Chapter 05 The U.S. Economy: Private and Public Sectors
Goals of Chapter
To acquire basic factual information about the household and business components of the private sector economy.
To acquire basic factual information about the public (or government) sector in the U.S. economy.
To understand the role of the public sector in the U.S. economy.
Households as Income Receivers
Functional distribution of income is shown in Figure 5‑1.(This figure is based on NI-National Income.)
Wages and salaries are 70 percent of total.
Proprietors' income (income to self‑employed business owners, doctors, lawyers, etc.) is under 10 percent of
total.(This is a combination of wage and profit income.)
Capitalist income-corporation profits, rent, interest-is less than one-fifth of total.(Note: rent may be negative
because of the depreciation charged against rental income.)
Personal distribution of income is shown in Figure 5‑2.(This figure is based on PI-Personal Income.)
It is often described by dividing the population into quintiles or five numerically equal parts.
Proportions of total income going to each quintile are then compared.
Comparison shows unequal distribution of income.For example, see how many times greater the share of
income going to the top quintile is relative to the bottom fifth.(Key Question 2)
Households As Spenders (Figure 5-3) (Figure is based on PI-Personal Income)
Use Figure 5.3 or most recent data from Survey of Current Business, January issue of current year, to describe the
following.
How do households dispose of their income?
Personal taxes, of which Federal personal income tax is the major component, has increased over the years.
Saving (dissaving if spending exceeds income) is the smallest fraction of personal income disposition.
Most of household income goes to consumer spending (Figure 5.3).There are several categories of spending
categories (Figure 5.4):
Durable goods are those with life of three or more years.
Nondurable goods include things such as food and clothing.
Services are today more than one‑half of all consumer spending, which demonstrates that ours is a
service-oriented economy.
The Business Population
Related definitions:
Plant:physical establishment where production or distribution takes place (factory, farm, store).
Firm:business organization that owns and operates the plants.(The legal entity.)
Industry: a group of related firms, producing the same or similar products.
Examples include the automobile industry or the tobacco industry.
Confusion often occurs because many businesses are multiproduct firms.
Types of multiplant firms:
Horizontal integrated: a multiplant firm with plants in the same stage, like a retail chain store such as J.
C. Penney or Safeway.
Vertical integrated: a multiplant firm in which the company owns plants at different production stages.
Example: A steel company may own ore and coal mines as well as different plants in different stages of
the manufacturing process.
Conglomerate: a firm that owns plants in different industries or markets.
Legal forms of businesses(Figure 5.5):
Definition:
Sole proprietorship: a business owned by a single individual.
Partnership: two or more individuals own and operate the business in a partnership agreement.
Corporation: a legal entity distinct from its individual owners. The organization acts as "legal person."
Discussion of Figure 5-5 relative to most important - percentage of firms versus percentage of sales.
Sole proprietorship
Advantages: easy to set up; proprietor is his/her own boss; because profit is proprietor's income, there
is an incentive to operate the business efficiently.
Disadvantages: financial resources are limited and insufficient; the proprietor is responsible for all of
management functions; the proprietor is subject to unlimited liability.
Partnership
Goals of Chapter
To acquire basic factual information about the household and business components of the private sector economy.
To acquire basic factual information about the public (or government) sector in the U.S. economy.
To understand the role of the public sector in the U.S. economy.
Households as Income Receivers
Functional distribution of income is shown in Figure 5‑1.(This figure is based on NI-National Income.)
Wages and salaries are 70 percent of total.
Proprietors' income (income to self‑employed business owners, doctors, lawyers, etc.) is under 10 percent of
total.(This is a combination of wage and profit income.)
Capitalist income-corporation profits, rent, interest-is less than one-fifth of total.(Note: rent may be negative
because of the depreciation charged against rental income.)
Personal distribution of income is shown in Figure 5‑2.(This figure is based on PI-Personal Income.)
It is often described by dividing the population into quintiles or five numerically equal parts.
Proportions of total income going to each quintile are then compared.
Comparison shows unequal distribution of income.For example, see how many times greater the share of
income going to the top quintile is relative to the bottom fifth.(Key Question 2)
Households As Spenders (Figure 5-3) (Figure is based on PI-Personal Income)
Use Figure 5.3 or most recent data from Survey of Current Business, January issue of current year, to describe the
following.
How do households dispose of their income?
Personal taxes, of which Federal personal income tax is the major component, has increased over the years.
Saving (dissaving if spending exceeds income) is the smallest fraction of personal income disposition.
Most of household income goes to consumer spending (Figure 5.3).There are several categories of spending
categories (Figure 5.4):
Durable goods are those with life of three or more years.
Nondurable goods include things such as food and clothing.
Services are today more than one‑half of all consumer spending, which demonstrates that ours is a
service-oriented economy.
The Business Population
Related definitions:
Plant:physical establishment where production or distribution takes place (factory, farm, store).
Firm:business organization that owns and operates the plants.(The legal entity.)
Industry: a group of related firms, producing the same or similar products.
Examples include the automobile industry or the tobacco industry.
Confusion often occurs because many businesses are multiproduct firms.
Types of multiplant firms:
Horizontal integrated: a multiplant firm with plants in the same stage, like a retail chain store such as J.
C. Penney or Safeway.
Vertical integrated: a multiplant firm in which the company owns plants at different production stages.
Example: A steel company may own ore and coal mines as well as different plants in different stages of
the manufacturing process.
Conglomerate: a firm that owns plants in different industries or markets.
Legal forms of businesses(Figure 5.5):
Definition:
Sole proprietorship: a business owned by a single individual.
Partnership: two or more individuals own and operate the business in a partnership agreement.
Corporation: a legal entity distinct from its individual owners. The organization acts as "legal person."
Discussion of Figure 5-5 relative to most important - percentage of firms versus percentage of sales.
Sole proprietorship
Advantages: easy to set up; proprietor is his/her own boss; because profit is proprietor's income, there
is an incentive to operate the business efficiently.
Disadvantages: financial resources are limited and insufficient; the proprietor is responsible for all of
management functions; the proprietor is subject to unlimited liability.
Partnership
