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Chapter 1

Chapter 1. Individuals and Government. Public Finance. Public finance is the field of economics that studies government activities and the alternative means of financing government expenditures. Government.

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Chapter 1

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  1. Chapter 1 Individuals and Government

  2. Public Finance • Public financeis the field of economics that studies government activities and the alternative means of financing government expenditures.

  3. Government • Governments are organizations formed to exercise authority over the actions of persons who live together in a society and to provide and finance essential services.

  4. Political Institutions • Political Institutions are rules and generally accepted procedures that evolve for determining what government does and how government outlays are financed.

  5. Examples of Political Institutions • Majority rule • Representative government

  6. The Allocation between Private and Government Resources • Private • Food • Housing • Cars • Clothing • Government • National Defense • Public Schools • Police

  7. Figure 1.1 A Production-Possibility Frontier C B G2 Government Goods and Services per Year A G1 X2 M X1 0 Private Goods and Services per Year

  8. Distribution of Government Goods and Services • Nonmarket rationing: • Prices and willingness to pay those prices are not applicable to goods like national defense.

  9. The Mixed Economy: Markets and Politics • Pure Market Economy • Virtually all goods and services are supplied by for-profit private firms. • Supply and demand determine price. • Mixed Economy • A mixed economyis one in which government supplies a considerable amount of goods and services and regulates private economic activity.

  10. Figure 1.2 Circular Flow in the Mixed Economy Goods & Services Goods & Services Output Market Dollars Dollars Income Support & Subsidies Subsidies Taxes, fees, charges Taxes, fees, charges Government Services Government Services Dollars Dollars Resources Resources Households Government Firms Input Market

  11. Government Expenditures in the United States • Government purchases of • labor • land • capital • Government Transfer Payments • Welfare • Social Security

  12. Year GDP Federal Government State and Local Government Total Government Percentage of GDP Total 1930 91.3 2.5 7.5 10.0 10.95 1945 223.0 84.7 8.5 93.2 41.79 1960 527.4 85.8 34.1 119.9 22.73 1975 1635.2 345.4 152.1 497.5 30.42 2002 10442.1 2073.9 1050.9 3124.8 29.93 Growth in Government Expenditures Table 1.1 (abbreviated)

  13. Country Government Current Expenditures as a Percentage of GDP 2001 Denmark 49.1 France 48.8 Germany 45.1 United Kingdom 39.4 Japan 38.1 Canada 36.7 United States 31.9 International Comparisons

  14. Figure 1.3 Total Government Expenditure as a Percentage of GDP 1929-2002

  15. Structure of Federal Government Expenditures • Purchases of Goods and Services • Transfer Payments • Grants in Aid to State and Local Governments • Net Interest Paid

  16. Other 2.2 Category Percentage of Total Federal Expenditures Transfer Payments 44.9 Purchases 28.2 Interest 14.7 Grants to State and Local 10.0 Federal Expenditure by Category, 2002 Table 1.2

  17. Figure 1.4 The Distribution of Federal Expenditure, 1966-2002

  18. Federal Government Expenditures by Function

  19. The Structure of State and Local Government Expenditures in the United States • Education • Civilian Safety • Transportation • Executive, Legislative, and Judicial • Income Security • Health and Hospitals • Recreational and Cultural Activities

  20. State and Local Government Expenditures

  21. Financing Government Expenditures in the US • Taxes: • Income (Corporate and Personal) • Payroll • Excise • Customs

  22. Federal Revenues

  23. State and Local Government Revenues

  24. State Budget Crunch of 2002 • 37 states were forced to reduce their budgets. • Revenues were typically 10% less than anticipated. • States with the most severe deficits: • AK, AZ, CA, NY, NC, OK, OR, VA, and WA • Causes • Cuts in taxes on business and individuals in the 1990s • No sales tax collections on services • Growth in costs of Medicaid

  25. Implications of a Graying America • Social Security • In 2008 baby-boomers start to retire and collect • The ratio of workers to retiree falls • Medicare • Health care inflation is substantially higher than overall inflation • Medicaid • Increased use of long-term care for baby-boomers

  26. How Much Government is Enough? • The question of how much government is enough is an important one in any society. It is the tradeoff between public and private goods. When government gets bigger, its increased involvement comes at the expense of less private consumption.

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