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Chapter 4

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  1. Chapter 4 The U.S. Economy: The Private and Public Sectors Buffland Economics

  2. Households – persons who occupy a housing unit • Supply the resources • Receive income • Demand the products • Spend income Buffland Economics

  3. Business – economic units that seek profits by employing resources to produce products • Demands the Resources • Supplies the Products • Definitions • Plant – building • Firm – organization • Industry – group of firms in a market Buffland Economics

  4. Legal forms of business • Sole Proprietorship – one owner/manager • Easy to set up, limited funds, full management, unlimited liability, limited life • Partnership – 2 or more owner/managers • Specialization, more funds available, unlimited liability • Corporation – separation of owners and managers • More funds, stability, limited liability, double taxation, unlimited life Buffland Economics

  5. Government sector • Functions • Maintains competition - Promoting competition • Antitrust laws • Deal with monopolies • Provides legal structure – Establishing and enforcing the rules of the game • safeguarding private property • Redistributes income - More equal distribution of income • Deals with market failures • Externalities – cost or benefit that falls on a third party who is not compensated or charged • Provides public goods • Promotes economic stability and growth, high employment and stable prices • Fiscal policy • Monetary policy Buffland Economics

  6. Government Finance • Spending is Government purchases and Transfer payments • Revenue is from taxation • Budgets • Deficit: Expenditures > Receipts • Surplus: Expenditures < Receipts • Balanced: Expenditures = Receipts Buffland Economics

  7. Actual Government Finance • Federal Finance • Expenditures: Income security, Defense and Health • Receipts: Income tax, Payroll tax (social security), Corporate Profit tax Buffland Economics

  8. State and Local Finance • State • Expenditures: Education, Public welfare, Health, Highways • Receipts: Sales tax, Income tax • Local • Expenditures: Education, Public safety, Housing • Receipts: Property tax, Sales tax, Federal Grants Buffland Economics

  9. Foreign Sector • International Trade • Volume: US is the leader • Dependence • Imports (foreign goods sold here): Oil, food • Exports (our goods sold there): Agriculture • Net Exports = Exports – Imports • Trading Partners • Canada, Japan, Mexico Buffland Economics

  10. Specialization and Trade • Comparative advantage – country with the lowest opportunity costs • Absolute advantage – can produce it more efficiently Buffland Economics

  11. Foreign Exchange Markets • Exchange rates – the rate at which two currencies trade • Appreciation – increase in value • Depreciation – decrease in value Buffland Economics

  12. Trade Barriers • Types • Tariffs – tax on imports • Quotas – quantity restriction • Reasons • Job protection – protect our industries • Antidumping • National Defense Buffland Economics

  13. Trade Agreements • Reciprocal Trade Agreements Act to reduce tariffs (both must do it) • GATT – reduce restrictions • WTO – settles disputes and provides legal framework • Oversees trade agreements • EU – 25 country free trade zone (trade bloc) • Euro – currency used by 11 • AFTA - Asian Free Trade Association: 10 nations • Agreement is called ASEAN • MERCOSUR – 4 South American countries • Argentina, Brazil, Paraguay and Uruguay Buffland Economics

  14. CAFTA – 5 Central American countries • Guatemala, El Salvador, Honduras, Nicaragua, and Costa Rica • NAFTA – free trade zone between U.S. Canada and Mexico (2010) • South African Customs Union (SACU) • South Africa, Botswana, Lesotho and Swaziland • FTAA – Free Trade Area of the Americas (not Cuba) • 2001 Quebec • 2003 Miami Buffland Economics