Up Coming StuffUp Coming Stuff
•Quiz Chapter 5 Friday, 10/14
•Bonus Work Chapter 5 Monday, 10/17
•All homework Chapters 4 & 5 Tuesday, 10/18
•Review Wednesday, 10/19
• Test on Chapter 4 & 5 – Thursday, 10/20!
GHSEnglishDept.
GHSEnglishDept.
Pure Capitalism to Mixed Economy.Pure Capitalism to Mixed Economy.• If you could choose anywhere in the world to live where
would it be and why????• If you had to rate countries in the world in terms of their
standards of living what characteristics would you use and why?
• The next chapter begins to look at how the government intervenes in an economic system to allocate resources.
• Chapter 5 gets us into some debatable issues dealing with tax rates, subsidies, social equality etc.. Does the government hurt or help??
• While watching the video look for those issues we have talked about with reference to how a capitalist economy works best.
• Also look for the policies of the government that lead to inefficiencies.
THE CIRCULAR FLOW REVISITEDTHE CIRCULAR FLOW REVISITED
BUSINESSESBUSINESSESsubsidysubsidy
HOUSEHOLDSHOUSEHOLDSFICAFICA
RESOURCERESOURCEMARKETMARKET
RESOURCESRESOURCES INPUTSINPUTS
$ COSTS$ COSTS $ INCOMES$ INCOMES
PRODUCTPRODUCTMARKETMARKET
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICES
$ CONSUMPTION$ CONSUMPTION$ REVENUE$ REVENUE
Tax PaymentsTax PaymentsGOVERNMENTGOVERNMENT
private propertyprivate property
freedom of enterprisefreedom of enterprise
freedom of choicefreedom of choice
self-interestself-interest
competitioncompetition
roundabout productionroundabout production
specializationspecialization
division of labordivision of labor
medium of exchangemedium of exchange
barterbarter
moneymoney
Five Fundamental QuestionsFive Fundamental Questions
economic costseconomic costs
normal profitnormal profit
economic profiteconomic profit
expanding industryexpanding industry
declining industrydeclining industry
consumer sovereigntyconsumer sovereignty
dollar votesdollar votes
derived demandderived demand
guiding function of pricesguiding function of prices
““invisible hand”invisible hand”
The Mixed Economy:The Mixed Economy:The Mixed Economy:The Mixed Economy:Private and Public SectorsPrivate and Public SectorsPrivate and Public SectorsPrivate and Public Sectors
CHAPTER FIVE
The Seven Roles of Government:The Seven Roles of Government:1. Maintain Competition
2. Protect Private Property (Life & Liberty)
3. Stabilize the Economy
4. Provide Public Goods:(Pure Private, Common Pool, Toll Goods, Pure Public)
5. Control Externalities/Spillovers: (Pollution Control v Schools)
6. Taxes – Redistribute Income
FUNCTIONAL DISTRIBUTIONFUNCTIONAL DISTRIBUTIONFUNCTIONAL DISTRIBUTIONFUNCTIONAL DISTRIBUTION WAGESWAGES RENT RENT
INTERESTINTEREST PROFIT/LOSSPROFIT/LOSS
HOUSEHOLDS AS INCOME RECEIVERSHOUSEHOLDS AS INCOME RECEIVERS
FUNCTIONAL DISTRIBUTIONFUNCTIONAL DISTRIBUTIONFUNCTIONAL DISTRIBUTIONFUNCTIONAL DISTRIBUTION WAGESWAGES RENT RENT
INTERESTINTEREST PROFIT/LOSSPROFIT/LOSSPERSONAL DISTRIBUTIONPERSONAL DISTRIBUTIONPERSONAL DISTRIBUTIONPERSONAL DISTRIBUTION
SHOWS ALLOCATION OF SHOWS ALLOCATION OF INCOME AMONG INDIVIDUAL INCOME AMONG INDIVIDUAL
HOUSEHOLDSHOUSEHOLDS
HOUSEHOLDS AS INCOME RECEIVERSHOUSEHOLDS AS INCOME RECEIVERS
I. How to measure economic activity?
I. How to measure economic activity?
• A. Functional Distribution of Income• 1. Measures wages, profits, interest and rent.• 2. Profits are divided into two categories.• - proprietors income – profits of those
self-employed, doctors, lawyers, farmers.• - Capitalist income or corporation
income/ profits.
WAGES $7,103 Billion 71%
PROPRIETOR’S INCOME 900 Billion 8%CORPORATE PROFITS 1,400 Billion 12%INTEREST 700 Billion 7%
RENTS 200 Billion 2%
FUNCTIONAL DISTRIBUTIONFUNCTIONAL DISTRIBUTIONFUNCTIONAL DISTRIBUTIONFUNCTIONAL DISTRIBUTION
HOUSEHOLDS AS INCOME RECEIVERSHOUSEHOLDS AS INCOME RECEIVERS
WAGES $7,103 Billion 70%
PROFITS $2,349 Billion 21%
INTEREST $750 Billion 7%
RENT $200 Billion 2%
FUNCTIONAL DISTRIBUTIONFUNCTIONAL DISTRIBUTIONFUNCTIONAL DISTRIBUTIONFUNCTIONAL DISTRIBUTION
2004 GDP2004 GDP
HOUSEHOLDS AS INCOME RECEIVERSHOUSEHOLDS AS INCOME RECEIVERS
WEASEL PUSS IS RED!
$10,402 Billion
I. How to measure cont…I. How to measure cont…
• B. Personal Distribution of Income• 1. Indicates how much total income is divided
among household units.• 2. The government uses this as a reference to
how equitable or inequitable income is distributed in the U.S.
• 3. The Lorenz Curve is a mathematically derived index of income inequality.
PERSONAL DISTRIBUTIONPERSONAL DISTRIBUTIONPERSONAL DISTRIBUTIONPERSONAL DISTRIBUTIONPersonal Income Received (Percent)Personal Income Received (Percent)
4.2%4.2%
10.0%10.0%
14.8%14.8%
22.1%22.1%
49.8%49.8%
Lowest 20% Income GroupLowest 20% Income Group
Second 20% Income GroupSecond 20% Income Group
Middle 20% Income GroupMiddle 20% Income Group
Highest 20% Income GroupHighest 20% Income Group
Fourth 20% Income GroupFourth 20% Income Group
HOUSEHOLDS AS INCOME RECEIVERSHOUSEHOLDS AS INCOME RECEIVERS
2004 US Census Bureau
Share of Income - HistoricallyShare of Income - Historically
Year Lowest 20%
Next 20%
Middle20%
Next 20%
Highest 20%
1968 4.2 11.1 17.5 24.4 42.8
1982 4.1 10.1 16.6 24.7 44.5
1992 3.8 13.4 15.8 24.2 46.9
2001 3.5 8.7 14.6 23.0 50.1
The Lorenz Curve
20 40 60 80 100
100
80
60
40
20
0
Percent of Families
Per
cen
t o
f In
com
e Perfect EqualityPerfect Equality
CompleteCompleteInequalityInequality
Copyright McGraw-Hill, Inc. 1999
The Lorenz Curve
20 40 60 80 100
100
80
60
40
20
0
Percent of Families
Per
cen
t o
f In
com
e Perfect EqualityPerfect Equality
CompleteCompleteInequalityInequality
Lorenz CurveLorenz Curve (actual distribution)(actual distribution)
Copyright McGraw-Hill, Inc. 1999
The Lorenz Curve
20 40 60 80 100
100
80
60
40
20
0
Percent of Families
Per
cen
t o
f In
com
e Perfect EqualityPerfect Equality
CompleteCompleteInequalityInequality
Lorenz CurveLorenz Curve (actual distribution)(actual distribution)
Area betweenthe lines shows
the degree ofincome inequality
Copyright McGraw-Hill, Inc. 1999
The Lorenz Curve
20 40 60 80 100
100
80
60
40
20
0
Percent of Families
Per
cen
t o
f In
com
e Perfect EqualityPerfect Equality
CompleteCompleteInequalityInequality
Lorenz CurveLorenz Curve (actual distribution)(actual distribution)
Area betweenthe lines shows
the degree ofincome inequality
Copyright McGraw-Hill, Inc. 1999
Two Adjustments:Two Adjustments:
TaxesCash Transfer Payments
TaxesCash Transfer Payments
30 40 50 60 70
GLOBAL PERSPECTIVEGLOBAL PERSPECTIVE
Percentage of total income earned by top fifth of income receivers
Percentage of total income earned by top fifth of income receivers
BrazilSouth Africa
GuatemalaMexico
United KingdomUnited States
JapanNorway
BrazilSouth Africa
GuatemalaMexico
United KingdomUnited States
JapanNorway
Percentage of total income earned by top 20% of income receivers
Percentage of total income earned by top 20% of income receivers
BrazilSouth Africa
GuatemalaMexico
United StatesUnited Kingdom
JapanNorway
BrazilSouth Africa
GuatemalaMexico
United StatesUnited Kingdom
JapanNorway
30 40 50 60 70
GLOBAL PERSPECTIVEGLOBAL PERSPECTIVE
Executive Pay in someUS. Industries is300 Times Higherthan an Average Worker’s Salary.
1 - Demand for Highly Skilled Workers 1 - Demand for Highly Skilled Workers
2 - Demographic Changes2 - Demographic Changes
3 - International Trade & Pressures 3 - International Trade & Pressures - Immigration + Illegal Immigration- Immigration + Illegal Immigration- Union Decline- Union Decline
The Lorenz Curve AP Test 2004The Lorenz Curve AP Test 2004graphically...
Causes of Growing InequalityCauses of Growing Inequality
Wage Data 138,000,000US Workers
Wage Data 138,000,000US Workers
• 100,000,000 full time US workers in 2001 earned less than $35,000/yr.
• 84% earned less than $65,000
• 10% earned between $65,000 and $100,000
• 5.7% earned more than $100,000US News and World Report
Wage Data – Median Incomefor a Person
Wage Data – Median Incomefor a Person
• Median Income: $33,636• Only 32.8% of all US
jobs paid over $45,000• Two-thirds of all wage
earners work two jobs• Two-thirds of all mothers
with children now work• Median paycheck for
working wives: $18,000
US News and World Report
Median Household Income: 2003 Median Household Income: 2003 • USA Median Household Income: $42,409• Half of US households earn more and half of US households earn less• 1999 Peak Median US Income: $43,915• Wisconsin: $45,985• Half of WI households earn more and half of WI households earn less
Source: US Census Bureau
Working MothersWorking Mothers
• 71.1 percent of mothers work
• 53.7 percent of mothers with children under 1 year work
• Unemployment Rate for unmarried mothers with children under age 18: 10.3%– Jobless Rate 20.5%
Vote KerryBush
Working PoorWorking Poor
• Of the 46,000,000 Americans who are not yet married, median earnings $17,000
• For single women-head of households, median income: $18,472
39,000,000 Working Poor39,000,000 Working Poor
• One in five full time 40 hr./week US jobs pays below the poverty-line $18,244 for a family of four
• 20,000,000 children live in families with incomes below the poverty line
Milwaukee Journal
28,000,000 Jobs28,000,000 Jobs
• 28,000,000 service jobs pay less than $8.84
• $8.84 is the hourly rate that matches the poverty-line $18,244
Milwaukee Journal
Helping the 39,000,000 Working Poor
Helping the 39,000,000 Working Poor
• Suggested Solutions???• Adult Education!• Job Training• Increased Minimum Wage• Subsidize Child Care for
low income workersHelp isOn the
Way?
Milwaukee Journal
$36,388 – Low Income Family$36,388 – Low Income Family
• A family of four living on an annual income of $36,388 is considered to be a low income family
• A family of four living on an annual income of $18,244 is considered to be living in poverty.
Milwaukee Journal
Median Incomes US FamiliesMedian Incomes US Families
• White: $47,800
• Hispanic: $33,000
• African American: $29,600
Milwaukee Journal
Median Family Net WorthsMedian Family Net Worths
• White Families: $88,000 up 17% since 1996
• Hispanic Families: $8,000 up 14% since 1996
• African American Families: $6,000 down 16% since 1996
Milwaukee Journal
The Lorenz Curve
20 40 60 80 100
100
80
60
40
20
0
Percent of Families
Per
cen
t o
f In
com
e Perfect EqualityPerfect Equality
CompleteCompleteInequalityInequality
Lorenz CurveLorenz Curve (actual distribution)(actual distribution)
Area betweenthe lines shows
the degree ofincome inequality
Copyright McGraw-Hill, Inc. 1999
1 - Ability Differences1 - Ability Differences2 - Education and Training2 - Education and Training3 - Discrimination3 - Discrimination4 - Tastes and Risks4 - Tastes and Risks5 - Unequal Distribution of Wealth5 - Unequal Distribution of Wealth6 - Market Power6 - Market Power7 - Luck, Connections, and Misfortune7 - Luck, Connections, and Misfortune
EQUALITY-EFFICIENCY TRADEOFFEQUALITY-EFFICIENCY TRADEOFF
CAUSES OF INCOME INEQUALITYCAUSES OF INCOME INEQUALITY
Labor Market TheoryThe Real World Will Get You!
• Human Capital– Education = Income
• Sorting Mechanism–Hoops
• Radical View–Rich Dad Poor Dad
• Dual Labor Market–Good Job v Bad Job Market
Family Income USAFamily Income USA
• 9.8% $100,000+• 8.9% $75-99,999• 19% $50-74,999• 16.3% $35-
49,999• 13% $25-34,999• 14.4% $15-
24,999• 18.6% <$15,000
Family Income Distribution2001
Family Income Distribution2001• $355,000
– Top 1%
• $130,600– Top 5%
• $93,800– Top 10%
• 60,800– Top 25%
• 33,400– Top 50%
38,500,000+: Men, Women, and Children(13.1%)
The typical poor person in the US:• Single Mom with Kids!• White unemployed female under forty• Found everywhere including Ozaukee County (2200+)!
$18,810 for a family of four!$12,015 for a family of two!$9,573 for a single person!!
Of the 200 largest US counties Waukesha with 3.0% of its residents in Poverty ranked second lowest in the US.
Of all 5,700+ US counties Ozaukee with 2.2% of itsResidents in Poverty ranked third lowest in the US.
Wisconsin PovertyWisconsin Poverty
• 528,000 people or 9.8% of WI residents
• WI residents without health insurance 593,000
• National rank 36th lowest poverty in poverty rate
Poverty in America: 2003 DataPoverty in America: 2003 Data
• 37.6 Million Americans– Up 1.7 million from 2002– 12.1 million are children
• 12.1% of Americans• Wisconsin’s poverty rate
2003: 8.2%• Poverty Line 2003:
– $18,244 for a family of 4– $9,359 for a single person
Source: US Census Bureau, Journal/Sentinel
State Rankings on PovertyFamilies Living Below the Poverty Line
State Rankings on PovertyFamilies Living Below the Poverty Line
1. Mississippi 16.0%
2. Louisiana 15.8%
3. New Mexico 14.5%
4. West Virginia 13.9%
5. Kentucky 12.7%
46. Iowa 6.0%
47. Connecticut 5.6%
48. Wisconsin 5.5%
49. Minnesota 5.1%
50. New Hampshire 4.3%
Total US Poor:32,500,000
Average Per State:9.2%
State Rankings on Families Receiving WelfareState Rankings on Families Receiving Welfare
1. Alaska 8.7%
2. Hawaii 7.2%
3. Oklahoma 5.1%
4. California 4.9%
5. New York 4.9%
46. Maryland 2.4%
47. Kansas 2.36%
48. Nevada 2.35%
49. Alabama 2.24%
50. Wisconsin 1.71%
Total Welfare Recipients:
Less than 22,000,000
The Working PoorThe Working Poor
• Income less than $8.00/Hour
• Yearly incomes less than $25,000 for a family of 4
• 30% of Americans: 74,000,000 people!
• Uninsured Americans 58,000,000
HELPHELP
WANTEDWANTED
The Working PoorThe Working Poor• Hourly wages needed
to afford a One Bedroom Apartment– $8.89
• Chance of a Welfare Recipient getting a $8.89/Hour Forty Hour/Week Job?– 97 to 1
Want Ads
Data: National Coalition for the Homeless
Functional Distribution of Income
Functional Distribution of Income
71%
8%
12%
7% 2%
WagesPro IncCorp IncInterestRent
How is the 10.4 TrillionDollars earned in theEconomy?
PERSONAL DISTRIBUTIONPERSONAL DISTRIBUTIONPERSONAL DISTRIBUTIONPERSONAL DISTRIBUTIONPersonal Income Received (Percent)Personal Income Received (Percent)
4.2%4.2%
10.0%10.0%
14.8%14.8%
22.1%22.1%
49.8%49.8%
Lowest 20% Income GroupLowest 20% Income Group
Second 20% Income GroupSecond 20% Income Group
Middle 20% Income GroupMiddle 20% Income Group
Highest 20% Income GroupHighest 20% Income Group
Fourth 20% Income GroupFourth 20% Income Group
HOUSEHOLDS AS INCOME RECEIVERSHOUSEHOLDS AS INCOME RECEIVERS
How is that income allocated??? What is in societies best interest???
C. Household Income! Disposal Spending+Saving+Taxes=GDP
C. Household Income! Disposal Spending+Saving+Taxes=GDP
• W+P+i+R • Weasel puss is red• 1. All Income is spent
or saved or lost to taxes!
• What is the distribution of spending, saving, and taxes?
GDP
Another way to measure!!!
1997 DATA1997 DATA
HOUSEHOLDS AS SPENDERSHOUSEHOLDS AS SPENDERS
6%6%
WHERE DOES OUR INCOME GO?WHERE DOES OUR INCOME GO?WHERE DOES OUR INCOME GO?WHERE DOES OUR INCOME GO?
to personal savings to personal savings
Milwaukee Journal
1997 DATA1997 DATA
6%6% to personal taxes excludingto personal taxes excludingSocial SecuritySocial Security
Affective tax rate for Americans:Affective tax rate for Americans:14% + 7.5% = 21.5%14% + 7.5% = 21.5%
Taxes as % of GDP = 29.9%Taxes as % of GDP = 29.9%
14%14%
WHERE DOES OUR INCOME GO?WHERE DOES OUR INCOME GO?WHERE DOES OUR INCOME GO?WHERE DOES OUR INCOME GO?
HOUSEHOLDS AS SPENDERSHOUSEHOLDS AS SPENDERS
Taxes as a Percent of GDPTaxes as a Percent of GDP
• Sweden 56.1%
• Denmark 49.9%• Netherlands 46.0%• Belgium 44.3%• France 43.8%• Austria 41.0%• Germany 38.1%• Italy 37.8%
• Ireland 37.6%• Britain
36.5%• Canada 35.3%• Spain 34.4%• Greece 33.2%• Japan 30.6%• Australia 30.1%• USA 29.9%
Source OECD
1997 DATA1997 DATA
6%6% to personal consumptionto personal consumption14%14% 80%80%
WHERE DOES OUR INCOME GO?WHERE DOES OUR INCOME GO?WHERE DOES OUR INCOME GO?WHERE DOES OUR INCOME GO?
HOUSEHOLDS AS SPENDERSHOUSEHOLDS AS SPENDERS
SAVINGS
TAXES
ConsumerSpending about80% of income
HOUSEHOLDS AS SPENDERSHOUSEHOLDS AS SPENDERS
WHERE DOES OUR INCOME GO?WHERE DOES OUR INCOME GO?WHERE DOES OUR INCOME GO?WHERE DOES OUR INCOME GO?
1997 DATA1997 DATA
6%6% to personal consumptionto personal consumption14%14% 83%83%
NOTES:NOTES:NOTES:NOTES:Spending ClassificationsSpending Classifications
1- Durables 12%1- Durables 12%
HOUSEHOLDS AS SPENDERSHOUSEHOLDS AS SPENDERS
WHERE DOES OUR INCOME GO?WHERE DOES OUR INCOME GO?WHERE DOES OUR INCOME GO?WHERE DOES OUR INCOME GO?
1997 DATA1997 DATA
6%6% to personal consumptionto personal consumption14%14% 83%83%
NOTES:NOTES:NOTES:NOTES:Spending ClassificationsSpending Classifications
1- Durables1- Durables1- Durables1- Durables
2- Nondurables 30%2- Nondurables 30%
HOUSEHOLDS AS SPENDERSHOUSEHOLDS AS SPENDERS
WHERE DOES OUR INCOME GO?WHERE DOES OUR INCOME GO?WHERE DOES OUR INCOME GO?WHERE DOES OUR INCOME GO?
1997 DATA1997 DATA
6%6% to personal consumptionto personal consumption14%14% 83%83%
NOTES:NOTES:NOTES:NOTES:Spending ClassificationsSpending Classifications
1-Durables 12%1-Durables 12%1-Durables 12%1-Durables 12%
2-Nondurables 30%2-Nondurables 30%2-Nondurables 30%2-Nondurables 30%
3-Services 58%3-Services 58%
II. Business OrganizationsPlant – Firm - Industry
II. Business OrganizationsPlant – Firm - Industry
Proprietorships
Partnerships
Corporations
Hybrids
Bush
THE BUSINESS POPULATIONTHE BUSINESS POPULATION
A. Terminology....A. Terminology....
1- PLANT1- PLANT1- PLANT1- PLANT
One LocationOne Location
1- PLANT1- PLANT1- PLANT1- PLANT
2- FIRM2- FIRM2- FIRM2- FIRMOne businessOne business
organization - Mayorganization - Mayhave one or have one or more plantsmore plants
THE BUSINESS POPULATIONTHE BUSINESS POPULATION
A. Terminology....A. Terminology....
One businessOne businessorganization - Mayorganization - May
have one or have one or more plantsmore plants
THE BUSINESS POPULATIONTHE BUSINESS POPULATION
Terminology....Terminology....
1- PLANT1- PLANT1- PLANT1- PLANT
2- FIRM2- FIRM2- FIRM2- FIRM
NOTES:NOTES:
VerticalVerticalCombinationsCombinations
VerticalVerticalCombinationsCombinations
One businessOne businessorganization - Mayorganization - May
have one or have one or more plantsmore plants
THE BUSINESS POPULATIONTHE BUSINESS POPULATION
Terminology....Terminology....
1- PLANT1- PLANT1- PLANT1- PLANT
2- FIRM2- FIRM2- FIRM2- FIRM
NOTES:NOTES:
Horizontal Horizontal CombinationsCombinationsHorizontal Horizontal
CombinationsCombinations
VerticalCombinations
One businessOne businessorganization - Mayorganization - May
have one or have one or more plantsmore plants
THE BUSINESS POPULATIONTHE BUSINESS POPULATION
Terminology....Terminology....
1- PLANT1- PLANT1- PLANT1- PLANT
2- FIRM2- FIRM2- FIRM2- FIRM
NOTES:NOTES:
Horizontal Combinations
VerticalCombinations
ConglomeratesConglomeratesConglomeratesConglomerates
THE BUSINESS POPULATIONTHE BUSINESS POPULATION
A. Terminology....A. Terminology....
1- PLANT1- PLANT1- PLANT1- PLANT
2- FIRM2- FIRM2- FIRM2- FIRM
3- INDUSTRY3- INDUSTRY3- INDUSTRY3- INDUSTRY
B. US Business OrganizationsB. US Business Organizations
• Proprietorships 75% 17,000,000
• Partnerships 7% 1,500,000
• Corporations 18% 4,000,000
• Hybrids/Corps 500,000
23,000,000
1. Type of Business Percent of Market Total Number
(Both Bush and VP Dick Cheney claimed in the last year’s debates that 900,000 "small businesses" would be hurt by restoration of taxes on $200,000+ incomes.)
Small Businesses USSmall Businesses US• The United States Small Business Administration
classifies companies with fewer than 500 employees as "small." There are more than 5 million such businesses that have payrolls, and they employ about half of the nation's private-sector workers. Of those 5 million firms, 4.3 million have fewer than 20 employees each. The small business owner's reputation as underdog and risk-taker is a hard-earned one. Every year sees 600,000 to 800,000 companies start up, just as 500,000 or so go under.
• Let's give credit where credit is due. Bush has cut taxes for all Americans, which has helped small business owners continue to generate 60 to 80 percent of all new jobs annually. (US Chamber of Commerce)
B. US Business OrganizationsB. US Business Organizations
• Proprietorships 6%
• Partnerships 5%
• Corporations 89%
2. Type of Business Percent of Market Sales
Top 10 US Corporations by RevenuesTop 10 US Corporations by Revenues
1. Wal-Mart $217,799,000,000
2. Exxon Mobile $187,510,000,000
3. General Motors $177,260,000,000
4. Ford Motor $162,412,000,000
5. General Electric $125,679,000,000
6. Citigroup $112,022,000,000
7. Chevron Texaco $106,245,000,000
8. Philip Morris $89,942,000,000
9. IBM $85,866,000,000
10. Microsoft $83,654,000,000
Top 10 International Corporations by RevenuesTop 10 International Corporations by Revenues
1. Wal-Mart $217,799,000,000
2. Exxon Mobile $187,510,000,000
3. Shell $177,281,000,000
4. General Motors$177,260,000,000
5. Ford Motor $162,412,000,000
6. Daimler Chrysler $152,446,000,000
7. BP $148,062,000,000
8. General Electric$125,679,000,000
9. Citigroup$112,022,000,000
10. Mitsubishi $110,787,000,000
C. LEGAL FORMS OF BUSINESS C. LEGAL FORMS OF BUSINESS ENTERPRISESENTERPRISES
1. Sole Proprietorship1. Sole Proprietorship
•Easy to OrganizeEasy to Organize•Proprietor is Own “Boss”Proprietor is Own “Boss”
Advantages...
1. Sole Proprietorship1. Sole Proprietorship
•Easy to OrganizeEasy to Organize•Proprietor is Own “Boss”Proprietor is Own “Boss”
Advantages...
Disadvantages...•Limited ResourcesLimited Resources•No Help With Decision MakingNo Help With Decision Making•Unlimited LiabilityUnlimited Liability
C. LEGAL FORMS OF BUSINESS C. LEGAL FORMS OF BUSINESS ENTERPRISESENTERPRISES
2. Partnership2. Partnership
Advantages...•Also Easy to OrganizeAlso Easy to Organize•More Management SkillsMore Management Skills•Greater Resources AvailableGreater Resources Available
C. LEGAL FORMS OF BUSINESS C. LEGAL FORMS OF BUSINESS ENTERPRISESENTERPRISES
2. Partnership2. Partnership
Disadvantages...
Advantages...•Also Easy to OrganizeAlso Easy to Organize•More Management SkillsMore Management Skills•Greater Resources AvailableGreater Resources Available
•Difficulty Making DecisionsDifficulty Making Decisions•Possibly Limited Financial ResourcesPossibly Limited Financial Resources•Partnership Continuity ProblemsPartnership Continuity Problems•Unlimited LiabilityUnlimited Liability
C. LEGAL FORMS OF BUSINESS C. LEGAL FORMS OF BUSINESS ENTERPRISESENTERPRISES
3. Corporation3. CorporationAdvantages...
•Most Effective Raising Capital - Stocks, Bonds Most Effective Raising Capital - Stocks, Bonds •Limited Liability******Limited Liability******•Easy Expansion of Size & ScopeEasy Expansion of Size & Scope•Infinite LifeInfinite Life
C. LEGAL FORMS OF BUSINESS C. LEGAL FORMS OF BUSINESS ENTERPRISESENTERPRISES
CorporationCorporationAdvantages...
•Most Effective Raising Capital - Stocks, Bonds Most Effective Raising Capital - Stocks, Bonds •Limited LiabilityLimited Liability•Easy Expansion of Size & ScopeEasy Expansion of Size & Scope•Infinite LifeInfinite Life
Disadvantages...•Corporate Regulations & Legal ExpensesCorporate Regulations & Legal Expenses•Some Unscrupulous PracticesSome Unscrupulous Practices•Double TaxationDouble Taxation•Separation of Ownership & ControlSeparation of Ownership & Control
LEGAL FORMS OF BUSINESS ENTERPRISESLEGAL FORMS OF BUSINESS ENTERPRISES
LEGAL FORMS OF BUSINESS ENTERPRISESLEGAL FORMS OF BUSINESS ENTERPRISES
CorporationCorporationAdvantages....
•Most Effective Raising Capital - Stocks, Bonds Most Effective Raising Capital - Stocks, Bonds •Limited LiabilityLimited Liability•Easy Expansion of Size & ScopeEasy Expansion of Size & Scope•Infinite LifeInfinite Life
Disadvantages•Corporate Regulations & Legal ExpensesCorporate Regulations & Legal Expenses•Some Unscrupulous PracticesSome Unscrupulous Practices•Double TaxationDouble Taxation•Separation of Ownership & ControlSeparation of Ownership & Control
NOTES:NOTES:
Principal-Agent
Problem
Principle Agent ProblemPrinciple Agent Problem
• Partnership and Proprietorship the owner/owners is/are the principle agents!
• Corporate America has a board of directors and CEO that serve as the principle agents for stockholders!Ken Lay – CFO Enron
BUSH
10 Highest Paid CEO’s in the US December 200110 Highest Paid CEO’s in the US December 20011. Michael Dell Dell Computers $235,192,000
2. Sanford Weill Citigroup $216,183,000
3. Gerald Levin AOL Time Warner $164,388,000
4. John Chambers Cisco Systems $157,305,000
5. Henry Silverman Cendant $137,447,000
6. Louis Gerstner Jr. IBM $103,410,000
7. Joseph Nacchio Qwest Com. $97,387,000
8. Walter Sanders Advanced Micro $92,246,000
9. Steven Jobs Apple Computers $90,000,000
10. Jeffery Skilling Enron $84,449,000
CorporationsCorporations
• 90% of Revenue• 80% of Output• Wal-Mart’s revenue
greater than the GDP of 170 nations
• Wal-Mart and GM combined revenues exceed total revenue of all US farms combined
CorporationCorporationAdvantages...
•Most Effective Raising Capital - Stocks, Bonds Most Effective Raising Capital - Stocks, Bonds •Limited LiabilityLimited Liability•Easy Expansion of Size & ScopeEasy Expansion of Size & Scope•Infinite LifeInfinite Life
Disadvantages...•Corporate Regulations & Legal ExpensesCorporate Regulations & Legal Expenses•Some Unscrupulous PracticesSome Unscrupulous Practices•Double TaxationDouble Taxation•Separation of Ownership & ControlSeparation of Ownership & Control
LEGAL FORMS OF BUSINESS ENTERPRISESLEGAL FORMS OF BUSINESS ENTERPRISES
LEGAL FORMS OF BUSINESS ENTERPRISESLEGAL FORMS OF BUSINESS ENTERPRISES
CorporationCorporationAdvantages....
•Most Effective Raising Capital - Stocks, Bonds Most Effective Raising Capital - Stocks, Bonds •Limited LiabilityLimited Liability•Easy Expansion of Size & ScopeEasy Expansion of Size & Scope•Infinite LifeInfinite Life
Disadvantages•Corporate Regulations & Legal ExpensesCorporate Regulations & Legal Expenses•Some Unscrupulous PracticesSome Unscrupulous Practices•Double TaxationDouble Taxation•Separation of Ownership & ControlSeparation of Ownership & Control
NOTES:NOTES:
Limited-Liability
Companies(LLCs)(LLCs)
4. Hybrids4. Hybrids
• LLC– Taxed like a
partnership– Limited Liability like a
corporation
• S-Corporations– Fewer than 35
employees– Limited liability– No double taxation
III. Five Major Roles of Government in a Capitalist
Economy
III. Five Major Roles of Government in a Capitalist
Economy• Provide Social and
Legal Framework• Maintain Competition• Redistribute Income• Correct Market Failure• Stabilize the Economy
A. LEGALA. LEGALANDAND
SOCIALSOCIALFRAMEWORKFRAMEWORK
ECONOMIC FUNCTIONS OF GOVERNMENTECONOMIC FUNCTIONS OF GOVERNMENT
1. Seeks to strengthen the market system.
B. MAINTAININGB. MAINTAININGCOMPETITIONCOMPETITION
ECONOMIC FUNCTIONS OF GOVERNMENTECONOMIC FUNCTIONS OF GOVERNMENT
“Microsoft willRule the World!’
Bill Gates 2002
ECONOMIC FUNCTIONS OF GOVERNMENTECONOMIC FUNCTIONS OF GOVERNMENT
MAINTAININGMAINTAININGCOMPETITIONCOMPETITION
Notes:Notes:1.MONOPOLY- illegal1.MONOPOLY- illegal
ECONOMIC FUNCTIONS OF GOVERNMENTECONOMIC FUNCTIONS OF GOVERNMENT
MAINTAININGMAINTAININGCOMPETITIONCOMPETITION
Notes:Notes:1.MONOPOLY- illegal
2. NATURALMONOPOLIES2. NATURALMONOPOLIES
ECONOMIC FUNCTIONS OF GOVERNMENTECONOMIC FUNCTIONS OF GOVERNMENT
MAINTAININGMAINTAININGCOMPETITIONCOMPETITION
Notes:Notes:1. MONOPOLY- illegal
2. NATURALMONOPOLIES
MARKET BIASES &SHORTCOMINGS CAN COMPEL ACTION BYGOVERNMENT
MARKET BIASES &SHORTCOMINGS CAN COMPEL ACTION BYGOVERNMENT
C. REDISTRIBUTIONC. REDISTRIBUTIONOF INCOME....OF INCOME....
1. Transfer Payments1. Transfer Payments
ECONOMIC FUNCTIONS OF GOVERNMENTECONOMIC FUNCTIONS OF GOVERNMENT
Of $10,000.00 Paid in Federal Income Tax: $2,620.00 goes to the military$2,260.00 goes to pay the interest on
the national debt$1,900.00 goes to health care $550.00 goes to income security $340.00 goes to benefits for veterans $320.00 goes to education $250.00 goes to nutrition spending $160.00 goes to housing $160.00 goes to the environment $40.00 goes to job training$1,400.00 goes to all other expenses
ExcludesFICA @7.5%
Ten Largest Militaries in the WorldTen Largest Militaries in the World
1. China 2,340,000
2. US 1,365,800
3. India 1,303,000
4. North Korea 1,082,000
5. Russia 1,004,000
6. South Korea 683,000
7. Pakistan 612,000
8. Turkey 609,000
9. Iran 513,000
10. Vietnam 484,000
Total US Military Spending:
$352,000,000,000
Top Military SpendersTop Military Spenders1. USA $352,000,000,000
2. Japan $46,700,000,000
3. Britain $36,000,000,000
4. France $33,600,000,000
5. China $31,100,000,000
6. Germany $27,700,000,000
7. Saudi Arabia $21,600,000,000
8. Italy $21,100,000,000
9. Iran $17,500,000,000
10. South Korea $13,500,000,000
11. India $12,900,000,000
12. Russia $11,400,000,000
The sum of spending by the other top 25 countries does not equal US spending!
Countries with the Highest Life Expectancy
Countries with the Highest Life Expectancy
1. Japan 81.5 yrs.
2. Sweden 80.1 yrs.
3. Iceland 79.4 yrs.
4. Australia 79.2 yrs.
5. Israel 79.2 yrs.
6. Martinique 79.1 yrs.
7. Switzerland 79.1 yrs.
8. Canada 79.0 yrs.
9. France 79.0 yrs.
10. Norway 78.9 yrs.USA 77.5Worldwide 66.0
C. REDISTRIBUTIONC. REDISTRIBUTIONOF INCOME....OF INCOME....
1. Transfer Payments1. Transfer Payments
ECONOMIC FUNCTIONS OF GOVERNMENTECONOMIC FUNCTIONS OF GOVERNMENT
2. Personal Income Tax2. Personal Income Tax
Taxes in the USATaxes in the USA
• 3. Theories of Taxation:– Ability to Pay– Benefits Received
• 4. Types of Taxes:– Progressive– Proportional– Regressive
Apportioning the Tax BurdenApportioning the Tax Burden
Benefits-Received PrincipleBenefits-Received Principle
Apportioning the Tax BurdenApportioning the Tax Burden
Benefits-Received PrincipleBenefits-Received PrincipleAbility-to-Pay PrincipleAbility-to-Pay Principle
Apportioning the Tax BurdenApportioning the Tax Burden
Benefits-Received PrincipleBenefits-Received PrincipleAbility-to-Pay PrincipleAbility-to-Pay Principle
• Progressive Tax & Progressive Tax & Marginal Tax Rates!Marginal Tax Rates!
Progressive TaxProgressive Tax
• The fraction of income paid in taxes increases as a person’s income increases.
• Marginal tax rate - rate at which the tax is paid on each additional unit of income.
• Example - Earning $50,000 – What do you pay in taxes given the following rates?
• 1 – 41,200 15%
• 41,201 – 99,600 28%
• 99,601 – 151,750 31%
• 151,751 – 271,050 36%
• 271,050 - 39.6%
$8,644What is your average tax??
17%
Apportioning the Tax BurdenApportioning the Tax Burden
Benefits-Received PrincipleBenefits-Received PrincipleAbility-to-Pay PrincipleAbility-to-Pay Principle
• Progressive Tax• Regressive TaxRegressive Tax
Apportioning the Tax BurdenApportioning the Tax Burden
Benefits-Received PrincipleBenefits-Received PrincipleAbility-to-Pay PrincipleAbility-to-Pay Principle
• Progressive Tax• Regressive Tax• Proportional TaxProportional Tax
Proportional and RegressiveProportional and Regressive
• Proportional is a tax where the fraction of income paid in taxes remains constant as a person’s income increases. A flat tax.
• Regressive is a tax where the fraction of income paid in taxes increases the lower your income.
• Sales taxes are what seem to be a proportional tax but indeed are regressive.
• Example Family 1 Family of 4 Family 235,000 75,000 5,000 Food expenses 5,000
6% tax rate – flat tax 6%
$300 tax paid $300 .8% of income .4%
Tax Applications:Tax Applications:
• Personal Income TaxPersonal Income Tax• Sales TaxSales Tax• Corporate Income TaxCorporate Income Tax• Payroll TaxesPayroll Taxes• Property Taxes Property Taxes
Identify whether progressive, regressive, or proportional
Taxes as a Percent of GDPTaxes as a Percent of GDP• Sweden
56.1%• Denmark 49.9%• Netherlands 46.0%• Belgium 44.3%• France 43.8%• Austria 41.0%• Germany 38.1%• Italy 37.8%
• Ireland 37.6%• Britain
36.5%• Canada 35.3%• Spain 34.4%• Greece 33.2%• Japan 30.6%• Australia 30.1%• USA 29.9%
Source OECD
C. REDISTRIBUTIONC. REDISTRIBUTIONOF INCOME....OF INCOME....
•1. Transfer Payments1. Transfer PaymentsFICA to PeopleFICA to People
5.5. Market InterventionMarket Intervention Minimum wages and subsidies.Minimum wages and subsidies.
ECONOMIC FUNCTIONS OF GOVERNMENTECONOMIC FUNCTIONS OF GOVERNMENT
• 2-4. Taxes2-4. Taxes
D. REALLOCATION OF RESOURCES....D. REALLOCATION OF RESOURCES....
ECONOMIC FUNCTIONS OF GOVERNMENTECONOMIC FUNCTIONS OF GOVERNMENT
1. The government will intervene when it feels a market failure has taken place.
2. The market produces the wrong type or amount of goods.
3. The market fails to allocate any resources for the production of a good.
D. REALLOCATION OF RESOURCES....D. REALLOCATION OF RESOURCES....4. Spillovers or Externalities4. Spillovers or Externalities
- Spillover Costs
ECONOMIC FUNCTIONS OF GOVERNMENTECONOMIC FUNCTIONS OF GOVERNMENT
When a producer avoids someof the costs of producinga product.
Example – pollution
A larger output is produced than is socially acceptable.
REALLOCATION OF RESOURCES....REALLOCATION OF RESOURCES....Spillovers or ExternalitiesSpillovers or Externalities
Spillover Costs
- Correcting For Spillover Costs
•Legislation Legislation
ECONOMIC FUNCTIONS OF GOVERNMENTECONOMIC FUNCTIONS OF GOVERNMENT
REALLOCATION OF RESOURCES....REALLOCATION OF RESOURCES....Spillovers or ExternalitiesSpillovers or Externalities
Spillover Costs
Correcting For Spillover Costs
•LegislationLegislation•Specific TaxesSpecific Taxes
ECONOMIC FUNCTIONS OF GOVERNMENTECONOMIC FUNCTIONS OF GOVERNMENT
P
Q
Correcting for Spillover CostsCorrecting for Spillover CostsCorrecting for Spillover CostsCorrecting for Spillover Costs
D
0
SpilloverSpillovercostscosts
OverallocationOverallocation
s + Tax
S
Price too Low!
Qd = Qs
Amount ofTax neededto correctNegative externality!
New market price paid by consumers
P
Q
Correcting for Spillover CostsCorrecting for Spillover CostsCorrecting for Spillover CostsCorrecting for Spillover Costs
D
0
SpilloverSpillovercostscosts
S + Tax
S
TAXTAXTo FixTo FixSpillover costSpillover cost
Overallocation CorrectedOverallocation Corrected
TaxConsumer pays
Producer Receives
REALLOCATION OF RESOURCES....REALLOCATION OF RESOURCES....Spillovers or ExternalitiesSpillovers or Externalities
Spillover BenefitsThe Underallocation of Resources
ECONOMIC FUNCTIONS OF GOVERNMENTECONOMIC FUNCTIONS OF GOVERNMENT
You don’t directly get all the utility or receive all the benefits,so you don’t consume as much as you could if you didreceive all of the benefits.
Example - Education
REALLOCATION OF RESOURCES....REALLOCATION OF RESOURCES....Spillovers or ExternalitiesSpillovers or Externalities
Spillover Benefits
Correcting for Spillover Benefits....
• Increase Demand
ECONOMIC FUNCTIONS OF GOVERNMENTECONOMIC FUNCTIONS OF GOVERNMENT
P
Q
Correcting for Spillover BenefitsCorrecting for Spillover BenefitsCorrecting for Spillover BenefitsCorrecting for Spillover Benefits
D
S
0
D + Subsidy
SpilloverSpilloverBenefitsBenefits
UnderallocationUnderallocationCorrectionCorrection
Initiallypriced toolow!!!
Federal Grants for Education
P
Q
Correcting for Spillover BenefitsCorrecting for Spillover BenefitsCorrecting for Spillover BenefitsCorrecting for Spillover Benefits
D
S
0
D + Subsidy
SubsidySubsidyto consumerto consumer
UnderallocationUnderallocationCorrectedCorrected
Amount of the subsidy needed to correct externality!
Price isIncreased!
REALLOCATION OF RESOURCES....REALLOCATION OF RESOURCES....Spillovers or ExternalitiesSpillovers or Externalities
Spillover Benefits
Correcting for Spillover Benefits....
• Increase Demand• Increase Supply
ECONOMIC FUNCTIONS OF GOVERNMENTECONOMIC FUNCTIONS OF GOVERNMENT
P
Q
Correcting for Spillover BenefitsCorrecting for Spillover BenefitsCorrecting for Spillover BenefitsCorrecting for Spillover Benefits
D
0
SubsidySubsidyto producersto producers
S
S + Subsidy
SubsidySubsidyto businessto business
UnderallocationUnderallocationCorrectedCorrected
Price for consumersfalls
Madison costs less than Marquette
REALLOCATION OF RESOURCES....REALLOCATION OF RESOURCES....Spillovers or ExternalitiesSpillovers or Externalities
Spillover Benefits
Correcting for Spillover Benefits....
• Increase Demand• Increase Supply• Government Provision
ECONOMIC FUNCTIONS OF GOVERNMENTECONOMIC FUNCTIONS OF GOVERNMENT
5. Ownership Rights5. Ownership Rights
• Some goods need to be produced because they produce a societal benefit but would not be produced if the gov’t did not intervene.
• In order to determine when the gov’t should intervene they classify goods according to categories.
• Exclusion principle - One of the main determining factors is if the good will be adequately produced in the market. Does the purchaser have an exclusive right to that good?
Pure Private GoodsPure Private Goods
• No Shared Consumption!
• Exclusion permitted!
• Hands off my burger!!
• Depletability
Toll GoodsToll Goods
• You pay to use a resource
• Using the resource doesn’t deplete its supply or usefulness
• You may be denied use if you fail to pay
• Applies to private goods
Pure Public GoodsPure Public Goods
• Indivisible – too large for individuals to consume.
• Free Rider Problem• The benefits to one
user does not exceed the cost!
• Highways, space shuttle, aircraft carrier
Private Goods:Private Goods:Divisibility &Divisibility &DepletabilityDepletability
Public Goods:Public Goods:
Indivisible Indivisible
Public or Social Goods Are...
IndivisibleSubject to the free-rider problem
May Provide Large SpilloverBenefits
Quasi-public GoodsCan be produced by market or government but have large spillover benefits.
Common Pool GoodsCommon Pool Goods
• Joint ownership• Fish in Lake Michigan• The UN plan to save
the Whales and Dolphin
• Gate Foundation to purchase from UN all whales and dolphins!
Public Goods & ServicesPublic Goods & Services
Note:Note:The Exclusion PrincipleDoes Not ApplyThe Exclusion PrincipleDoes Not Apply
Note:Note:The Exclusion PrincipleDoes Not ApplyThe Exclusion PrincipleDoes Not ApplySome Goods & ServicesWould Not Be ProducedBy The Market System
Public or Social Goods Are...
Public Goods & ServicesPublic Goods & Services
The Free Rider Problem:Visitors to Ozaukee County may use this public goodeven if they have never paid at tax in this county.
Public or Social Goods Are...
IndivisibleSubject to the free-rider problem
May Provide Large SpilloverBenefits
E. Stabilization of the EconomyE. Stabilization of the Economy
1. Should the Government take a Role?
2. Action is taken to deal with issues of unemployment and inflation.
STABILIZATION....whenSTABILIZATION....when
• Cut TaxesCut Taxes• Raise GovernmentRaise Government SpendingSpending• Run a DeficitRun a Deficit
ECONOMIC FUNCTIONS OF GOVERNMENTECONOMIC FUNCTIONS OF GOVERNMENTIn A RecessionIn A Recession
GDP: Growing to SlowlyOr High Unemployment
STABILIZATION....STABILIZATION....GDP: Growing too FastPrices Rising out of Control
• Raise TaxesRaise Taxes• Cut GovernmentCut Government SpendingSpending• Run a SurplusRun a Surplus
ECONOMIC FUNCTIONS OF GOVERNMENTECONOMIC FUNCTIONS OF GOVERNMENTIn A Period of InflationIn A Period of Inflation
THE CIRCULAR FLOW REVISITEDTHE CIRCULAR FLOW REVISITED
BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS
RESOURCERESOURCEMARKETMARKET
RESOURCESRESOURCES INPUTSINPUTS
$ COSTS$ COSTS $ INCOMES$ INCOMES
PRODUCTPRODUCTMARKETMARKET
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICES
$ CONSUMPTION$ CONSUMPTION$ REVENUE$ REVENUE
GOVERNMENTGOVERNMENT
THE CIRCULAR FLOW REVISITEDTHE CIRCULAR FLOW REVISITED
BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS
RESOURCERESOURCEMARKETMARKET
RESOURCESRESOURCES INPUTSINPUTS
$ COSTS$ COSTS $ INCOMES$ INCOMES
PRODUCTPRODUCTMARKETMARKET
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICES
$ CONSUMPTION$ CONSUMPTION$ REVENUE$ REVENUE
NET TAXES FLOWTO GOVERNMENTFROM BUSINESSES
GOVERNMENTGOVERNMENT
THE CIRCULAR FLOW REVISITEDTHE CIRCULAR FLOW REVISITED
BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS
RESOURCERESOURCEMARKETMARKET
RESOURCESRESOURCES INPUTSINPUTS
$ COSTS$ COSTS $ INCOMES$ INCOMES
PRODUCTPRODUCTMARKETMARKET
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICES
$ CONSUMPTION$ CONSUMPTION$ REVENUE$ REVENUE
GOVERNMENTGOODS & SERVICES
FLOW TO BUSINESSES
GOVERNMENTGOVERNMENT
THE CIRCULAR FLOW REVISITEDTHE CIRCULAR FLOW REVISITED
BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS
RESOURCERESOURCEMARKETMARKET
RESOURCESRESOURCES INPUTSINPUTS
$ COSTS$ COSTS $ INCOMES$ INCOMES
PRODUCTPRODUCTMARKETMARKET
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICES
$ CONSUMPTION$ CONSUMPTION$ REVENUE$ REVENUE
NET TAXES FLOWTO GOVERNMENT
FROM HOUSEHOLDS
GOVERNMENTGOVERNMENT
THE CIRCULAR FLOW REVISITEDTHE CIRCULAR FLOW REVISITED
BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS
RESOURCERESOURCEMARKETMARKET
RESOURCESRESOURCES INPUTSINPUTS
$ COSTS$ COSTS $ INCOMES$ INCOMES
PRODUCTPRODUCTMARKETMARKET
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICES
$ CONSUMPTION$ CONSUMPTION$ REVENUE$ REVENUE
GOODS & SERVICESFLOW TO HOUSEHOLDS
FROM GOVERNMENT
GOVERNMENTGOVERNMENT
THE CIRCULAR FLOW REVISITEDTHE CIRCULAR FLOW REVISITED
BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS
RESOURCERESOURCEMARKETMARKET
RESOURCESRESOURCES INPUTSINPUTS
$ COSTS$ COSTS $ INCOMES$ INCOMES
PRODUCTPRODUCTMARKETMARKET
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICES
$ CONSUMPTION$ CONSUMPTION$ REVENUE$ REVENUE
EXPENDITURESFLOW TO
ACQUIRE RESOURCES
GOVERNMENTGOVERNMENT
THE CIRCULAR FLOW REVISITEDTHE CIRCULAR FLOW REVISITED
BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS
RESOURCERESOURCEMARKETMARKET
RESOURCESRESOURCES INPUTSINPUTS
$ COSTS$ COSTS $ INCOMES$ INCOMES
PRODUCTPRODUCTMARKETMARKET
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICES
$ CONSUMPTION$ CONSUMPTION$ REVENUE$ REVENUE
GOVERNMENTGOVERNMENT
RESOURCESFLOW TO
GOVERNMENT
THE CIRCULAR FLOW REVISITEDTHE CIRCULAR FLOW REVISITED
BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS
RESOURCERESOURCEMARKETMARKET
RESOURCESRESOURCES INPUTSINPUTS
$ COSTS$ COSTS $ INCOMES$ INCOMES
PRODUCTPRODUCTMARKETMARKET
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICES
$ CONSUMPTION$ CONSUMPTION$ REVENUE$ REVENUE
GOVERNMENTGOVERNMENT
GOVERNMENTEXPENDITURES
FLOW TOPRODUCT MARKET
THE CIRCULAR FLOW REVISITEDTHE CIRCULAR FLOW REVISITED
BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS
RESOURCERESOURCEMARKETMARKET
RESOURCESRESOURCES INPUTSINPUTS
$ COSTS$ COSTS $ INCOMES$ INCOMES
PRODUCTPRODUCTMARKETMARKET
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICES
$ CONSUMPTION$ CONSUMPTION$ REVENUE$ REVENUE
GOVERNMENTGOVERNMENT
GOODS & SERVICESFLOW TO
GOVERNMENT
THE CIRCULAR FLOW REVISITEDTHE CIRCULAR FLOW REVISITED
BUSINESSESBUSINESSESsubsidysubsidy
HOUSEHOLDSHOUSEHOLDSFICAFICA
RESOURCERESOURCEMARKETMARKET
RESOURCESRESOURCES INPUTSINPUTS
$ COSTS$ COSTS $ INCOMES$ INCOMES
PRODUCTPRODUCTMARKETMARKET
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICES
$ CONSUMPTION$ CONSUMPTION$ REVENUE$ REVENUE
Tax PaymentsTax PaymentsGOVERNMENTGOVERNMENT
The Federal Budget!The Federal Budget!
Total Revenues (Taxes) – Total Costs (Expenditures)
+ Budget Surplus0 Balanced Budget- Budget Deficit
2004 Deficit:$480 Billion
Sum of all yearly deficits is the National Debt of: 7.4 Trillion Dollars!
Projected 2005333 Billion
GOVERNMENT GROWTHGOVERNMENT GROWTHPurchases & Transfers...
•Government Purchases
GOVERNMENT GROWTHGOVERNMENT GROWTHPurchases & Transfers...
•Transfer Payments
•Government Purchases
The Federal BudgetThe Federal Budget
Federal Expenditures
How Does Government Spend Its Money????
The Federal BudgetThe Federal Budget
Federal ExpendituresIncome Security 38%
The Federal BudgetThe Federal Budget
Federal ExpendituresIncome Security 38%Health 20%
The Federal BudgetThe Federal Budget
Federal ExpendituresIncome Security 38%Health 20%National Defense 18%
The Federal BudgetThe Federal Budget
Federal ExpendituresIncome Security 38%Health 20%National Defense 18%Interest on Public Debt 15%
The Federal BudgetThe Federal Budget
Federal ExpendituresIncome Security 38%Health 20%National Defense 18%Interest on Public Debt 15%All Other 9%
The Federal Budget Funded on a Percentage Basis of Income Tax Dollars
26.2% goes to the military22.6% goes to pay the interest on the national debt19.0% goes to health care 5.5% goes to income security 3.4% goes to benefits for veterans 3.2% goes to education 2.5% goes to nutrition spending 1.6% goes to housing 1.6% goes to the environment 0.4% goes to job training 14.0% goes to all other expenses
Remember…..FICA funds SocialSecurity Payments!
Of $10,000.00 Paid in Federal Income Tax: $2,620.00 goes to the military$2,260.00 goes to pay the interest on
the national debt$1,900.00 goes to health care $550.00 goes to income security $340.00 goes to benefits for veterans $320.00 goes to education $250.00 goes to nutrition spending $160.00 goes to housing $160.00 goes to the environment $40.00 goes to job training$1,400.00 goes to all other expenses
ExcludesFICA @7.5%
The Federal BudgetThe Federal BudgetFederal Receipts/Revenues
How Does Government Raise Its Money????
The Federal BudgetThe Federal BudgetFederal Receipts/Revenues
Personal Income Tax 45%
Personal Income Tax 45%
The Federal Budget, 1996The Federal Budget, 1996
Federal ReceiptsNotes:Notes:MARGINAL
TAXRATES
MARGINALTAX
RATES
Personal Income Tax 45%
The Federal Budget, 1996The Federal Budget, 1996
Federal ReceiptsNotes:Notes:Notes:Notes:MARGINALMARGINAL
TAXTAXRATESRATES
MARGINALMARGINALTAXTAX
RATESRATES
AVERAGETAX
RATES
AVERAGETAX
RATES
The Federal BudgetThe Federal BudgetFederal Receipts/Revenues
Personal Income Tax 45%Payroll Taxes 35%
The Federal BudgetThe Federal Budget
Personal Income Tax 45%Payroll Taxes 35%Corporate Income Tax 12%
Federal Receipts/Revenues
The Federal BudgetThe Federal Budget
Personal Income Tax 45%Payroll Taxes 35%Corporate Income Tax 12%Excise or Sales Taxes 4%
Federal Receipts/Revenues
The Federal BudgetThe Federal Budget
Personal Income Tax 45%Payroll Taxes (FICA) 35%Corporate Income Tax 12%Excise or Sales Taxes 4%All Other 4%
Federal Receipts/Revenues
STATE & LOCAL FINANCESTATE & LOCAL FINANCEState Expenditures
Public Welfare 32%
1994 DATA
Public Welfare 32%Education 21%
1994 DATA
State ExpendituresSTATE & LOCAL FINANCESTATE & LOCAL FINANCE
Public Welfare 32%Education 21%Health & Hospitals 10%
1994 DATA
State ExpendituresSTATE & LOCAL FINANCESTATE & LOCAL FINANCE
Public Welfare 32%Education 21%Health & Hospitals 10%Highways 10%
1994 DATA
State ExpendituresSTATE & LOCAL FINANCESTATE & LOCAL FINANCE
Public Welfare 32%Education 21%Health & Hospitals 10%Highways 10%Public Safety 8%
1994 DATA
State ExpendituresSTATE & LOCAL FINANCESTATE & LOCAL FINANCE
Public Welfare 32%Education 21%Health & Hospitals 10%Highways 10%Public Safety 8%All Other 21%1994 DATA
State ExpendituresSTATE & LOCAL FINANCESTATE & LOCAL FINANCE
State ReceiptsSales Taxes 49%
1994 DATA
STATE & LOCAL FINANCESTATE & LOCAL FINANCE
State ReceiptsSales Taxes 49%Income Taxes
(Personal & Corporate) 32%
1994 DATA
STATE & LOCAL FINANCESTATE & LOCAL FINANCE
State ReceiptsSales Taxes 49%Income Taxes
(Personal & Corporate) 32%Corporate Income Tax 7%
1994 DATA
STATE & LOCAL FINANCESTATE & LOCAL FINANCE
State ReceiptsSales Taxes 49%Income Taxes
(Personal & Corporate) 32%Corporate Income Tax 7%Property Taxes 2%
1994 DATA
STATE & LOCAL FINANCESTATE & LOCAL FINANCE
State ReceiptsSales Taxes 49%Income Taxes
(Personal & Corporate) 32%Corporate Income Tax 7%Property Taxes 2%Death & Gift Taxes 1%
1994 DATA
STATE & LOCAL FINANCESTATE & LOCAL FINANCE
State ReceiptsSales Taxes 49%Income Taxes
(Personal & Corporate) 32%Corporate Income Tax 7%Property Taxes 2%Death & Gift Taxes 1%Licenses Other Taxes 9%
1994 DATA
STATE & LOCAL FINANCESTATE & LOCAL FINANCE
Local Expenditures
1994 DATA
Education 42%
STATE & LOCAL FINANCESTATE & LOCAL FINANCE
Local Expenditures
1994 DATA
Education 42%Welfare, Health, & Hospitals 14%
STATE & LOCAL FINANCESTATE & LOCAL FINANCE
Local Expenditures
1994 DATA
Education 42%Welfare, Health, & Hospitals 14%Housing & Sewerage 8%
STATE & LOCAL FINANCESTATE & LOCAL FINANCE
Local Expenditures
1994 DATA
Education 42%Welfare, Health, & Hospitals 14%Housing & Sewerage 8%Public Safety 10%
STATE & LOCAL FINANCESTATE & LOCAL FINANCE
Local Expenditures
1994 DATA
Education 42%Welfare, Health, & Hospitals 14%Housing & Sewerage 8%Public Safety 10%Highways 5%
STATE & LOCAL FINANCESTATE & LOCAL FINANCE
Local ExpendituresEducation 42%Welfare, Health, & Hospitals 14%Housing & Sewerage 8%Public Safety 10%Highways 5%All Others 21%
1994 DATA
STATE & LOCAL FINANCESTATE & LOCAL FINANCE
Local ReceiptsProperty Taxes 75%
1994 DATA
STATE & LOCAL FINANCESTATE & LOCAL FINANCE
Local Receipts
1994 DATA
Property Taxes 75%Sales & Excises 15%
STATE & LOCAL FINANCESTATE & LOCAL FINANCE
Local Receipts
1994 DATA
Property Taxes 75%Sales & Excises 15%Personal & Corporate
Income Taxes 6%
STATE & LOCAL FINANCESTATE & LOCAL FINANCE
Local ReceiptsProperty Taxes 75%Sales & Excises 15%Personal & Corporate
Income Taxes 6%All Other 4%
1994 DATA
STATE & LOCAL FINANCESTATE & LOCAL FINANCE
Property Taxes 75%Sales & Excises 15%Personal & Corporate
Income Taxes 6%All Other 4%
Local Receipts
LOTTERIESLOTTERIES
1994 DATA
STATE & LOCAL FINANCESTATE & LOCAL FINANCE
Property Taxes 75%Sales & Excises 15%Personal & Corporate
Income Taxes 6%All Other 4%
Local Receipts
Fiscal FederalismFiscal Federalism
LOTTERIESLOTTERIES
1994 DATA
STATE & LOCAL FINANCESTATE & LOCAL FINANCE
Property Taxes 75%Sales & Excises 15%Personal & Corporate
Income Taxes 6%All Other 4%
LOTTERIESLOTTERIES
Local Receipts
1994 DATA
STATE & LOCAL FINANCESTATE & LOCAL FINANCE
Fiscal FederalismFiscal Federalism
ANY QUESTIONS?
functional distribution of functional distribution of incomeincome
personal distribution of personal distribution of incomeincome
durable gooddurable good
non-durable goodnon-durable good
servicesservices
plantplant
firmfirm
vertical combinationvertical combination
horizontal combinationhorizontal combination
conglomerate conglomerate combinationcombination
industryindustry
sole proprietorshipsole proprietorship
partnershippartnership
corporationscorporations
stocksstocks
bondsbonds
limited liabilitylimited liability
double taxationdouble taxation
principal-agent problemprincipal-agent problemCopyright McGraw-Hill, Inc. 1999
Page 2
monopolymonopoly
spillover costsspillover costs
spillover benefitsspillover benefits
exclusion principleexclusion principle
public goodspublic goods
free-rider problemfree-rider problem
quasipublic goodsquasipublic goods
government government purchasespurchases
transfer paymentstransfer payments
personal income taxpersonal income tax
marginal tax ratemarginal tax rate
average tax rateaverage tax rate
payroll taxespayroll taxes
corporate income corporate income taxtax
sales & excise taxessales & excise taxes
property taxproperty tax
fiscal federalismfiscal federalism
lotterieslotteriesCopyright McGraw-Hill, Inc. 1999
Page 1
Next:Next:
The United StatesThe United Statesin thein the
Global EconomyGlobal Economy
Chapter 6Chapter 6
Top Related