Chapter Three:

What Economies Do

Introducing the Four Essential Economic Activities

financial capitalfinancial capitalcommercial production

Figure 3.1: The Role of Financial Capital in Commercial Production

Resource Maintenance: Attending to the Asset Base of

the Macroeconomy

FlowsStock Stock

Additions

Time

Subtractions

InitialStock

NextStock

InitialStock

NextStock

Figure 3.2: The General Stock-Flow Diagram

Additionsor Inflows

Subtractionsor Outflows

Stock

Figure 3.3: A “Bathtub”-Style Diagram

Distribution: Who Gets What, and How?

Group of Households Share of Aggregate Income (%) Lower Limit of Each Fifth ($)

Poorest Fifth 3.4 $0

Second Fifth 8.6 $20,453

Middle Fifth 14.6 $38,550

Fourth Fifth 23.2 $61,801

Richest Fifth 50.3 $100,000

Richest five percent 21.7 $180,000

Table 3.1: Distribution of U.S. Household Income in 2009

Figure 3.4: Lorenz Curve for U.S. Household Income, 2009

Figure 3.5: Lorenz Curve for Sweden Household Income, 2009

0 20 6040 10080

20

80

100

60

40

Percent of Households

A

B

Figure 3.6: The Gini Ratio,

Sh

are

of

Inco

me

(%)

Top 5% of households

Bottom 20% of households

Figure 3.7: Income Shares of the Richest and Poorest Households, 1968-2010

The Three Spheres of Economic Activity

BusinessSphere

Economic Activity

Social Context

Physical Context

CoreSphere

PublicPurposeSphere

Natural Inputs(flows of naturalresources and environmental

services)

Outputs(pollution and

wastes)

Figure 3.8: Social and Environmental Contexts of Economic Activity