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Up Coming Stuff. GHS English Dept. GHS English Dept. 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!. Pure Capitalism to Mixed Economy.

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slide1

Up Coming Stuff

GHS

English

Dept.

GHS

English

Dept.

  • 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!
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.
slide3

THE CIRCULAR FLOW REVISITED

$ COSTS

$ INCOMES

RESOURCE

MARKET

RESOURCES

INPUTS

Tax Payments

GOVERNMENT

BUSINESSES

subsidy

HOUSEHOLDS

FICA

GOODS &

SERVICES

GOODS &

SERVICES

PRODUCT

MARKET

$ REVENUE

$ CONSUMPTION

slide4

Key Ideas Chap 4

private property

freedom of enterprise

freedom of choice

self-interest

competition

roundabout production

specialization

division of labor

medium of exchange

barter

money

Five Fundamental Questions

economic costs

normal profit

economic profit

expanding industry

declining industry

consumer sovereignty

dollar votes

derived demand

guiding function of prices

“invisible hand”

the mixed economy

CHAPTER FIVE

The Mixed Economy:

Private and Public Sectors

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

slide7

HOUSEHOLDS AS INCOME RECEIVERS

FUNCTIONAL DISTRIBUTION

WAGES RENT

INTEREST PROFIT/LOSS

slide8

HOUSEHOLDS AS INCOME RECEIVERS

FUNCTIONAL DISTRIBUTION

WAGES RENT

INTEREST PROFIT/LOSS

PERSONAL DISTRIBUTION

SHOWS ALLOCATION OF

INCOME AMONG INDIVIDUAL HOUSEHOLDS

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.
slide10

HOUSEHOLDS AS INCOME RECEIVERS

FUNCTIONAL DISTRIBUTION

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%

slide11

HOUSEHOLDS AS INCOME RECEIVERS

FUNCTIONAL DISTRIBUTION

WAGES $7,103 Billion 70%

PROFITS $2,349 Billion 21%

INTEREST $750 Billion 7%

RENT $200 Billion 2%

$10,402 Billion

WEASEL PUSS IS RED!

2004 GDP

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.
slide13

HOUSEHOLDS AS INCOME RECEIVERS

4.2%

Lowest 20% Income Group

10.0%

Second 20% Income Group

Middle 20% Income Group

14.8%

Fourth 20% Income Group

22.1%

49.8%

Highest 20% Income Group

PERSONAL DISTRIBUTION

Personal Income Received (Percent)

2004 US Census Bureau

slide15

The Lorenz Curve

100

80

60

40

20

Perfect Equality

Percent of Income

Complete

Inequality

0

20 40 60 80 100

Percent of Families

Copyright McGraw-Hill, Inc. 1999

slide16

The Lorenz Curve

100

80

60

40

20

Lorenz Curve

(actual distribution)

Perfect Equality

Percent of Income

Complete

Inequality

0

20 40 60 80 100

Percent of Families

Copyright McGraw-Hill, Inc. 1999

slide17

The Lorenz Curve

100

80

60

40

20

Lorenz Curve

(actual distribution)

Perfect Equality

Percent of Income

Area between

the lines shows

the degree of

income inequality

Complete

Inequality

0

20 40 60 80 100

Percent of Families

Copyright McGraw-Hill, Inc. 1999

slide18

The Lorenz Curve

Two Adjustments:

Taxes

Cash Transfer Payments

100

80

60

40

20

Lorenz Curve

(actual distribution)

Perfect Equality

Percent of Income

Area between

the lines shows

the degree of

income inequality

Complete

Inequality

0

20 40 60 80 100

Percent of Families

Copyright McGraw-Hill, Inc. 1999

slide19

GLOBAL PERSPECTIVE

Percentage of total income earned by top fifth of income receivers

30 40 50 60 70

Brazil

South Africa

Guatemala

Mexico

United Kingdom

United States

Japan

Norway

slide20

GLOBAL PERSPECTIVE

Percentage of total income earned by top 20% of income receivers

30 40 50 60 70

Brazil

South Africa

Guatemala

Mexico

United States

United Kingdom

Japan

Norway

Executive Pay in some

US. Industries is

300 Times Higher

than an Average

Worker’s Salary.

slide21

Causes of Growing Inequality

1 - Demand for Highly Skilled Workers

2 - Demographic Changes

3 - International Trade & Pressures

- Immigration + Illegal Immigration

- Union Decline

The Lorenz Curve AP Test 2004

graphically...

wage data 138 000 000 us 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 $100,000

US News and World Report

wage data median income for a person

US News and World Report

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
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 mothers
Working 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 Kerry

Bush

working poor
Working 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 poor
39,000,000 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 jobs
28,000,000 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 workers

Help is

On 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 families
Median Incomes US Families
  • White: $47,800
  • Hispanic: $33,000
  • African American: $29,600

Milwaukee Journal

median family net worths
Median 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

slide33

The Lorenz Curve

100

80

60

40

20

Lorenz Curve

(actual distribution)

Perfect Equality

Percent of Income

Area between

the lines shows

the degree of

income inequality

Complete

Inequality

0

20 40 60 80 100

Percent of Families

Copyright McGraw-Hill, Inc. 1999

slide34

CAUSES OF INCOME INEQUALITY

1 - Ability Differences

2 - Education and Training

3 - Discrimination

4 - Tastes and Risks

5 - Unequal Distribution of Wealth

6 - Market Power

7 - Luck, Connections, and Misfortune

EQUALITY-EFFICIENCY TRADEOFF

slide36

Labor Market TheoryThe Real World Will Get You!

  • Human Capital
    • Education = Income
  • Sorting Mechanism
    • Hoops
  • Radical View
    • Rich Dad Poor Dad

1 out of 8

US Workers

Has worked or works for?

  • Dual Labor Market
    • Good Job v Bad Job Market
slide37

1 out of 8

US Workers

Has worked or works for?

slide38

New US Workers Hired

by Mc Donalds in 2003-4

1,000,000: #1 in USA

family income usa
Family 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 distribution 2001
Family Income Distribution2001
  • $355,000
    • Top 1%
  • $130,600
    • Top 5%
  • $93,800
    • Top 10%
  • 60,800
    • Top 25%
  • 33,400
    • Top 50%
slide41

Poverty in America

How many poor people are there???

38,500,000+: Men, Women, and Children(13.1%)

Describe the typical poor person in the US!

  • The typical poor person in the US:
  • Single Mom with Kids!
  • White unemployed female under forty
  • Found everywhere including Ozaukee County (2200+)!
slide42

What is the Poverty Line???

$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 its

Residents in Poverty ranked third lowest in the US.

wisconsin poverty
Wisconsin 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 data
Poverty 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 poverty families living below the poverty line
State Rankings on PovertyFamilies Living Below the Poverty Line
  • Mississippi 16.0%
  • Louisiana 15.8%
  • New Mexico 14.5%
  • West Virginia 13.9%
  • 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 welfare
State Rankings on Families Receiving Welfare
  • Alaska 8.7%
  • Hawaii 7.2%
  • Oklahoma 5.1%
  • California 4.9%
  • 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 poor

HELP

WANTED

The 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
the working poor48
The 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

Annual Salary at $8.89/hr = $17780

Data: National Coalition for the Homeless

functional distribution of income
Functional Distribution of Income

How is the 10.4 Trillion

Dollars earned in the

Economy?

slide50

HOUSEHOLDS AS INCOME RECEIVERS

4.2%

Lowest 20% Income Group

10.0%

Second 20% Income Group

Middle 20% Income Group

14.8%

Fourth 20% Income Group

22.1%

49.8%

Highest 20% Income Group

PERSONAL DISTRIBUTION

Personal Income Received (Percent)

How is that income allocated??? What is in societies best interest???

c household income disposal spending saving taxes gdp

Another way to measure!!!

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

slide52

HOUSEHOLDS AS SPENDERS

1997 DATA

WHERE DOES OUR INCOME GO?

6%

to personal savings

Milwaukee Journal

slide53

HOUSEHOLDS AS SPENDERS

1997 DATA

WHERE DOES OUR INCOME GO?

6%

to personal taxes excluding

Social Security

Affective tax rate for Americans:

14% + 7.5% = 21.5%

Taxes as % of GDP = 29.9%

14%

taxes 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%

Taxes as a Percent of GDP

Source OECD

slide55

HOUSEHOLDS AS SPENDERS

1997 DATA

WHERE DOES OUR INCOME GO?

6%

to personal consumption

80%

14%

T

A

X

E

S

S

A

V

I

N

G

S

Consumer

Spending about

80% of income

slide56

HOUSEHOLDS AS SPENDERS

NOTES:

Spending Classifications

1- Durables 12%

1997 DATA

WHERE DOES OUR INCOME GO?

6%

to personal consumption

83%

14%

slide57

HOUSEHOLDS AS SPENDERS

NOTES:

Spending Classifications

1- Durables

2- Nondurables 30%

1997 DATA

WHERE DOES OUR INCOME GO?

6%

to personal consumption

83%

14%

slide58

HOUSEHOLDS AS SPENDERS

NOTES:

Spending Classifications

1-Durables 12%

2-Nondurables 30%

3-Services 58%

1997 DATA

WHERE DOES OUR INCOME GO?

6%

to personal consumption

83%

14%

ii business organizations plant firm industry

II. Business OrganizationsPlant – Firm - Industry

Proprietorships

Partnerships

Corporations

Hybrids

Bush

slide61

THE BUSINESS POPULATION

One Location

A. Terminology....

1- PLANT

slide62

THE BUSINESS POPULATION

One business

organization - May

have one or

more plants

A. Terminology....

1- PLANT

2- FIRM

slide63

THE BUSINESS POPULATION

One business

organization - May

have one or

more plants

NOTES:

Terminology....

Vertical

Combinations

1- PLANT

2- FIRM

slide64

THE BUSINESS POPULATION

One business

organization - May

have one or

more plants

NOTES:

Terminology....

Vertical

Combinations

1- PLANT

2- FIRM

Horizontal

Combinations

slide65

THE BUSINESS POPULATION

One business

organization - May

have one or

more plants

NOTES:

Terminology....

Vertical

Combinations

1- PLANT

2- FIRM

Horizontal

Combinations

Conglomerates

slide66

THE BUSINESS POPULATION

A. Terminology....

1- PLANT

2- FIRM

3- INDUSTRY

b us business organizations
B. US Business Organizations

1. Type of Business Percent of Market Total Number

  • Proprietorships 75% 17,000,000
  • Partnerships 7% 1,500,000
  • Corporations 18% 4,000,000
  • Hybrids/Corps 500,000

23,000,000

(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 us
Small 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 organizations69
B. US Business Organizations

2. Type of Business Percent of Market Sales

  • Proprietorships 6%
  • Partnerships 5%
  • Corporations 89%
top 10 us corporations by revenues
Top 10 US Corporations by Revenues
  • Wal-Mart $217,799,000,000
  • Exxon Mobile $187,510,000,000
  • General Motors $177,260,000,000
  • Ford Motor $162,412,000,000
  • General Electric $125,679,000,000
  • Citigroup $112,022,000,000
  • Chevron Texaco $106,245,000,000
  • Philip Morris $89,942,000,000
  • IBM $85,866,000,000
  • Microsoft $83,654,000,000
top 10 international corporations by revenues
Top 10 International Corporations by Revenues
  • Wal-Mart $217,799,000,000
  • Exxon Mobile $187,510,000,000
  • Shell $177,281,000,000
  • General Motors $177,260,000,000
  • Ford Motor $162,412,000,000
  • Daimler Chrysler $152,446,000,000
  • BP $148,062,000,000
  • General Electric $125,679,000,000
  • Citigroup $112,022,000,000
  • Mitsubishi $110,787,000,000
slide74

C. LEGAL FORMS OF BUSINESS ENTERPRISES

1. Sole Proprietorship

Advantages...

  • Easy to Organize
  • Proprietor is Own “Boss”
slide75

C. LEGAL FORMS OF BUSINESS ENTERPRISES

1. Sole Proprietorship

Advantages...

  • Easy to Organize
  • Proprietor is Own “Boss”

Disadvantages...

  • Limited Resources
  • No Help With Decision Making
  • Unlimited Liability
slide78

C. LEGAL FORMS OF BUSINESS ENTERPRISES

2. Partnership

Advantages...

  • Also Easy to Organize
  • More Management Skills
  • Greater Resources Available
slide79

C. LEGAL FORMS OF BUSINESS ENTERPRISES

2. Partnership

Advantages...

  • Also Easy to Organize
  • More Management Skills
  • Greater Resources Available

Disadvantages...

  • Difficulty Making Decisions
  • Possibly Limited Financial Resources
  • Partnership Continuity Problems
  • Unlimited Liability
slide82

C. LEGAL FORMS OF BUSINESS ENTERPRISES

3. Corporation

Advantages...

  • Most Effective Raising Capital - Stocks, Bonds
  • Limited Liability******
  • Easy Expansion of Size & Scope
  • Infinite Life
slide83

LEGAL FORMS OF BUSINESS ENTERPRISES

Corporation

Advantages...

  • Most Effective Raising Capital - Stocks, Bonds
  • Limited Liability
  • Easy Expansion of Size & Scope
  • Infinite Life

Disadvantages...

  • Corporate Regulations & Legal Expenses
  • Some Unscrupulous Practices
  • Double Taxation
  • Separation of Ownership & Control
slide84

LEGAL FORMS OF BUSINESS ENTERPRISES

NOTES:

Corporation

Advantages....

Principal-Agent Problem

  • Most Effective Raising Capital - Stocks, Bonds
  • Limited Liability
  • Easy Expansion of Size & Scope
  • Infinite Life

Disadvantages

  • Corporate Regulations & Legal Expenses
  • Some Unscrupulous Practices
  • Double Taxation
  • Separation of Ownership & Control
principle agent problem
Principle 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!

B

U

S

H

Ken Lay – CFO Enron

10 highest paid ceo s in the us december 2001
10 Highest Paid CEO’s in the US December 2001
  • Michael Dell Dell Computers $235,192,000
  • Sanford Weill Citigroup $216,183,000
  • Gerald Levin AOL Time Warner $164,388,000
  • John Chambers Cisco Systems $157,305,000
  • Henry Silverman Cendant $137,447,000
  • Louis Gerstner Jr. IBM $103,410,000
  • Joseph Nacchio Qwest Com. $97,387,000
  • Walter Sanders Advanced Micro $92,246,000
  • Steven Jobs Apple Computers $90,000,000
  • Jeffery Skilling Enron $84,449,000
corporations
Corporations
  • 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
slide88

LEGAL FORMS OF BUSINESS ENTERPRISES

Corporation

Advantages...

  • Most Effective Raising Capital - Stocks, Bonds
  • Limited Liability
  • Easy Expansion of Size & Scope
  • Infinite Life

Disadvantages...

  • Corporate Regulations & Legal Expenses
  • Some Unscrupulous Practices
  • Double Taxation
  • Separation of Ownership & Control
slide89

LEGAL FORMS OF BUSINESS ENTERPRISES

NOTES:

Corporation

Advantages....

Limited-

Liability

Companies

(LLCs)

  • Most Effective Raising Capital - Stocks, Bonds
  • Limited Liability
  • Easy Expansion of Size & Scope
  • Infinite Life

Disadvantages

  • Corporate Regulations & Legal Expenses
  • Some Unscrupulous Practices
  • Double Taxation
  • Separation of Ownership & Control
4 hybrids
4. 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
slide92

ECONOMIC FUNCTIONS OF GOVERNMENT

A. LEGAL

AND

SOCIAL

FRAMEWORK

1. Seeks to strengthen the market system.

slide93

ECONOMIC FUNCTIONS OF GOVERNMENT

“Microsoft will

Rule the World!’

Bill Gates 2002

B. MAINTAINING

COMPETITION

slide94

ECONOMIC FUNCTIONS OF GOVERNMENT

Notes:

1.MONOPOLY- illegal

MAINTAINING

COMPETITION

slide95

ECONOMIC FUNCTIONS OF GOVERNMENT

Notes:

1.MONOPOLY- illegal

MAINTAINING

COMPETITION

2. NATURAL

MONOPOLIES

slide96

ECONOMIC FUNCTIONS OF GOVERNMENT

Notes:

1. MONOPOLY- illegal

MAINTAINING

COMPETITION

2. NATURAL

MONOPOLIES

MARKET BIASES &

SHORTCOMINGS CAN

COMPEL ACTION BY

GOVERNMENT

slide97

ECONOMIC FUNCTIONS OF GOVERNMENT

C. REDISTRIBUTION

OF INCOME....

1. Transfer Payments

slide98

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

Excludes

FICA @

7.5%

ten largest militaries in the world
Ten Largest Militaries in the World
  • China 2,340,000
  • US 1,365,800
  • India 1,303,000
  • North Korea 1,082,000
  • Russia 1,004,000
  • South Korea 683,000
  • Pakistan 612,000
  • Turkey 609,000
  • Iran 513,000
  • Vietnam 484,000

Total US Military Spending:

$352,000,000,000

top military spenders
Top Military Spenders
  • USA $352,000,000,000
  • Japan $46,700,000,000
  • Britain $36,000,000,000
  • France $33,600,000,000
  • China $31,100,000,000
  • Germany $27,700,000,000
  • Saudi Arabia $21,600,000,000
  • Italy $21,100,000,000
  • Iran $17,500,000,000
  • South Korea $13,500,000,000
  • India $12,900,000,000
  • 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
  • Japan 81.5 yrs.
  • Sweden 80.1 yrs.
  • Iceland 79.4 yrs.
  • Australia 79.2 yrs.
  • Israel 79.2 yrs.
  • Martinique 79.1 yrs.
  • Switzerland 79.1 yrs.
  • Canada 79.0 yrs.
  • France 79.0 yrs.
  • Norway 78.9 yrs.

USA 77.5

Worldwide 66.0

slide102

ECONOMIC FUNCTIONS OF GOVERNMENT

C. REDISTRIBUTION

OF INCOME....

1. Transfer Payments

2. Personal Income Tax

taxes in the usa
Taxes in the USA
  • 3. Theories of Taxation:
    • Ability to Pay
    • Benefits Received
  • 4. Types of Taxes:
    • Progressive
    • Proportional
    • Regressive
slide104

Apportioning the Tax Burden

Benefits-Received Principle

slide105

Apportioning the Tax Burden

Benefits-Received Principle

Ability-to-Pay Principle

slide106

Apportioning the Tax Burden

Benefits-Received Principle

Ability-to-Pay Principle

  • Progressive Tax & Marginal Tax Rates!
progressive tax
Progressive 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%

$8,644

What is your average tax??

17%

slide108

Apportioning the Tax Burden

Benefits-Received Principle

Ability-to-Pay Principle

  • Progressive Tax
  • Regressive Tax
slide109

Apportioning the Tax Burden

Benefits-Received Principle

Ability-to-Pay Principle

  • Progressive Tax
  • Regressive Tax
  • Proportional Tax
proportional and regressive
Proportional 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 2

35,000 75,000

5,000 Food expenses 5,000

6% tax rate – flat tax 6%

$300 tax paid $300

.8% of income .4%

slide111

Tax Applications:

Identify whether progressive, regressive, or proportional

  • Personal Income Tax
  • Sales Tax
  • Corporate Income Tax
  • Payroll Taxes
  • Property Taxes
taxes as a percent of gdp112
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%

Taxes as a Percent of GDP

Source OECD

slide113

ECONOMIC FUNCTIONS OF GOVERNMENT

C. REDISTRIBUTION

OF INCOME....

  • 1. Transfer Payments
  • FICA to People
  • 2-4. Taxes
  • Market Intervention
  • Minimum wages and subsidies.
slide114

ECONOMIC FUNCTIONS OF GOVERNMENT

D. REALLOCATION OF RESOURCES....

  • The government will intervene
  • when it feels a market
  • failure has taken place.
  • The market produces the
  • wrong type or amount
  • of goods.
  • The market fails to
  • allocate any resources
  • for the production of a good.
slide115

ECONOMIC FUNCTIONS OF GOVERNMENT

D. REALLOCATION OF RESOURCES....

4. Spillovers or Externalities

- Spillover Costs

When a producer avoids some

of the costs of producing

a product.

Example – pollution

A larger output is produced

than is socially acceptable.

slide116

ECONOMIC FUNCTIONS OF GOVERNMENT

REALLOCATION OF RESOURCES....

Spillovers or Externalities

Spillover Costs

- Correcting For Spillover Costs

  • Legislation
slide117

ECONOMIC FUNCTIONS OF GOVERNMENT

REALLOCATION OF RESOURCES....

Spillovers or Externalities

Spillover Costs

Correcting For Spillover Costs

  • Legislation
  • Specific Taxes
slide118

Correcting for Spillover Costs

P

s + Tax

Spillover

costs

S

New market price

paid by consumers

Price too Low!

Amount of

Tax needed

to correct

Negative

externality!

D

Q

0

Qd = Qs

Overallocation

slide119

Correcting for Spillover Costs

P

S+ Tax

Spillover

costs

S

Tax

Consumer pays

Producer Receives

TAX

To Fix

Spillover cost

D

Q

0

Overallocation Corrected

slide120

ECONOMIC FUNCTIONS OF GOVERNMENT

REALLOCATION OF RESOURCES....

Spillovers or Externalities

Spillover Benefits

The Underallocation of Resources

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 did

receive all of the benefits.

Example - Education

slide121

ECONOMIC FUNCTIONS OF GOVERNMENT

REALLOCATION OF RESOURCES....

Spillovers or Externalities

Spillover Benefits

Correcting for Spillover Benefits....

  • Increase Demand
slide122

Correcting for Spillover Benefits

P

S

Spillover

Benefits

Initially

priced too

low!!!

D + Subsidy

D

Underallocation

Correction

Q

0

Federal Grants for Education

slide123

Correcting for Spillover Benefits

P

Amount of the subsidy needed to correct externality!

S

Subsidy

to consumer

Price is

Increased!

D + Subsidy

D

Underallocation

Corrected

Q

0

slide124

ECONOMIC FUNCTIONS OF GOVERNMENT

REALLOCATION OF RESOURCES....

Spillovers or Externalities

Spillover Benefits

Correcting for Spillover Benefits....

  • Increase Demand
  • Increase Supply
slide125

Correcting for Spillover Benefits

P

S

S + Subsidy

Subsidy

to producers

Price for

consumers

falls

Subsidy

to business

D

Underallocation

Corrected

Q

0

Madison costs less than Marquette

slide126

ECONOMIC FUNCTIONS OF GOVERNMENT

REALLOCATION OF RESOURCES....

Spillovers or Externalities

Spillover Benefits

Correcting for Spillover Benefits....

  • Increase Demand
  • Increase Supply
  • Government Provision
5 ownership rights
5. 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 goods
Pure Private Goods
  • No Shared Consumption!
  • Exclusion permitted!
  • Hands off my burger!!
  • Depletability
toll goods
Toll 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 goods
Pure 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
slide131

Private Goods:

Divisibility &

Depletability

Public Goods:

Indivisible

slide132

Public or Social Goods Are...

Indivisible

Subject to the free-rider problem

May Provide Large Spillover

Benefits

Quasi-public Goods

Can be produced by market or government but have large

spillover benefits.

common pool goods
Common 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!
slide134

Public Goods & Services

Note:

The Exclusion Principle

Does Not Apply

slide135

Public Goods & Services

Note:

The Exclusion Principle

Does Not Apply

Some Goods & Services

Would Not Be Produced

By The Market System

Public or Social Goods Are...

slide136

The Free Rider Problem:

Visitors to Ozaukee County may use this public good

even if they have never paid at tax in this county.

slide137

Public or Social Goods Are...

Indivisible

Subject to the free-rider problem

May Provide Large Spillover

Benefits

e stabilization of the economy

E. Stabilization of the Economy

1. Should the Government take a Role?

2. Action is taken to deal with issues of unemployment and inflation.

slide139

ECONOMIC FUNCTIONS OF GOVERNMENT

In A Recession

STABILIZATION....when

GDP: Growing to Slowly

Or High Unemployment

  • Cut Taxes
  • Raise Government
  • Spending
  • Run a Deficit
slide140

ECONOMIC FUNCTIONS OF GOVERNMENT

In A Period of Inflation

STABILIZATION....

GDP: Growing too Fast

Prices Rising out of Control

  • Raise Taxes
  • Cut Government
  • Spending
  • Run a Surplus
slide141

THE CIRCULAR FLOW REVISITED

$ COSTS

$ INCOMES

RESOURCE

MARKET

RESOURCES

INPUTS

BUSINESSES

HOUSEHOLDS

GOVERNMENT

GOODS &

SERVICES

GOODS &

SERVICES

PRODUCT

MARKET

$ REVENUE

$ CONSUMPTION

slide142

THE CIRCULAR FLOW REVISITED

NET TAXES FLOW

TO GOVERNMENT

FROM BUSINESSES

$ COSTS

$ INCOMES

RESOURCE

MARKET

RESOURCES

INPUTS

BUSINESSES

HOUSEHOLDS

GOVERNMENT

GOODS &

SERVICES

GOODS &

SERVICES

PRODUCT

MARKET

$ REVENUE

$ CONSUMPTION

slide143

THE CIRCULAR FLOW REVISITED

GOVERNMENT

GOODS & SERVICES

FLOW TO BUSINESSES

$ COSTS

$ INCOMES

RESOURCE

MARKET

RESOURCES

INPUTS

BUSINESSES

HOUSEHOLDS

GOVERNMENT

GOODS &

SERVICES

GOODS &

SERVICES

PRODUCT

MARKET

$ REVENUE

$ CONSUMPTION

slide144

THE CIRCULAR FLOW REVISITED

NET TAXES FLOW

TO GOVERNMENT

FROM HOUSEHOLDS

$ COSTS

$ INCOMES

RESOURCE

MARKET

RESOURCES

INPUTS

BUSINESSES

HOUSEHOLDS

GOVERNMENT

GOODS &

SERVICES

GOODS &

SERVICES

PRODUCT

MARKET

$ REVENUE

$ CONSUMPTION

slide145

THE CIRCULAR FLOW REVISITED

GOODS & SERVICES

FLOW TO HOUSEHOLDS

FROM GOVERNMENT

$ COSTS

$ INCOMES

RESOURCE

MARKET

RESOURCES

INPUTS

BUSINESSES

HOUSEHOLDS

GOVERNMENT

GOODS &

SERVICES

GOODS &

SERVICES

PRODUCT

MARKET

$ REVENUE

$ CONSUMPTION

slide146

THE CIRCULAR FLOW REVISITED

EXPENDITURES

FLOW TO

ACQUIRE RESOURCES

$ COSTS

$ INCOMES

RESOURCE

MARKET

RESOURCES

INPUTS

BUSINESSES

HOUSEHOLDS

GOVERNMENT

GOODS &

SERVICES

GOODS &

SERVICES

PRODUCT

MARKET

$ REVENUE

$ CONSUMPTION

slide147

THE CIRCULAR FLOW REVISITED

RESOURCES

FLOW TO

GOVERNMENT

$ COSTS

$ INCOMES

RESOURCE

MARKET

RESOURCES

INPUTS

BUSINESSES

HOUSEHOLDS

GOVERNMENT

GOODS &

SERVICES

GOODS &

SERVICES

PRODUCT

MARKET

$ REVENUE

$ CONSUMPTION

slide148

THE CIRCULAR FLOW REVISITED

GOVERNMENT

EXPENDITURES

FLOW TO

PRODUCT MARKET

$ COSTS

$ INCOMES

RESOURCE

MARKET

RESOURCES

INPUTS

BUSINESSES

HOUSEHOLDS

GOVERNMENT

GOODS &

SERVICES

GOODS &

SERVICES

PRODUCT

MARKET

$ REVENUE

$ CONSUMPTION

slide149

THE CIRCULAR FLOW REVISITED

GOODS & SERVICES

FLOW TO

GOVERNMENT

$ COSTS

$ INCOMES

RESOURCE

MARKET

RESOURCES

INPUTS

BUSINESSES

HOUSEHOLDS

GOVERNMENT

GOODS &

SERVICES

GOODS &

SERVICES

PRODUCT

MARKET

$ REVENUE

$ CONSUMPTION

slide150

THE CIRCULAR FLOW REVISITED

$ COSTS

$ INCOMES

RESOURCE

MARKET

RESOURCES

INPUTS

Tax Payments

GOVERNMENT

BUSINESSES

subsidy

HOUSEHOLDS

FICA

GOODS &

SERVICES

GOODS &

SERVICES

PRODUCT

MARKET

$ REVENUE

$ CONSUMPTION

the federal budget
The Federal Budget!

Total Revenues (Taxes)

– Total Costs (Expenditures)

+ Budget Surplus

0 Balanced Budget

- Budget Deficit

2004 Deficit:

$480 Billion

Sum of all yearly deficits is the National Debt of:

7.4 Trillion Dollars!

Projected 2005

333 Billion

slide152

GOVERNMENT GROWTH

Purchases & Transfers...

  • Government Purchases
slide153

GOVERNMENT GROWTH

Purchases & Transfers...

  • Government Purchases
  • Transfer Payments
slide154

The Federal Budget

Federal Expenditures

How Does Government

Spend Its Money????

slide155

The Federal Budget

Federal Expenditures

Income Security 38%

slide156

The Federal Budget

Federal Expenditures

Income Security 38%

Health 20%

slide157

The Federal Budget

Federal Expenditures

Income Security 38%

Health 20%

National Defense 18%

slide158

The Federal Budget

Federal Expenditures

Income Security 38%

Health 20%

National Defense 18%

Interest on Public Debt 15%

slide159

The Federal Budget

Federal Expenditures

Income Security 38%

Health 20%

National Defense 18%

Interest on Public Debt 15%

All Other 9%

slide160

The Federal Budget Funded on a Percentage Basis of Income Tax Dollars

26.2% goes to the military 22.6% goes to pay the interest on the national debt 19.0% 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 Social

Security Payments!

slide161

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

Excludes

FICA @

7.5%

slide162

The Federal Budget

Federal Receipts/Revenues

How Does Government

Raise Its Money????

slide163

The Federal Budget

Federal Receipts/Revenues

Personal Income Tax 45%

slide164

Notes:

MARGINAL

TAX

RATES

The Federal Budget, 1996

Federal Receipts

Personal Income Tax 45%

slide165

Notes:

MARGINAL

TAX

RATES

AVERAGE

TAX

RATES

The Federal Budget, 1996

Federal Receipts

Personal Income Tax 45%

slide166

The Federal Budget

Federal Receipts/Revenues

Personal Income Tax 45%

Payroll Taxes 35%

slide167

The Federal Budget

Federal Receipts/Revenues

Personal Income Tax 45%

Payroll Taxes 35%

Corporate Income Tax 12%

slide168

The Federal Budget

Federal Receipts/Revenues

Personal Income Tax 45%

Payroll Taxes 35%

Corporate Income Tax 12%

Excise or Sales Taxes 4%

slide169

The Federal Budget

Federal Receipts/Revenues

Personal Income Tax 45%

Payroll Taxes (FICA) 35%

Corporate Income Tax 12%

Excise or Sales Taxes 4%

All Other 4%

slide170

STATE & LOCAL FINANCE

State Expenditures

Public Welfare 32%

1994 DATA

slide171

STATE & LOCAL FINANCE

State Expenditures

Public Welfare 32%

Education 21%

1994 DATA

slide172

STATE & LOCAL FINANCE

State Expenditures

Public Welfare 32%

Education 21%

Health & Hospitals 10%

1994 DATA

slide173

STATE & LOCAL FINANCE

State Expenditures

Public Welfare 32%

Education 21%

Health & Hospitals 10%

Highways 10%

1994 DATA

slide174

STATE & LOCAL FINANCE

State Expenditures

Public Welfare 32%

Education 21%

Health & Hospitals 10%

Highways 10%

Public Safety 8%

1994 DATA

slide175

STATE & LOCAL FINANCE

State Expenditures

Public Welfare 32%

Education 21%

Health & Hospitals 10%

Highways 10%

Public Safety 8%

All Other 21%

1994 DATA

slide176

STATE & LOCAL FINANCE

State Receipts

Sales Taxes 49%

1994 DATA

slide177

STATE & LOCAL FINANCE

State Receipts

Sales Taxes 49%

Income Taxes

(Personal & Corporate) 32%

1994 DATA

slide178

STATE & LOCAL FINANCE

State Receipts

Sales Taxes 49%

Income Taxes

(Personal & Corporate) 32%

Corporate Income Tax 7%

1994 DATA

slide179

STATE & LOCAL FINANCE

State Receipts

Sales Taxes 49%

Income Taxes

(Personal & Corporate) 32%

Corporate Income Tax 7%

Property Taxes 2%

1994 DATA

slide180

STATE & LOCAL FINANCE

State Receipts

Sales Taxes 49%

Income Taxes

(Personal & Corporate) 32%

Corporate Income Tax 7%

Property Taxes 2%

Death & Gift Taxes 1%

1994 DATA

slide181

STATE & LOCAL FINANCE

State Receipts

Sales Taxes 49%

Income Taxes

(Personal & Corporate) 32%

Corporate Income Tax 7%

Property Taxes 2%

Death & Gift Taxes 1%

Licenses Other Taxes 9%

1994 DATA

slide182

STATE & LOCAL FINANCE

Local Expenditures

Education 42%

1994 DATA

slide183

STATE & LOCAL FINANCE

Local Expenditures

Education 42%

Welfare, Health, & Hospitals 14%

1994 DATA

slide184

STATE & LOCAL FINANCE

Local Expenditures

Education 42%

Welfare, Health, & Hospitals 14%

Housing & Sewerage 8%

1994 DATA

slide185

STATE & LOCAL FINANCE

Local Expenditures

Education 42%

Welfare, Health, & Hospitals 14%

Housing & Sewerage 8%

Public Safety 10%

1994 DATA

slide186

STATE & LOCAL FINANCE

Local Expenditures

Education 42%

Welfare, Health, & Hospitals 14%

Housing & Sewerage 8%

Public Safety 10%

Highways 5%

1994 DATA

slide187

STATE & LOCAL FINANCE

Local Expenditures

Education 42%

Welfare, Health, & Hospitals 14%

Housing & Sewerage 8%

Public Safety 10%

Highways 5%

All Others 21%

1994 DATA

slide188

STATE & LOCAL FINANCE

Local Receipts

Property Taxes 75%

1994 DATA

slide189

STATE & LOCAL FINANCE

Local Receipts

Property Taxes 75%

Sales & Excises 15%

1994 DATA

slide190

STATE & LOCAL FINANCE

Local Receipts

Property Taxes 75%

Sales & Excises 15%

Personal & Corporate

Income Taxes 6%

1994 DATA

slide191

STATE & LOCAL FINANCE

Local Receipts

Property Taxes 75%

Sales & Excises 15%

Personal & Corporate

Income Taxes 6%

All Other 4%

1994 DATA

slide192

LOTTERIES

STATE & LOCAL FINANCE

Local Receipts

Property Taxes 75%

Sales & Excises 15%

Personal & Corporate

Income Taxes 6%

All Other 4%

1994 DATA

slide193

LOTTERIES

STATE & LOCAL FINANCE

Local Receipts

Property Taxes 75%

Sales & Excises 15%

Personal & Corporate

Income Taxes 6%

All Other 4%

Fiscal Federalism

1994 DATA

slide194

ANY QUESTIONS?

LOTTERIES

STATE & LOCAL FINANCE

Local Receipts

Property Taxes 75%

Sales & Excises 15%

Personal & Corporate

Income Taxes 6%

All Other 4%

Fiscal Federalism

1994 DATA

slide195

Page 2

functional distribution of income

personal distribution of income

durable good

non-durable good

services

plant

firm

vertical combination

horizontal combination

conglomerate combination

industry

sole proprietorship

partnership

corporations

stocks

bonds

limited liability

double taxation

principal-agent problem

Copyright McGraw-Hill, Inc. 1999

slide196

Page 1

monopoly

spillover costs

spillover benefits

exclusion principle

public goods

free-rider problem

quasipublic goods

government purchases

transfer payments

personal income tax

marginal tax rate

average tax rate

payroll taxes

corporate income tax

sales & excise taxes

property tax

fiscal federalism

lotteries

Copyright McGraw-Hill, Inc. 1999

slide197

Next:

The United States

in the

Global Economy

Chapter 6