Chapter 2 homework

• Number 4: Kevin Wallace

• Number 8: Michael Schwager

• Number 12: Audrey Stawecki

• Alternate: Jessica Zatwarnicki

Chapter 3

The American Economy in a Global Setting

Government Spending, Government Revenue, and the Circular Flow

• Government adds to incomes by providing transfer payments. A shift of funds from one group to another Do not involve exchange or transactions An injection into the circular flow

• The government takes away from the flow of income through taxes. A leakage from the circular flow

Spending, Taxes, and the Budget Deficit

• Federal budget deficit spends more money than it takes in. Financed by selling securities

• “IOU” certificate Bonds are an example

• Federal budget surplus Tax revenues exceed government spending.

Theory in action…

• We have been talking about the functions of government

The article examines the use of carbon offsets to help reduce global warming.

• http://news.yahoo.com/s/csm/20070110/ts_csm/cgreen_1

• Questions:

• What is the external cost associated with carbon emissions? Do carbon emissions lead to a positive or a negative externality? Explain.

• In the article, economist Jonathon Isham states that "once we get the legislation we need, prices will reflect the social costs of production. What does he mean?

The Financial Sector

• Households also save some of their income average is 3% of their annual income A leakage from the circular flow

• People borrow money from banks Borrow some of the 3% people are saving

An injection into the circular flow

• The financial sector brings savers and borrowers together to recycle funds into the economy.

The International Sector of the Economy

• Up to this point, we have looked at a closed economy. Based on the assumption that households and firms

don’t engage in international trade

• An open economy is an economy that does engage in international trade.

Trade and the Circular Flow

• Imports are goods that are purchased from foreign producers. A leakage (pay money for the import) from the

circular flow.

• Exports are goods that are produced domestically and sold to foreign buyers. An injection (get money for the export) into the

circular flow.

Trade and the Circular Flow (cont’d)

• The difference between exports and imports is called net exports. Trade Surplus• Exports > Imports

Trade Deficit• Imports > Exports

Except for right after WWII, the US consistently runs a trade deficit

Table 3.1 U.S. Exports and Imports in 2004 by Product Group (in Billions of Dollars)

Strategy and Policy

• Unexpected Victims of Taxation Tax on luxury items costing more than $100,000 Who could complain about taxing the yacht industry,

an industry that caters to the rich and powerful? People went to other countries to buy their yachts or

bought cheaper boats to avoid the tax Many unskilled workers lost their jobs! Tax was revoked

Chapter 3 homework

• Numbers 4, 8, 10, and 18

Chapter 4

Introduction to the Demand and Supply Framework

Demand

• The willingness and ability to pay for a good or service at a given set of prices over a given period of time.

• Quantity Demanded specific amount that consumers are willing and able to

purchase at a given price.

Demand (cont’d)

• Demand Schedule—a table that tells the quantity of a good or service that consumers purchase at each price.

• Demand Curve—a graph that shows the quantity demanded at each price.