Chapter 2 homework

• Numbers 4, 8 and 12

• Comparative Advantage Problem

• Now…the multiple choice answers

Chapter 3

The American Economy in a Global Setting

“What Goes Around Comes Around”

• When firms prosper, so do households. When households struggle, so do firms.

• What are the economic forces that connect the well-being of households and firms?

The Circular Flow of Economic Activity

• Households and firms depends on the well-being of each other.

• This interaction is represented by the circular flow model.

Figure 3.1 The Circular Flow of Economic Activity

Households

• Is the typical family 2 parents, 2 children, and a dog??? TV depicts this family….

• Characteristics: One-fourth are headed by single individuals. About half are headed by two parents. They are aging. They are geographically mobile.

Firms

• Firms take on many different forms: Sole Proprietorships• Only one owner

Partnerships• Several owners pool their resources.

Corporations• Sell ownership in the form of stock

Stockholders have no financial liability beyond the value of their stock

Figure 3.2 The Changing Pattern in U.S. Production Between 1947 and 2004

FIRE Finance, insurance, and real estate

Changes in the U.S. Economy

• Major trends: More service sector jobs

• These are not only cleaning and retail jobs Legal services Health services Social services

Who buys from the product market?

• 62% comes from consumers

• 14% comes from other firms

• 16% comes from the government

• 8% comes from foreign firms, consumers, and government

Where does the money come from?

• Income from the resource market takes the form of payments to: Labor wages, salaries, and other

compensation

Landowners rent

Capital interest

Entrepreneurial skill profit

• Proprietor's income from partnerships

• Corporate profits from corporations

Figure 3.3 Sources of Incomein the United States Economy in 2004

The Government Sector of the Economy

• Direct effects: Adding to or taking from the flow of income

• Indirect effects: Purchasing goods and resources in markets

Levels of Government and the Circular Flow

• Local Government Collects property taxes Provides parks, museums, schools, police protection

• State Government Collects sales taxes Provides roads and school systems

• Federal Government Collects income taxes Pays transfer payments Provides national defense and interstate highways