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The Three Fundamental Questions
• What gets produced, and in what quantities?• How are these goods produced?• For whom are these goods produced ?
:
We can’t have it all; thus we must
decide
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•If you buy a new car, you won’t be able to afford a new TV set.
•If you attend college, you give up income you could have earned by working full-time.
•If a farmer opts to grow soybeans, the land will not be available to grow cotton.
•If resources are allocated to manufacture military aircraft, then those resources will not be available to manufacture civilian aircraft.
•If state politicians allocate more state revenues for prison construction, then less money is left over for teacher salaries.
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Congress has made supplemental appropriations for
the Iraq effort of $110 billion since June of 2003 year. We should
ask the question: what could we have for $110 billion?
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•628 Boeing 7E7 Aircraft
• Construct three (3) 700 mile bullet trains (includes the cost of inner-city land acquisition).
•4,075 “high quality” educational facilities to accommodate 1,000 students.
•Write a $379 check to every U.S. citizen.
•Fund 1,000 universities the size of Arkansas State for one year.
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What we produce
Output of the United States, 2002
8.5%
16.6%
13.4%61.5%
Gov. goods, services
Exports
Investment goodsConsumption goods
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Economic Functions of Government
• Administration of justice
• Provision of “public goods”
• Correcting for “externalities” such as air pollution.
• Redistribution of income
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23%
27%19%
3%
28%
Property Taxes
Sales taxes
Individual incvometaxes
Corporate incometaxes
Other
State and Local Government Revenues by Source, 2001
Source: Economic Report of the President
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42%
46%
2%
3% 7%Sales taxes
Individual incometaxes
Corporate incometaxes
Alcohol andTobacco taxes
Other
State of Arkansas Revenues by Source, 2003
Source: www.state.ar.us/dfa
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“Other” includes spending for libraries, hospitals, health, employment security, water transport and terminals, police and fire, solid waste management, parking, corrections, parks and recreation, housing, and other items.
35%
7%
16%
42%Education
Highways
Public Welfare
Other
Source: Economic Report of the President
State and Local Government Expenditures, 2001
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7%
50%17%
21%
5%Criminal Justice
General Education
Higher Education
Health/HumanServices
Other
State of Arkansas Expenditures, 2003
Source: www.state.ar.us/dfa
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45%
7%
40%
8%Individual incometaxes
Corporate incometaxes
Payroll taxes
Other
Federal Revenues by Source, 2003
Source: Economic Report of the President
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Category Amount (Millions) Percent of TotalSocial Security 406,625 22.7National Defense 290,636 16.2Interest on National Debt 220,314 12.3Income Security 251,286 14.0Medicare 202,513 11.3Health 154,227 8.6Education & Training 63,397 3.5Veterans' Benefits 46,796 2.6Transportation 46,709 2.6Agriculture 31,988 1.8International Affairs 17,078 1.0
Major Categories of Federal Spending, 2000
www.census.gov
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Federal Revenues by Source in 2000
www.census.gov
33%
10%
48%
Miscellaneous
Customs duties
Estate & Gift taxes
Excise taxes
Payroll taxes
Corporate taxes
Income taxes
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Land
Labor
Capital
Entrepreneurship
Economic resourcesare also called
“factors of production,”since they furnish the
physical and intellectualmeans to produce and distribute
goods and services
The Economic Resources
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“Free gifts of nature”
Land or natural resources
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Labor or “Human Resources”
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Capital“Manmade instruments of production.”
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Types of capital
•Private, tangible capitalExamples: Aircraft and trucks used by Federal Express; Nuclear Plants “owned” by Entergy; Plants “owned” by Case Equipment Co.
•Public, tangible capital or “infrastructure”Examples: Bridges and viaducts; Water collection and filtration systems; navigable waterways; Mass transit systems; Airports.
•Human capital, defined as “the skills and training of the labor force.”Examples: Network engineers and webmasters; Accountants; Chemists; Machinists; Nurses; Pilots.
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Entrepreneurship Entrepreneurship is the human resource that organizes land, labor and capital.
•Entrepreneurs identify profitable business opportunities and mobilize and coordinate resources to take advantage.
•Sam Walton, Michael Dell, Martha Stewart, and Bill Gates are examples of highly successful entrepreneurs.
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Income received by owners of economic resources
•Rent: Income paid for the use of land.
•Wages (and salaries): income paid for the services of labor.
•Interest: income paid for the use of capital.
•Profit (or loss): Income earned by an entrepreneur for running a business.
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The functional distribution of income refers to the division of
factor payments between wages, rent, profits, and
interest
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The Functional Distribution of Income
United States, 2002
Source: www.bea.gov
18.5%
7.5%
1.8%
72.2%
Profits
Interest
Rent
Wages
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Occupation Mean Annual Income ($)
Chief Executives $113,700Lawyers 88,280Judges 86,760Engineering Professors 65,640Postmasters 44,260Brickmasons 40,280Elementary Teachers 39,700Occupational Therapists 34,340Butchers 24,120
Source: Bureau of Labor Statistics 1999 Occupational Survey
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The personal distribution of income describes the
distribution of income among households or individuals
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Personal Distribution of Income in the U.S.
Source: Bureau of the Census, Current Population Report, 2001, Table A2
Year
20001970
Pe
rce
nt o
f In
com
e R
ece
ive
d b
y60
55
50
45
40
35
30
25
20
15
10
50
Quintile
Lowest
Send lowest
Middle
Second highest
Highest
Top 5 percent
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Income Ratios for Full-Time, Year-Round Workers, U.S.A.
Ratio of 90th to 10th percentile
Source: Bureau of the Census, Historical Income Table IE-2
YEAR
2001199519901985198019751970
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
MEN
WOMEN
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Average Wages of Men Compared to HS Grads
Percent Difference in Weekly Wages for Selected Years
Source: Finis Welch (1999, Table 4, p. 7)
YEARS
1993-971988-921977-811967-77
110
90
70
50
30
10
-10
-30
-50
HS Dropouts, White
HS Dropouts, Black
1-3 YRS Coll., White
1-3 YRS Coll., Black
Coll. Grad., White
College Grad., Black
Out of school for less than 10 years
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A market is an institutionin which buyers and
sellers exchange goodsand services for
a medium of exchange--money
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The Circular Flow Model
Households
Firms
GoodsMarkets
FactorMarkets
Resources
Rent, wages, interest, profit received
Rent, wages, interest, profit paid
Resources
Expenditure on goods and services
Revenue from the sale of goods and services
Goods and services bought
Goods and services supplied
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Governments in the Circular Flow Model
Households
Firms
GoodsMarkets
FactorMarkets
Rent, wages, interest, profit received
Rent, wages, interest, profit paid
Expenditure on goods and services
Expenditures on goods and services
Expenditure on Goods and servicesGovernments
Tax
esT
axes
Transfers
Transfers