Final Exam Review Role for Government Size and Growth of the U S Government Transfer Payments Rational Ignorance Effect Median Voter Theory The 4 Ways We Spend Money When the Political Process Works User Charges When the Political Process Does Not Work 2 Shortsightedness Effect 3 Rent Seeking Chapter 6 The Economics of Collective Decision Making Protect individuals and their property rights Provide goods that cannot be easily provided by the market Understand how government has grown where government is spending the most money 1 2 Size of government is indicated by government expenditures as a percentage of U S GDP The government gets money from taxing your production 1 2 Social security State and Local Spending Federal Spending 1 Medicare health 2 3 National defense Transfers of income from some individuals to others half of total government spending The process of taking money from one group of people and giving it to another group of people because they are in that group rational individual can have little no incentive to get info needed to cast informed vote Marginal Cost of Voting 3 Administrative expenses Police fire protection 4 Education Public welfare and health Marginal Benefit of Voting MB is relatively close to zero Probability your vote was MB deciding vote x how much you care your candidate wins vs The cost of informing yourself registering to vote and actually voting The bigger the decision is to you the more information going to gather The idea that a vote maximizing politician in a two party system will be close to the middle so that there is little difference between candidates and the preferences of the median voter will be represented Applies more specifically to the USA 1 2 3 4 Spend your own money on yourself the most careful efficient Spend somebody else s money on yourself not as careful not your Spend own money on somebody else set budget for yourself possibly not careful Spend somebody else s money on somebody else government tax money least affective careful When voters pay in proportion to the benefits they receive then productive projects will be passed and unproductive projects will not requires people who use a service more to pay a larger share of the cost When voters pay in proportion to the benefits they receive then productive projects will be passed and unproductive projects will not 1 Special interest groups 100s of special interest groups Issue that generates benefits for small group by generating min costs to large group A Logrolling practice of trading votes by a politician to get the support to pass legislation B Pork barrel Legislation a package of spending projects benefiting local areas financed through the federal government politicians will favor programs that generate current visible benefits even if long term costs of the project outweighs the benefits All politicians not just one party did do this This is how debt is formed actions individuals groups take in order to use political process to take wealth of others People spend time trying to gain political favors instead of producing Lobbying taking tax dollars the more time you spend lobbying the less time you take to increase the political economic pie 4 Lack of Profit Motive unlike private firms public sector lacks the incentive to produce efficiently Government Private Business Owner When put into situation no matter how efficient normally are you would respond same Inefficient Budget gets expanded Loss go out of business Efficient Budget gets cut Profit 1 Final Exam Review Chapter 7 Taking the Nation s Economic Pulse GDP market value of all final goods services produced within a country during specific period Transactions Included in the GDP Avoid Double Counting Production Within a Country During a Specific Period Two Approaches for Finding GDP Consumption Gross Investment Government Expenditure Net Exports 2 Resource Cost Income Approach Final Goods Services Final goods goods and services purchased by their ultimate user Ultimate user the person who finally consumes that good or service instead of using it as an ingredient to make another good or service Intermediate goods Goods purchased for resale use in producing another good We don t count intermediate goods because value is contained in the final good Only goods services that are produced are included in GDP transfers are not GDP counts only goods produced within the geographic borders of a country No matter citizenship of producer if produced in that country counted in country s GDP Usually within the year items resold in different years than production not recounted 1 Household spending on goods services during the current period 1 Durable goods things you use reuse Ex house appliances car s 2 Nondurable goods things you use once Ex food trash etc 3 Consumption is the largest component of GDP always around 70 production construction of capital goods that provide future service Consists of Expenditure approach Y C I G NX GDP Consumption Private Investment Government Consumption Net Exports Services Ex doctor lawyer real estate agent 1 2 Fixed investment things that help you produce other things Inventory investment how much the company added produced but hasn t been sold yet Net Investment investment depreciation Investment fixed investment inventory investment Inventory Investment end inventory beginning inventory Government Expenditures includes spending on 1 Goods and services Ex paper staples paying police officers soldiers etc 2 Capital goods Ex missals highways aircraft carriers Transfer payments not included are counted at cost not value to tax payer Net Exports Exports Import N X M Imports don t get included in our GDP but exports do USA usually imports more than we export usually have a negative net export All 8 components added together GDP 1 2 3 Rents 4 Exports domestically produced goods and services sold abroad Imports foreign produced goods and services purchased domestically Employee compensation makes up 2 3rds Proprietors income corporate profits Interest income indirect business taxes 5 6 7 depreciation 8 Net income of foreigners GNP GNP total market value of all final good service produced by country s citizens Calculations Counts the income Americans earn abroad ignores income foreigners earn in U S Price index measures the cost of purchasing a market basket of goods at a point in time relative to cost of purchasing the identical market basket during earlier reference period PI Cost of bundle in
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