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Unit 3

Unit 3. Macroeconomics: Institutions Ch 8 – Employment, Labor, and Wages Ch 9 – Sources of Gov.’t Revenue Ch 10 – Gov.’t Spending Ch 11 – Money and Banking Ch 12 – Financial Markets SKIP . Ch 8 and 9 Quiz. Macroeconomics.

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Unit 3

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  1. Unit 3 Macroeconomics: Institutions Ch 8 – Employment, Labor, and Wages Ch 9 – Sources of Gov.’t Revenue Ch 10 – Gov.’t Spending Ch 11 – Money and Banking Ch 12 – Financial MarketsSKIP

  2. Ch 8 and 9 Quiz

  3. Macroeconomics The area of economics that deals w/ the economy as a whole, including inflation, employment, economic growth, gross domestic product, + the distribution of income. Macro = Large

  4. Labor The civilian labor force – includes men + women 16 yrs + older who are either working or actively looking for a job. It excludes members of the armed forces, the prison population, other institutionalized people or those who are not seeking employment. Ch 8 – Employment, Labor, and Wages

  5. Unions Associations of workers formed to bargain for better working conditions + fair wages. Approximately 15% of American labor is represented by unions. Unions tend to be concentrated in manufacturing areas + increasingly in among gov.’t workers. Have collective bargaining power (negotiations b/w workers + employers). If an agreement cannot be reached, workers may go on strike (refusing to work). Striking workers may picket (protest in front of the employer’s business). As a final result, striking workers may organize a boycott (a mass refusal to buy products from their employers). End Section 1

  6. Collective bargaining Occurs when representatives from both labor + management meet. Labor is represented by a group of elected union officials. Requires compromise from both sides. If a compromise cannot be reached b/w the 2 sides, other methods of negotiation are available: Mediation – involves bringing in a neutral 3rd party whose job it is to find a solution acceptable to both sides. The mediator’s solution is NOT BINDING. Arbitration – involves bringing in a 3rd party whose decision is BINDING. Fact-finding – involves bringing in a neutral 3rd party to collect facts about a dispute + present a solution which is NOT BINDING. Beneficial if both sides have presented distorted facts or if one side doesn’t trust the other. Injunction (court order not to act) or seizure (temporary gov.’t take over). Presidential intervention – may involve a simple public appeal or firing federal workers. End Section 2

  7. Categories of labor Unskilled labor – people who work primarily w/ their hands b/c they lack training + skills required for other tasks. Basically anyone, regardless of education, could walk in off the street + easily take over their jobs. Usually earn the lowest wages. Ex: Fruit pickers Semiskilled labor – workers w/ enough mechanical abilities/skills to operate machines that require a minimum of training. Ex: Lawnmowers Skilled labor – workers who are able to operate complex equipment + can perform their tasks w/ little supervision. Ex: Carpenters Professional labor – workers w/ the highest level of knowledge-based education + managerial skills. Usually earn the highest wages. Doctors

  8. Wage determination The traditional theory of wage determination states that supply + demand for a worker’s skills/services determine their wages. High demand + low supply = high wages Low demand + high supply = low wages The equilibrium wage rate is the wage rate that leaves neither a surplus nor shortage in the labor market. The theory of negotiated wages states that organized labor’s bargaining strength is a factor that helps determine wages. Seniority is the length of time a person has been on the job + in some jobs, the more seniority a person has the higher his/her wages are. The signaling theory states that employers are willing to pay more for people w/ certificates, diplomas, degrees, + other “signals” of superior ability. The ability of a region to attract labor also determines wages at the local level. End Section 3 P S1 D1 Q

  9. Women in labor For every dollar a man makes, a woman averages about 75 cents. This is known as the gender wage gap. Over 1/3 of the gap is due to the differences in skills + experience. Ex: Many women leave the labor force to start a family. Less than 1/3 of the gap is due to the uneven distribution of men + women in certain positions (meaning more men tend to be employed in higher level positions). Over 1/3 of the gap is due to discrimination.

  10. The ERA (Equal Rights Amendment) would have assured that women enjoyed the same rights + protections under the law. It passed in Congress in 1972, but Conservatives feared that it disrupt America’s social structure + launched a Stop-ERA campaign. The amendment was never ratified by enough states. Some anti-discrimination laws have been passed however. In addition, women + minorities have greater difficulties in getting raises + promotions. This invisible barrier that obstructs their advancement up the corporate ladder is known as the glass ceiling. Ratified --- Red Ratified, then rescinded  ---- Yellow  Ratified in 1 house of legislature   --- Green Not ratified --- Blue

  11. Minimum wage The lowest wage that can be paid by law to most workers. Currently it is set at $7.25 per hr. Intended to protect workers from being exploited. However, it is controversial. Some argue that employers cannot afford as many employees + so fewer people get hired. Does this lead to a surplus or shortage of workers? Surplus

  12. End Section 4

  13. Taxes Taxes impact the economy in by affecting: Resource allocation – the higher the taxes on resources, the fewer people can afford them + it can unemployment. Consumer behavior – can discourage consumers from buying certain products. Ex: The sin tax (a relatively high tax designed to raise revenue + consumption) on items such as tobacco + alcohol. The nation’s productivity + growth Also, the burden of taxes is sometimes transferred onto another party besides the one being taxed. If a company is charged a higher tax it may the cost of its goods (passing cost onto consumers), take it out of profits (passing cost onto owners), or lay off workers (passing cost onto employees). Ch 9 – Sources of Gov.’t Revenue

  14. Criteria for effective taxes 1. Equity – fairness. But what is fair? 2. Simplicity – laws should be written so that the tax payer + tax collector can understand them. Good ex: Sales taxes Bad ex: The income tax 3. Efficiency – relatively easy to administer + reasonably successful at generating income. Good ex: Income tax Bad ex: Toll booths on highways

  15. Principles of taxation The benefit principle of taxation says that those who benefit from gov.’t goods/services should pay in proportion to the benefits they receive. Ex: toll booth taxes, gas taxes, etc… 2 disadvantages: 1. Those who can least afford to pay taxes are usually the ones who benefit most from gov.’t services. 2. Benefits are often hard to measure. The ability to pay principle of taxation says that people should be taxed according to their ability to pay regardless of the benefits received. Ex: income tax 2 bases for: 1. Benefits are often hard to measure. 2. Assumes that people w/ higher incomes suffer less discomfort paying taxes than people w/ lower incomes.

  16. Types of taxes Proportional tax or “flat tax” – everyone pays the same percentage rate (not the same amount) regardless of income. Ex: If flat tax was applied to income taxes everyone would have to pay 20%. So someone who made $20,000 would pay $4,000 + someone who made $200,000 would pay $40,000. Progressive tax – people who make more pay a higher percentage rate of their income. Ex: Current income tax Regressive tax – people who make less pay a higher percentage rate of their income. Ex: Sales tax End Section 1

  17. Federal taxes The most important taxes the national gov.’t collects are the income tax (over 35% of its revenue), social security taxes (about 33%), + corporate income taxes (about 7.5%). P. 232 Excise tax – taxes on the manufacture or sale of selected items like gas, alcohol, coal, etc… Property tax – taxes levied on either real property (land, buildings, etc) or on personal property (cars, stocks, bank accounts, etc). Estate tax – (or “death tax”) taxes the gov.’t levies on the transfer of property when a person dies. Gift tax – taxes on donations of $ or wealth PAID BY THE PERSON GIVING THE GIFT. This is to prevent people from giving away their wealth shortly before dying. Customs duties or tariffs – taxes on imports. User fees – charges on the use of goods/service such as gov.’t land. End Section 2

  18. Sources of revenue for state gov.’ts Sources of revenue for local gov.’ts $ from the federal gov.’t (over 22%). Sales tax (20% - except for the states w/ no sales tax). State employee retirement + insurance (18%). State income tax (15% - except for the states w/o an income tax). $ from the federal + state gov.’ts (35%). Property taxes such as real estate, cars, bank accounts, buildings, etc… (24%). Utilities + state-owned liquor stores (8%). Sales tax (6%). End Section 3

  19. The flat tax A proportional tax on individual income. Gained widespread attention during the election of 1996 as a way to “fix” the current tax system. Advantages: 1. Simplicity 2. Eliminates many loopholes 3. Reduces the need for many accountants, tax preparers, + a good portion of the IRS Disadvantages: 1. Removes many behavior incentives in the current tax code (ex: you can get deductions for certain donations) 2. Would benefit the wealthy more + hurt lower classes 3. No one knows what rate would be needed to raise the current revenue. End Section 4

  20. Ch 10 and 11 Quiz

  21. Spending In 2003, federal, state, + local gov.’ts collected nearly $2 TRILLION. That averaged out to about $10,300 per capita (per person). The public sector refers to the part of the economy made up of federal, state, + local gov.’ts. The private sector refers to the part of the economy made up of private individuals + privately-owned businesses. Ch 10 – Gov.’t Spending

  22. Are they part of the public or private sector? ______________ 1. Employees at TL Hanna High School ______________ 2. Employees at Microsoft ______________ 3. The President of the United States ______________ 4. Police ______________ 5. The veterinarian at Pet-Smart ______________ 6. Bankers ______________ 7. A soldier ______________ 8. Your family physician

  23. Types of gov.’t spending Purchase of goods/services: Tanks, ships, weapons, space shuttles, land, roads, offices, schools, prisons, employees, etc… Transfer payments (a payment for which the gov.’t receives neither goods nor services): Social security, welfare, unemployment, Medicare, grants-in-aid (transfer payment from one level of gov.’t to another), etc…

  24. Impact of gov.’t spending Due to its sheer size, the public sector has a huge impact on people’s lives: 1. Affecting resource allocation – military spending encourages private industries that make weapons, agricultural price supports encourage more people to stay on farms, etc… 2. Redistributing income – the amount of $ received by lower income families through programs such as Medicare, the closing of a military base causes the surrounding community to lose $, etc… 3. Competing w/ the private sector – public education vs. private education, military vs. private hospitals, etc… End Section 1

  25. Federal gov.’t spending The federal budget is an annual plan outlining proposed $ that will be raised + spent. About 2/3 of the federal budget is mandatory spending (spending authorized by law that doesn’t have to be approved by Congress every year – ex: Social Security, Medicare, etc…). About 1/3 of the federal budget is discretionary spending (programs that must receive Congressional authorization every year – ex: the military, welfare, stimulus $, etc…). The fiscal year is a 12 month financial planning period. The federal gov.’t’s fiscal year is from Oct. 1st – Sept. 30th. A budget deficit is when the gov.’t spends more $ than it takes in. A budget surplus is when the gov.’t takes in more $ than it spends.

  26. Major spending by the federal gov.’t Social Security (over 20%) National defense (18%) Income security (15%) – includes retirement benefits for federal + military employees, food programs for low income families, subsidized housing, Medicare, etc… Interest on the national debt (varies) End Section 2

  27. State spending Unlike the federal gov.’t, some states have enacted a balanced budget amendment in their state constitutions which requires that annual spending not exceed revenues. So in other words, by law, some states cannot spend more than they take in. If one of these states experience an unanticipated in revenue, they must immediately cut spending.

  28. Major spending by state gov.’ts Major spending by local gov.’ts $ to local gov.’ts (30%) Public Welfare (18%) Higher education (10%) Highways (6%) K-12 Education (36%) Utilities (10%) Police (5%) Gov.’t administration (5%) End Section 3

  29. Deficit spending Occurs when the gov.’t spends more than it collects. The federal gov.’t usually runs a deficit. Why? Planned, to stimulate the economy (Ex: Stimulus $ of 2008). Unplanned, b/c of an unexpected event (Ex: WWII). Unplanned, b/c the gov.’t doesn’t take in as much $ as it anticipated (Budgets are based on estimates). The deficit is the loss of $ PER YEAR. The federal debt (or national debt) is the TOTAL amount of $ the federal gov.’t has borrowed to pay off the debt. So how does the gov.’t borrow $? By selling bonds to the public (a formal contract to repay borrowed $ + interest on the borrowed $ in the future). One of the reasons the gov.’t has difficulties balancing the budget is b/c much of the budget is spent on entitlements (or entitlement programs) which are programs or benefits using established eligibility requirements to provide health, nutritional, or income supplements to individuals. Ex: Social security, Medicare, welfare, unemployment, etc… End Section 4

  30. Functions of $ Money is any substance that serves as a medium of exchange, a measure of value, + a store of value. Medium of exchange – something accepted by all parties as payment for goods/services (Ex: gold, silver, salt, seashells, etc…). Measure of value – a common denominator that can be used to express worth in terms that most individuals understand (Ex: price tags, to base the value of something by the weight of something else, etc…). Store of value – the property that allows purchasing power to be saved until needed (putting $ in the bank, stockpiling gold etc…). Ch 11 – Money and Banking

  31. Characteristics of $ Portable – easy to move from one place to another. Durable – won’t disintegrate or fall apart after a short period of time. Divisible – can be divided into smaller units. Limited availability – if too much exists or can be made, it loses its value. End Section 1

  32. The gold standard A monetary standard under which the basic currency unit is equal to, + can be exchanged for, a specific amount of gold. In 1900, the US went on the gold standard w/ an ounce of gold being worth $20.67. Although people continued to use paper $, they could at any time exchange the $ for a set amount of gold at the Treasury. Many other countries were also on the gold standard. Advantages: People feel more secure if they can convert their $ into gold. It is supposed to prevent the gov.’t from printing too much $ (thus, preventing inflation). In reality, countries that go on the gold standard never have enough gold. Disadvantages: The gold stock may not grow fast enough to keep pace w/ a growing economy + thereby preventing economic growth. If too many people demand gold all at once, there can be a gold shortage. The price of gold can change dramatically over time. A gov.’t looks inept if it isn’t able to accurately manage the gold/$ supply. The US went off the gold standard in 1934 during the Great Depression, when people didn’t trust in the value of paper $ + began stockpiling gold. Fearing there would be a severe shortage of gold, the gov.’t ended the gold standard. End Section 2

  33. The Fed (Federal Reserve System) Janet Yellen Chairman of the Fed The central bank of the US. A central bank is a bank that can loan $ to other banks. It issues our paper $. B/c its member banks own stock in the Fed, the gov.’t does not own it. However the gov.’t does control it. The president appoints (w/ Congress’s approval) the Chairman of the Fed.

  34. The FDIC When the stock market crashed in 1929, many people lost their fortunes + immediately ran to the banks to withdraw their $. Many banks ran out of $ + closed permanently. Countless people lost everything. To re-establish people’s confidence in the banking system, Congress passes The Banking Act of 1933 which created the Federal Deposit Insurance Corporation (FDIC) which protects customer deposits in the event of a bank closure (up to $250,000 per individual per bank) Bank failures still happen occasionally. If a bank appears to be in danger of collapsing, the FDIC can seize the bank + either sell it to a bigger bank or liquidate it + pay off the depositors. This is all done in secrecy to prevent panic withdrawals. The primary reason for bank closures is poor management. End Section 3

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