Grants to Local Governments Chapter Conclusions

36. 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 corporations 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 exclusion principle exclusion principle 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 fiscal federalism fiscal federalism Copyright McGraw-Hill/Irwin 2002 BACKEND

37. 5 - 36 Copyright McGraw-Hill/Irwin, 2002 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