REVIEW
Vocabulary Economics l Study of how decisions are made when resources are limited l Scarcity l Not enough resources to satisfy all of our desires l Needs l Things required for survival l Wants l Things we would like to have but don’t need for survival l Resources l Things used in making goods & providing services l
SCARCITY IS THE FUNDAMENTAL ECONOMIC PROBLEM l Because of Scarcity we must answer 3 questions in economics l What to Produce? l How to Produce? l Whom to produce for? l
Trade Offs & Opportunity Costs Trade Off – Decision that must be made when choosing between items l Opportunity Cost – Value of the next best alternative that was given up when an economic choice was made l Can be time or money as well l You always lose when faced with a trade off l Production Possibilities: The combinations of goods and services that can be produced from a fixed amount of resources. (Guns vs. Butter or Computers vs. Food). l
Assessment Activity: All economic questions and problems arise from scarcity. Economics assumes people do not have the resources do satisfy all of their wants. Therefore, we must make choices about how to allocate those resources. We make decisions about how to spend our money and use our time. This activity will focus on the central idea of economics- every choice involves a cost. l Let's say you have five dollars. What would you like to spend it on? There a million things you would love to spend five bucks on, but let's imagine there are only three things out there you really want to buy: gum, soda, and movie tickets. Look at the price chart to the right and answer the questions. l Good Price Gum $. 50 Soda $1. oo Movie Ticket $5. 00
Considerations for Businesses l Productivity l Measure of the amount of output produced by a given amount of inputs in a specific period of time l Specialization Takes place when people, businesses, regions & countries concentrate on goods or services that they can produce better than anyone else l Examples – China and electronics l l Human l Capital Sum of the skills, abilities & motivations of people
Gross Domestic Product (GDP) Measure of an economy’s size & success (monetary measure - $13. 78 trillion in 2007) l Total value of all the final goods & services produced in a country during a single year l l Used cars not counted in GDP because second hand sales are not counted Used to measure standard of living (quality of life based on the possession of necessities and luxuries that make life easier) in a country l Measures quantity not quality l
Gross Domestic Product (GDP) cont. l Per Capita GDP – total GDP divided by the country’s population (U. S. was $45, 800 (2007 est. ) ) l Compared yearly to check growth of country l Higher GDP from previous year = growing economy l Lower GDP from previous year = shrinking economy
NAFTA l North America Free Trade Agreement (NAFTA) – agreement between Canada, Mexico, and the USA where tariffs were almost completely eliminated (“free trade”)
Demand Desire, willingness, and ability must all be present in the consumer for demand to exist l Demand Schedule: a table that show the various quantities of a product or service that someone is willing to buy over a range of possible prices l Demand Schedule Shown as a graph:
Demand cont. Each point represents how much of a product a person will buy at a certain price l Demand Curve – formed by connecting the points – always slopes downward (Demand = Down) l Shows most people are willing to buy less of a product at a higher price and more at a low price l Law of Demand l Quantity demanded and price move in opposite directions l l P D
Market Demand – total demand of all consumers for a product or service l Example – Tobacco l We buy products for their utility (pleasure, usefulness or satisfaction products give us) – it is different for everyone l Example – l Diminishing Marginal Utility l Our additional satisfaction tends to go down as we consume more units l Therefore we are willing to pay less for it as we use more of it l Example – Pizza, Roller Coaster Rides l
Elasticity of Demand Extent of change in price causes a change in demand l Elastic products – demand changes by large amounts when the price is only slightly changed l Inelastic products – demand changes by small amounts or does not change at all even if price changes drastically l Products with substitutes or luxury items are more elastic l Products with few or no substitutes are inelastic l
Supply Can be 1 supplier or total supply for a product l Producers offer different quantities of a product depending on the price consumers are willing to pay l Supply Schedule l Quantities producers are willing to supply at various prices l The supply schedule graphed shows the supply curve. l Supply Schedule Shown as a graph:
Supply cont. l l Each point represents how much of a product a company will produce or supply at a certain price Supply Curve – formed by connecting the points – always slopes up (Up is in Supply) Shows most companies are willing to supply more of a product at a higher price and less at a lower price Law of Supply l As price rises, quantity supplied rises l As price falls, quantity supplied falls l Quantity demanded and price move in same direction l P S
Surplus & Shortages A surplus will be at the top of the curves l A shortage will be at the bottom of the curves l At $6, QD = 5 QS = 2 At $12, QD = 2 QS = 4 The Surplus in this graph is _________ The Shortage in this graph is _______ • A surplus signals the price is too high • A shortage signals the price is too low
Price Ceiling l Government or group imposed limit on how high a price can get for a product l l Examples: Rent prices in NYC after WWII, Gas Prices Must be below Equilibrium Price to be effective l l Ineffective Effective Why? Causes Shortages in the Market What is the Shortage in the graph?
Price Floor l Government or Group imposed limit on how low the price of an item can get l l Must be above Equilibrium Price to work l l Example: Minimum Wage, Agriculture Why? Causes Surplus in the Market
Class Question 150 375 What is the Surplus from the Price Floor?
The Business Cycle l l The Business Cycle (AKA The Economic Rollercoaster) l The ups & downs of the economy l Alternating periods of growth & decline 4 Phases 1. Expansion (Also known as Prosperity or Recovery) l Economy is improving l Businesses produce more needing more employees l Higher employment means higher wages l Higher wages mean higher consumption l Higher consumption means more production
The Business Cycle 2. Boom l Economic activity is at its peak l Peak – the highest point of the boom l Businesses are working at full capacity l Law of Diminishing Returns – as a business adds more resources to production profits will rise until a point where more resources begin reducing profits
Business Cycle Peak Trough Boom Expansion Decline/ Recession Recovery/ Prosperity
The Business Cycle 3. Decline l l l The economy is slowing down Production is cut down Workers are laid off 4. Recession (Contraction) l Occurs when Real GDP goes down over 6 months Real GDP – shows economy’s production after the distortions of price increases have been removed l Eliminates impression that output has gone up when only prices have gone up l l l Lowest period of production Unemployment is high People do not buy as much Trough: lowest point of a recession Depression: a severe recession
Business Cycle
Measuring the Economy l GDP Categories Consumer goods – bought by consumers for final use l Business (Capital) goods – bought to be used by a business to produce other goods l Government goods – anything bought by the federal, state and local governments l l Net Exports The difference in what the nation buys & sells with other countries l Export – anything sold to another country l Import – anything bought from other countries l
Trade Deficit
Imports vs. Exports
Types of Business CH. 22, SECTION 1
4 Elements of Business Expenses 1. • What you need to start & continue a business Advertising 2. • Introduction and reminder of your business Receipts & Record Keeping 3. • Needs to be accurate and dependable – for profits & losses Risk (profit vs. loss) 4. • Risk is a consequence to the
Considerations When Starting a Business l Establishment of inventory l Use of computers/Technol ogy l Turbo Tax l Time – the opportunity cost. You could be working for someone else.
3 Types of Businesses 1. Sole Proprietorship • • • Owned by 1 person Easy & relatively inexpensive to start would be a need Small businesses typically Most common form of business Owner receives all
Sole Proprietorship Advantages l Receive all profits l Quick decisions because no consultation l Relatively low taxes Disadvantages l Unlimited liability l Handle all decisions l Time consuming l Rely on own funds l Business depends on one person
3 Types of Businesses cont. 2. Partnership • • • Owned by 2 or more individuals Articles of Partnership – Partners sign an agreement on what each is responsible for. Limited Partnership o o • Partners are not equal General Partner – majority of control Limited Partner – own a small part – do not voice opinions & are responsible only for what they put in LLPs (Limited Liability Partnerships) [mix of corporations and partnerships): Very popular with lawyers, accountants, and architects. Joint Venture o temporary partnership to do a job
Partnership Advantages l Losses are shared l More efficient than proprietorships l Pay taxes on share of profit l Easier to borrow money Disadvantages l Profits are shared l Unlimited liability, most of the time l Must reach agreements l Committed partners
3 Types of Businesses cont. 3. Corporation l Owned by many l Started by a founder l Owned by Stockholders l Run by a Board of Directors l State government issues a charter to run the business l Complicated structure l Business has the same rights as an individual l Are Double Taxed l Founder’s responsibilities l l Register with the state government for a charter Sell Stock Select the initial Board of Directors l l l Elected by Stockholders Supervise & control the corporation Make all major decisions Board of Director’s responsibility
Corporations Advantages l Owners do not have to devote time to make money. l Stockholders have limited liability; they only lose what they put in. l Individuals trained in specific areas make decisions. Disadvantages l Decisions are slow. Interest of the board may differ from the stockholders. l Double taxation. Govt. taxes corporate profit than individual shares. l Stockholders have little or no say in how business is run.
Stocks and Bonds l Stock: Individual ownership in a corporation. Shareholder receives voting rights and dividends. l Bond: Promise by a corporation to pay a stated amount of interest over a period of time.
Other Types of Businesses l Franchise – sell the name & structure of a business l Help train employees & set up the business l Franchisee – pays a start up fee & annual fee l Non – Profit – business does not run to make money l Cooperative – individual businesses that work together to benefit all members l Producer – Ex: Farmer’s Market l Consumer – Ex: PCC Natural Markets, REI l Service – Ex: Credit Unions, Utility companies
Collective Bargaining l Process where union leaders & employers discuss employment terms l Compromise is the issue l 3 steps Negotiation – Labor & management meet to discuss contract issues l Mediation – A neutral 3 rd party hears both sides l l l Federal Mediation & Conciliation Service provides a mediator Arbitration – 3 rd party makes a final decision of compromise
Unions Today l Right to Work States l l Right to Work States in Blue Prevents unions from forcing workers to join Movement of Human Capital l Rust belt – the North Sun belt – the South Factories & businesses moved from the rustbelt to the sunbelt l l Weather was better Cheaper labor No existing unions White collar vs. Blue collar jobs White Collar = upper management l Lot of news lately on white collar crime in big business. Example: Enron, Merrill Lynch l Blue Collar = working class, usually doing manual labor l Blue Collar Workers
Roles of the Government & Monopolies Ch. 23, Section 1
Roles of the Government 1. Provide Goods & Services l Private goods Exclusion Principle – a person is excluded from an item’s consumption unless he/she pays for it l Mostly businesses provide private goods l Examples l l Public goods Non-Exclusion Principle – no one is excluded from a good or service whether or not they pay l The government provides public goods l Examples l
Roles of the Government 2. Handle Externalities l Externality – unintended side effect of an action Public goods provide positive externalities because everyone benefits from them l Promotes positive externalities l l l Examples Prevents negative externalities l Examples
Positive or Negative? l Bee Keepers next to a farm field l l Positive. Why? l l Negative. Why? l l Positive. Why? Ryan burning tires for the scrap metal Company that pollutes the local stream Over-harvesting of the fish population. Danny buys a brand new video game. Storing nuclear waste from the power plants. Mrs. Smith planting a flower garden. Taylor finds the cure for AIDS. Mr. Cleland buys a home.
Roles of the Government 3. Regulate Market Activities l By regulations, the government reduces negative externalities l FTC – Federal Trade Commission – regulates truth in advertising l Example l FDA – Food & Drug Administration – enforces purity, effectiveness and labeling of food, drugs & cosmetics l CPSC – Consumer Product Safety Commission – recalls unsafe products l Recall – company pulls product or changes it l Example – Peanut recall, Chinese lead based toys l Pg. 632 for other regulatory agencies
Roles of the Government 4. Ensures Competition l Competition is fundamental to a market economy l Exists if different businesses produce similar products l Monopoly – One group controls the market l Anti-trust laws – intended to control monopoly power & promote competition l Sherman Anti-trust Act – 1890 l Theodore Roosevelt – the “Trust-Buster” – Northern Securities l AT&T – Ma-Bell l Mergers – combination of two or more companies to form a single business l l Government will stop if competition will be decreased Horizontal Merger – Companies in the same business Vertical Merger – Company joins with one it buys from Conglomerate – Buying of un-related businesses l Example: GE (power plants, light bulbs, etc)
Perfect Competition l Large markets – requires a large amount of buyers & sellers l Similar products l Easy Entry & Exit l Information obtainable for Buyers l No control over price – Market price is the equilibrium price (decided by supply & demand)
Imperfect Competition l Imperfect l One Competition group can affect price l Monopoly – one group controls all of the market l Single seller l No substitutes l No easy entry l Controls the market price – suppliers can raise prices without losing business
Types of Monopolies l Natural: Control of resources – the government allows these but regulates them l l Example: Water Company Geographic: control of a location l Example: Dick’s only Sports store in area Technological: Patent owned on technology l Government: created by the government. – Illegal to enter l l l Example: Postal Service Cartel: International form of monopoly l Example: OPEC
Barriers to Entry l Government regulations: Technological or Government or regulations are too expensive l Cost of getting started: Large amounts of capital are needed l Ownership of Raw Materials: Companies control materials & do not sell to competitors
Oligopoly l Domination of a few businesses in competition l Barriers to entry l Identical or slightly different products l Some control of price
Oligopoly Examples l Movie Studios l Example: l Television l Disney/ABC, CBS Corp. , NBC Universal, Time Warner, and News Corporation l Food Processing l Kraft Foods, Pepsi. Co, and Nestle
Fiscal and Monetary Policy Ch. 24
The Government and the Economy l Regulating the economy We want slow growth l If the economy is not doing good we can fall into a recession (right now) and people can lose their jobs l If the economy is growing too fast we can have rapid inflation; where prices rise faster than wages l Both are bad – Two ways to make sure our economy is growing slowly l l Fiscal and Monetary Policy
The Federal Reserve (FED) l Independent Agency: part of the government but unattached to Congress & the President l l Allows them to make economic decisions free from political pressure Roles of the FED Regulates foreign banks that do business in the U. S. 2. Our Government’s bank 1. Holds government’s money l Buys and Sells Bonds for Government l Issues our currency l 3. Conducts Monetary policy
The Federal Reserve (FED) cont. l Board of Governors (7 member board) Chairman – Ben Bernake l Alan Greenspan was Chairman from 1987 to 2006 l l Advisory Council (12 members – 1 from each district) l Federal Open Market Committee (FOMC) – major policy making group l 12 Federal Reserve Banks & Branch banks
Fractional Reserve Banking l The tools the FED has to create money Discount rate – prime rate which banks borrow money from the FED l Reserve Requirements – Percentage of deposits that banks must hold l Open Market Operations – buying and selling of government bonds l Federal Funds Rate – interest rate that banks lend to other banks usually overnight l l The FED Today video
Monetary Policy l Quicker response than fiscal policy l Regulates the amount of money in circulation l Tight Money Policy Goal is to stall growth to stop inflation l Taking money out of circulation l Can lead to a recession l Raising interest rates l Raising the reserve requirements l Selling bonds l
Monetary Policy cont. l Loose Money Policy Goal is to start growth of the economy to combat a recession l Increasing the money supply l Can lead to inflation l Lowering of interest rates l Lowing reserve requirements l Buying bonds l
Fiscal Policy Government (politicians) use taxing and spending to regulate the economy l Tools: l l Tax: can be raised or lowered Spending: can be increased or decreased. Ex. Cutting back on public works projects Tight Fiscal Policy l l l Combat inflation Raise taxes Cut spending Take money out of economy – slow economy l l Combat a decline Cut taxes Increase spending Put money into Economy – grow economy Loose Fiscal Policy
Money Replaced the barter system in traditional economies l Functions l l Medium of exchange l l Used to trade items Reliability to store, save, and retrieve Store of value Measure of value Can be divisible Each one must be equal to the other l Not easy to counterfeit l l
Banking l l l Brings savers (sellers) & borrowers (buyers) together in the market Savers = deposits Borrowers = loans Banks are a business and have profit motive Make money off of fees and interest on loans Reserve Requirements – banks want more deposits so they can loan more money
Types of Deposit Accounts 1. Checking Account l l l Allows customers to write checks, use debit cards or withdraw money from an ATM (Automated Teller Machine) Money transactions are quick and efficient Money does not stay in the account for long Depositor usually receives no interest Checking/Debit Cards l Transfer of funds electronically l Tied directly to checking accounts
Types of Deposit Accounts cont. 2. Savings Account Banks pay interest to customers based on how much money is deposited l Money grows larger the longer it is there l Money remains untouched for longer periods of time l
Types of Deposit Accounts cont. 3. Certificate of Deposit (CDs) l Customers loan a certain amount to the bank for a certain amount of time l Ex. I bought a $1, 000 CD for 1 year at 4% l Higher rates of interest than savings l Customers can’t withdraw their money without a penalty
Types of Banks Commercial Banks – full service to individuals & businesses (Most common) 2. Savings & Loan Associations – traditionally loaned money to people buying homes & issued only savings accounts 3. Credit Unions – non-profit – sponsored by large businesses, labor unions or government institutions – offer full services at usually lower prices 1.
FDIC l Federal Deposit Insurance Corporation l Insures deposited money in the bank up to $100, 000 – Right now $250, 000 l Most are FDIC insured
Loans l l l l l Agreement for borrowing money with repayment plus interest Used to make expensive purchases Banks make money on the interest paid for a loan In order to make loans, banks have to have money To have the money, banks must attract deposit customers Can increase the supply of money Principle – amount borrowed Interest – cost of borrowing Interest Rate – rate of cost to borrow
Types of Loans Fixed – interest is set & can’t be changed 2. Variable – Changes when interest rates change 1.
Charge Accounts l Buy goods & services at individual stores & pay for them later l Credit limit: maximum amount a person can buy with the promise of payment
Types of Charge Accounts 1. Installment Account Repaid with equal payments over a certain period of time Part of the payment goes towards interest & part towards the principle l l l 2. Regular Account Billing cycles where a bill is sent at the end No interest is charged if entire bill is paid Account can’t be used again until the balance is paid Interest is charged on the balance not paid l l l 3. Car loan or mortgage Furniture Stores usually do this. Pay by 2010, certain amount each month, but with no interest. Revolving Account Billing cycles where a bill is sent at the end Interest charged on portion not paid Account can still be used until credit limit is reached l l Example: Credit Cards
Credit Cards l Make purchases without having the money l Charge high interest rates – usually @ 18% l Lower interest rates if the customer is reliable l Finance Charges – Cost of credit (interest) expressed in dollars l APR – Cost of credit (interest) expressed as a percentage
Applying for Credit l Fill out application l Credit Bureau does a credit check l Creditor may ask for references l Credit checks show your income, debt and ability to pay debts in the past
Credit Rating of risk: Excellent, Good, Average or Poor l Ratings have a number associated with them l 3 Credit Bureaus: Experian, Transunion & Equifax l Gives lenders an idea of reliability when issuing loans l l Higher Credit Score = less interest you are charged on a loan = saving money Unsecured loans – loan based on reputation l Secured loans – have collateral to back up the loan l
Government Regulations l Equal Credit Opportunity Act: a person can’t be denied credit because of race, religion, national origin, gender, marital status or age l Usury Laws: Restrict the amount of interest companies, not banks, can charge l In North Carolina, it is 8%. Lend neighbor $100 loan can only receive $8 from interest
Bankruptcy l Debts are so large they can’t be paid back l Most of what a debtor owns is sold or given to creditors l Takes 10 years to reestablish credit l States can become bankrupt too
Consumer Responsibilities l Smart Buying Strategies l l l Info on products Watch out for advertising Comparison shopping – find out prices on product from different stores/internet l l When product fails l l l Brand Name vs. Generic Report it Check the warranty Keep a copy of records Be calm Make Fair complaints l Ex.
Taxation and Budget Ch. 25
Major United States Taxes l Personal income: Tax on an individual’s yearly income. l l l l l Granted by the 16 th amendment April 15 th is income tax day. Corporate income: Tax on a corporation’s profit. Social Insurance: Social security tax. (FICA). Excise: Special tax on alcohol, tobacco, and gasoline. Estate: Tax on the assets of the deceased. Inheritance: Tax paid on anything person inherits. Gift: Tax paid on the value of an expensive gift received. Sales: Tax paid on all purchases made by people who work. Property: Tax on the value of property. Can include buildings, stocks, bonds, and home furnishings.
Example of a Paycheck
Example of a Paycheck
What shows the economy is growing? 1. 2. 3. 4. GDP decreases from the previous year CPI is very low Mr. Cleland doesn’t give homework for a week GDP increases from the previous year
Taxation Revenue: Money the government receives. l Expenditures: Money the government spends. l 60 to 80 percent of state and local government revenue comes from taxation. l Intergovernmental Revenue: Money received from other governments. l l l Example: States receive a big chunk of money from the Federal Government. Local governments then can get some of that money from the state. Nearly 100 percent of federal government revenue comes from taxes.
NC Governme nt Revenue
NC 2005
What happens when the real GDP goes up? 1. 2. 3. 4. The economy expands Unemployment rises Prices are inflated The economy suffers a recession
Taxation Problems l l The government sometimes abuses its power to tax which leads to revolts. Stamp Act (1765): British tax on virtually all goods. Tea Act (1773): British tax on tea. Led to the Boston Tea Party. British taxes lead to the American Revolution where the United States became a free country after defeating England.
Which of the following is known as a “banker’s bank”? 1. 2. 3. 4. Department of Welfare Federal Reserve System Internal Reserve Service Federal Open Market Committee
United States Taxation Problems Shay’s Rebellion (1786): Heavy state taxes in Massachusetts put many farmers in debt. Daniel Shay led a group of 1, 200 farmers in a revolt. The revolt was put down. l Tariff of 1828: High tariff on imports. Hurt the southern states because of lack of industries. Secession was openly discussed in South Carolina. l Tariff: Tax on imports. l Secession: Separate from the nation. l
The Glass-Steagall Banking Act established which federal institution? 1. 2. 3. 4. The Federal Deposit Insurance Corporation The Bank of the District of Columbia The Federal Reserve The 2 nd Bank of the US
Taxation Powers l The first government of the United States was the Articles of Confederation. l The national government could not tax under the Articles. l Under the Constitution, the government is given a limited power to tax to keep it from abusing its power.
If a nation has a comparative advantage w/regard to the production of a certain good, what is most likely to do? 1. 2. 3. 4. Import more of that product Specialize in making that product Ban the making of that product Suffer from a scarcity of that product
Limits on Taxation The Constitution gives the government the power to tax. l All appropriations bills (tax bills) are introduced in the House of Representatives. l l Appropriations bills are laws that allow spending for a particular activity All national taxes are the same throughout the country. l The 14 th amendment says all groups must be taxed equally. l
Which of the following was not an effect of the trade deficit in the US in the late 1990 s? 1. 2. 3. 4. The import industries had higher unemployment The supply of US dollars increased The US dollar lost some of its value The export industries had higher unemployment
Tax Classifications Progressive tax: Based on income. Higher taxes on those with higher incomes. Those who make less than a certain minimum pay no taxes. l Regressive tax: People pay the same amount with no consideration of income. l l l Effects people with lower incomes because it’s a larger percentage of their total income. Proportional tax: Takes the same percentage of all incomes.
Income Tax l Tax on income l 16 th amendment (1913): Gave the government the power to collect income tax. l Personal income and corporate income are the two types.
Tax Burden on Income Levels
2008 Income Tax Brackets
Which of the following is essential to the success of a free enterprise system? 1. 2. 3. 4. Minimal government interference Minimal legal ground rules Minimal private ownership Minimal competition between businesses
Tax Return l l l The deadline is April 15 th. All taxpayers fill out a tax return form and send it to the Internal Revenue Service (IRS). An exemption is a portion of income that is not taxed. Deductions are for medical expenses and charitable contributions. They are not taxed. Everything else is taxable income.
The forklifts that are used to load semis would be classified under which of the following 4 “factors of production”? 1. 2. 3. 4. Natural resources Labor Capital entrepreneurs
Paying Income Tax l Employers withhold funds from checks to pay the state and national government. l Because of this, taxpayers do not pay as much at the end of the year. l Some taxpayers receive a refund.
Property Tax l The property is examined to asses the value. l Local governments set the tax rate. l Property taxes have increased steadily over the years leading to taxpayer revolts.
Sales Tax l Tax paid at the time of purchase. l The revenue is sent to state and local governments. l Many state governments exclude necessary items from the sales tax. l North Carolina is the 1 st Friday in August
Which of the following statements about e-commerce is not accurate? 1. 2. 3. 4. It boosts the revenue of each state in the US. It can take away business from traditional retail stores. It allows customers to avoid paying sales tax. It offers customers greater shopping convenience.
Tariffs l l Designed to raise revenue and protect American businesses. Products are made cheaper in other countries and brought to America. When America charges a tariff, the country charges a tariff on American goods. Tariffs have caused many problems in U. S. history.
Non-Tax Revenue l l l The government will sell and rent land. The government will charge tolls for the use of roads and canals. The government will charge fees for driving, hunting, fishing, and getting married. Charge fines (traffic). Government run lotteries provide revenue, but they are controversial.
Budget l l l l Budget: Plan for managing and spending money. Governments create budgets to help them make decisions because of limited resources. Two parts: Revenue and Expenditures. (look on page 679) Runs on a fiscal year: October 1 -September 30. The Office of Management and Budget (OMB) asks each federal department to estimate the amount of money they will need. The OMB estimates the government’s revenue. The completed budget is about 1000 pages long.
Federal Revenue 2007
2006 Government Expenditures
Revenue vs. Expenditures
Which form of tax revenue accounts for the highest percentage of federal income? 1. 2. 3. 4. Estate taxes Excise tax Income tax Payroll tax
Passing the Budget l The President sends the budget to Congress. l Appropriations bills must be passed by the House of Representatives Congress frequently changes the budget. l The budget is always filled with compromises. l State budgets follow the same process as the national budget. (look on page 683) l Budgets change from year to year because of different political philosophies. l
Budget Deficits l l l Deficits occur when expenditures exceed revenue. The U. S. budget had a deficit from 1968 -1996. Look on page 690 Governments are expected to do more without raising taxes. This forces them to borrow money. l President Obama has proposed cutting deficit in half before his first term is over.
Expenditures on Elementary and Secondary Education
What conclusion can be reached in determining why the Federal Reserve Board lowered interest rates? The economy is booming and spending needs to decrease 2. The FED is encouraging the national government to borrow money from private banks 3. The FED is attempting to loosen the money supply to encourage more borrowing by individuals 4. Businesses are experiencing record losses in sales 1.
Borrowing Money l The government borrows money to make up for a deficit. l Most borrowing comes from the sale of government bonds. l The government pays off the bonds as they come due. l China owns a great amount of the US bonds. Estimated $900 billion.
Percentage of Foreign Holder of US Bonds
National Debt l The total amount the government owes on the money it has borrowed. l Goes up with each deficit and accumulated interest. l Interest: Fee paid for the use of money. l 1996: Interest was $345 billion. They borrow to pay off the interest.
National Debt in the Future
Why would a person put money into a Certificate of Deposit (CD) instead of a regular savings account? 1. 2. 3. 4. Money is more easily accessible with CD’s Savings accounts do not accumulate interest A person receives greater tax benefits with CD’s accumulate higher interest compared to savings accounts
Balancing the Budget l Balanced Budget: Expenditures do not exceed revenue. l In 1995, Republicans introduced the Balanced Budget Amendment. It called for a balanced budget by 2002. It did not pass. l Many state constitutions require balanced budgets with no borrowing. l Rely on the emergency funds to pay off debts when state economy is struggling
Automatic Stabilizers l Programs to automatically stimulate economy as soon as they are needed l Unemployment l Income tax insurance
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