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McConnell Economics, Chapter 5

Posted: Sun Dec 15, 2019 3:29 pm
by Jin+Guice
Discussion of the curriculum McConnell, Brue, Flynn Economics text, chapter 5.

Re: McConnell Economics, Chapter 5

Posted: Sat Mar 28, 2020 6:20 pm
by Jin+Guice
The first section of this chapter discusses income distribution. The majority of income in the United States is paid in wages, with the rest being divided between corporate profit, small business owners, interest on debt and rent. In the United States the distribution of income is highly unequal.
In the United States, the savings rate is very low with most money flowing to personal consumption. In the U.S. about 12% of personal consumption expenditures are spent on durable goods, 30% are spent on non-durable goods and 58% are spend on services.

The second section discusses businesses. Vertical integration is defined as firms that own plants (stores) that different functions in the production process. Three legally different types of firms are defined and the distribution of their number and percentage of sales in the U.S. is presented. Sole proprietors make up 73% of businesses and 5% of sales, partnerships make up 7% of firms and 6% of sales and corporations make up the remaining 20% of businesses and 89% of sales. The legal protection of the owners of corporate entities is discussed (people may sue for business but not personal assets of the corporation, this include LLCs which can be partnerships or sole proprietors). This section introduces the principal-agent problem, a problem encountered by medium and large corporations. This problem occurs when the interests and incentives for the managers of a firm do not align with the owners of the firm. One solution, suggested by the text, is to compensate corporate executives with stock in the company, thus making them owners and, in theory, aligning interests.

The third section discusses the economic role of government in a market economy. The text suggests that the government is responsible for maintaining a legal structure conducive to trade, promoting competition with antitrust laws, forming utilities in the case of natural monopolies, redistributing income through transfer payments, market intervention and progressive taxation; Punishing firms for negative externalities* and rewarding positives ones; and ensuring providing public goods**.

*Externalities are costs or benefits of market transactions not captured by the market. Pollution, for example.**Public goods are goods that suffer from the "free-rider problem," that is, once they are constructed, it is not possible to exclude others from using them. Examples are a lighthouse or national defence. 

The final section largely discusses how government spending is financed. It begins with a discussion of circular flow, which sort of ties the chapter together. Money and goods flow between the consumers, businesses and the government through different markets and government transfer payments to businesses and consumers.

The federal government collects revenue from income tax (48%), social security and medicare taxes (34%), corporate income tax (10%), excise taxes on commodities such as alcohol, tobacco and gasoline (4%) and other unspecified sources (4%). They spend this money on Pensions and income security payments (39%), Healthcare (19%, but this is pre obamacare) National Defense (16%), interest on public debt (14%) and "other" (14%). 

States get tax funding from sales tax, state income tax, corporate income tax and license fees. They spend this money on education, public welfare, hospitals and highway maintenance. They also receive transfer payments from the federal government. Local governments obtain most of their revenue from property taxes and spend most of it on education.

Re: McConnell Economics, Chapter 5

Posted: Fri Apr 03, 2020 12:42 pm
by white belt
Overall, I think this chapter provided a good overview of how the government interacts with a market economy. This explanation is what I felt like was missing from the previous chapter on free markets because it revealed some of the downsides of free market capitalism.

I found the requirement for a plant to have a physical establishment to be outdated, but perhaps this is a function of the text being ~20 years old. For example, a website that offers paid online courses for a cloud certification would not meet the definition for a business because it does not have a physical establishment?

What I've appreciated so far about the textbook is that it presumes almost no background knowledge. I find myself learning quite a bit about topics I already thought I completely understood because of the way the authors break everything down "Barney-style."