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Chapter 4 Presentation 1
The US Economy: Private and Public Sectors
Private v. Public Sector
• Private Sector = households and businesses
• Public Sector = Government
Functional Distribution of Income
• Indicates how the nation’s earned income is divided among wages, rents, interest, and profits
• Ex- wages are paid to labor• Rents and interest are paid to
resource owners• Profits paid to business owners
Households as Income Receivers
Functional Distribution of Income-2005
Wages & Salaries
Rents
Interest
Proprietor’sIncome
CorporateProfits
Inco
me
By
Fu
nct
ion
Per
form
edNational Income Received (Percent)
0 10 20 30 40 50 60 70
71%
1%
5%
9%
14%Source: Bureau of Economic Analysis
Personal Distribution of Income
• Show how the nation’s money income is divided among individual households
Households as Income Receivers
Personal Distribution of Income-2004
Lowest20%
Second20%
Middle20%
Fourth20%
Highest20%
Inco
me
Gro
up
(H
ou
seh
old
s)Personal Income Received (Percent)
0 10 20 30 40 50 60
3.4%
8.7%
14.7%
23.2%
50.1%Source: Bureau of the Census
Households as Spenders
• Households can dispose of their income in 3 ways:
• 1. Taxes
• 2. Personal Savings
• 3. Personal Consumption
Personal Taxes
• In 2005, US households paid $1210 billion in taxes out of incomes of $9912 B (12%)
• In 1941, Americans only paid 3% of total income on taxes
Personal Savings
• Savings are the part of after-tax income that is not spent
• ***income that goes into bank accounts, stocks, bonds, mutual funds, etc.
• On avg. Americans save 3% of income
Personal Consumption
• $$ spent on goods and services• 12% on durable goods-goods that are
expected to last > 3 yrs (cars, furniture)• 29% on nondurable goods- last < 3 yrs
(clothing, food)• 59% on services- work done by
lawyers, barbers etc.
Plant
• A physical establishment- factory, farms, mines, store or warehouse- makes and/or distributes G/S
Firm
• A business organization that owns and operates plants
• Some firms operate 1 plant and others operate several
Industry
• A group of firms that produce the same, or similar products
Vertical and Horizontal Integration
• Vertical- own all the means of producing the product
• Ex- Shell owns the mines, refineries, trucks and gas stations
• Horizontal- attempting to take over competitive firms
• Ex- Cingular and AT&T
Conglomerates
• Firms that have plants that produce products in several different industries
• Ex- Pfizer makes medicines (Lipitor), chewing gum (Trident/Dentyne), and Razors (Schick)
Legal Forms of Businesses
• 1. Sole Proprietorship- owned and operated by 1 person
• 2. Partnership- 2 or more owners w/ shared financial investment and risks
• 3. Corporations- a legal entity (“person”) chartered by state or local governments that is separate from the owners
Legal Forms of Business
Domestic Output by Business Type
Percentage of Firms Percentage of Sales
Sole Proprietorships
Partnerships
Corporations
Sole Proprietorships
Partnerships
Corporations
72%
8%
20%
5%
11%
84%
Source: U. S. Census Bureau
Advantages of Corporations
• 1. Easy to raise funds-through sale of stocks (shares of ownership in the company) and bonds (a loan to the company w/ future repayment & interest)
• 2. Limited Liability- cannot sue the individual owners, only the company
• 3. Ease of expansion
• 4. Ability to hire specialists