The Three Fundamental Questions
We can’t have it
all; thus we must
decide
:
• What gets produced, and in what quantities?
• How are these goods produced?
• For whom are these goods produced ?
•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.
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?
•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.
What we produce
Output of the United States, 2002
Gov. goods, services
8.5%
Exports
16.6%
13.4%
Investment goods
61.5%
Consumption goods
Economic Functions of Government
• Administration of justice
• Provision of “public goods”
• Correcting for “externalities”
such as air pollution.
• Redistribution of income
State and Local Government Revenues by Source, 2001
Property Taxes
28%
23%
Sales taxes
Individual incvome
taxes
3%
27%
19%
Source: Economic Report of the President
Corporate income
taxes
Other
State of Arkansas Revenues by Source, 2003
Sales taxes
3% 7%
2%
42%
46%
Individual income
taxes
Corporate income
taxes
Alcohol and
Tobacco taxes
Other
Source: www.state.ar.us/dfa
State and Local Government Expenditures, 2001
35%
42%
Education
Highways
Public Welfare
Other
7%
16%
Source: Economic Report of the President
“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.
State of Arkansas Expenditures, 2003
5%
Criminal Justice
7%
General Education
21%
Higher Education
17%
50%
Health/Human
Services
Other
Source: www.state.ar.us/dfa
Federal Revenues by Source, 2003
8%
Individual income
taxes
45%
Corporate income
taxes
Payroll taxes
40%
Other
7%
Source: Economic Report of the President
Major Categories of Federal Spending, 2000
Category
Social Security
National Defense
Interest on National Debt
Income Security
Medicare
Health
Education & Training
Veterans' Benefits
Transportation
Agriculture
International Affairs
Amount (Millions)
406,625
290,636
220,314
251,286
202,513
154,227
63,397
46,796
46,709
31,988
17,078
www.census.gov
Percent of Total
22.7
16.2
12.3
14.0
11.3
8.6
3.5
2.6
2.6
1.8
1.0
Federal Revenues by Source in 2000
Miscellaneous
Customs duties
Estate & Gift tax es
Excise taxes
Payroll taxes
48%
33%
10%
Corporate taxes
www.census.gov
Income taxes
The Economic Resources
Land
Labor
Economic resources
are also called
“factors of production,”
since they furnish the
physical and intellectual
means to produce and distribute
goods and services
Capital
Entrepreneurship
Land or natural resources
“Free gifts of nature”
Labor or “Human Resources”
Capital
“Manmade instruments of
production.”
Types of capital
•Private, tangible capital
Examples: 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.
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.
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.
The functional
distribution of income
refers to the division of
factor payments between
wages, rent, profits, and
interest
The Functional Distribution of Income
United States, 2002
Profits
18.5%
Interest
7.5%
Rent
1.8%
Wages
72.2%
Source: www.bea.gov
Occupation
Chief Executives
Lawyers
Judges
Engineering Professors
Postmasters
Brickmasons
Elementary Teachers
Occupational Therapists
Butchers
Mean Annual Income ($)
$113,700
88,280
86,760
65,640
44,260
40,280
39,700
34,340
24,120
Source: Bureau of Labor Statistics 1999 Occupational Survey
The personal distribution of
income describes the
distribution of income among
households or individuals
Personal Distribution of Income in the U.S.
60
55
50
Quintile
45
40
Lowest
35
Send lowest
30
25
Middle
20
Second highest
15
10
Highest
5
0
Top 5 percent
1970
2000
Year
Source: Bureau of the Census, Current Population Report, 2001, Table A2
Income Ratios for Full-Time, Year-Round Workers, U.S.A.
Ratio of 90th to 10th percentile
6.0
5.5
5.0
4.5
4.0
3.5
3.0
MEN
2.5
WOMEN
1970
1975
1980
1985
1990
1995
2001
YEAR
Source: Bureau of the Census, Historical Income Table IE-2
Ave rage Wages of Men Comp ared to HS Grads
Percent Dif ference in Weekly Wages for Selected Years
110
Out of
school for
less than
10 years
90
70
50
HS D ropouts , White
30
HS D ropouts , Black
10
1-3 Y RS Col l., White
-10
1-3 Y RS Col l., Black
-30
Coll . Grad., White
-50
Coll ege Grad., Black
1967-77
1977-81
1988-92
YEARS
Sour ce: Fini s Welch (1999, Table 4, p. 7)
1993-97
A market is an institution
in which buyers and
sellers exchange goods
and services for
a medium of exchange
--money
The Circular Flow Model
Rent, wages, interest,
profit received
Expenditure on goods
and services
Households
Resources
Goods and
services
bought
Factor
Markets
Goods
Markets
Goods and
services
supplied
Resources
Firms
Rent, wages, interest,
profit paid
Revenue from the
sale of goods and
services
Governments in the Circular Flow Model
Rent, wages, interest,
profit received
Transfers
Taxes
Households
Transfers
Firms
Rent, wages, interest,
profit paid
Goods
Markets
Taxes
Expenditure
on Goods
Governments and services
Factor
Markets
Expenditure on goods
and services
Expenditures on
goods and services