TEST 2 NYCE Module 5 Government s Role in Society to understand how why what type of decisions government entities make you need to understand the government s role in society It is important to remember that the roles played by governments in other countries may be vastly different We will talk about the federal state and local levels of the U S government Three players in U S government households businesses and government U S Economic Statistics U S economy has about 115 million households Households consist of one or more persons occupying a housing unit and are both the ultimate suppliers of all economic resources and the major spenders of economy Distribution of Income Income categorized by how it was earned and how it was divided among households Functional Distribution of Income Indicates how the nation s earned income is apportioned among wages rents interests and profits according to the function performed by the income receiver Personal distribution of income indicates how the nation s money income is divided among individual households There is income inequality income disparity and it keeps getting bigger growing gap between wealthy and poor The middle income class hasn t gotten a real raise in 15 years The rich are getting richer and the poor are getting poorer Households as spenders our economy is driven by household spending If we are saving today today s economy will be worse We are spending more and the government is providing more Households dispose of their income in the following ways 1 Personal Taxes 2 Personal Saving 3 Personal Consumption Expenditures Personal Saving The portion of income that is not paid in taxes or used to purchase consumer goods but instead flows to bank accounts insurance policies bonds and stocks mutual funds and other financial assets U S households typically save about 3 of income People save for two reasons security and speculation Personal Consumption Expenditures More than 85 of total household income flows back into the business sector as money spent on consumer goods 1 Durable Goods Life expectancy of 3 years or more 12 of spending 2 Nondurable Goods Life expectancy less than 3 years 29 of spending 3 Services work done for consumers by lawyers barbers doctors etc 59 of spending The U S economy is a service based industry Business Population Businesses constitute the second major part of the private sector Plant physical establishment that performs one or more functions in fabricating and distributing goods and services Firm business organization that owns and operates plants May be one plant or many o Multi plant firms may be organized horizontally with several plants performing much the same function o Vertically integrated firms own plants that performs different functions in the various stages of the production process o Conglomerates firms that have plants which produce products in several industries Industry groups of firms that produce the same or similar products Legal Forms of Business 1 Sole proprietorship 72 of U S firms Business is owned and operated by one person Most common form of a business 2 Partnership 8 of U S firms Business in which two or more partners agrees to own and operate a business together pooling financial resources and sharing risks of profits losses 3 Corporation 20 of U S firms this is our biggest in terms of employment There are fewer of them but they are huge They can acquire resources own assets produce sell products incur debts extend credit sue be sued Advantages of Corporations debt financing Most effective for raising money For example stocks equity financing and bonds Limited liability Owners stockholders risk only what they paid for the stock Personal assets are not at stake Expand easily due to attracting capital Life independent of owners and officers Long range planning and growth Principle Agent Problem downside to corporations Exists when interests of principals and agents are not aligned Owners want maximum company profit and stock price but agents want power high pay etc regardless of company performance Problem originates from owners stockholders of a corporation hiring others to control assets Principals stockholders Agents hired by stockholders to run business Ex CEO Externality occurs when some of the cost or the benefits of a good are passed on to someone other than the immediate buyer or seller Negative externality Production or consumption costs inflicted on a third party without compensation They correct negative externalities through Legislation ex EPA OSHA etc Specific taxes tax confined to a particular product Positive externality externality that appears as a benefit to other producers consumers like immunizations or educations They correct positive externalities through Subsidize consumers low interest loans for college Subsidize suppliers public colleges Provide goods via the government postal service Free Rider Problem when people can receive benefits from a public good without contributing to its cost The Functional Distribution of Income indicates how the nation s earned income is apportioned among wages paid to labor workers rents paid to owners of property interest paid to owners of property and profits paid to owners of corporations and unincorporated businesses Q What is the largest source of income A Wages and Salaries paid to workers Personal Distribution of Income indicates how the nation s money income is divided among individual households There is considerable inequality in the personal distribution of income Saving part of the after tax income that is not spent The portion of income that is not paid in taxes or used to purchase consumer goods but instead flow into bank accounts insurance policies bonds stocks mutual funds and other financial assets People save due to scarcity and speculation Being able to save depends on the size of your income if your income is low you may not be able to save Households as Spenders 1 Personal Taxes 2 Personal Savings 3 Personal Consumption Expenditures Durable Goods products that have expected lives of 3 years or more Example automobiles furniture and personal computers Nondurable Goods products that have lives less than 3 years Example food clothing and gasoline Services the work done for customers by lawyers doctors barbers lodging personal etc The US is referred to as a service oriented economy The Business Population 1 Plant a physical establishment that performs one or more functions in fabricating and
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