The Private Sector

The term “private sector”is used to connote business

firms and households--domestic as well as foreign

Households

Households “own” economic resources (directly or indirectly through ownership of shares).

Households are sellers in resource or “factor” markets.

Households are buyers in final product markets.

Firms

Firms are buyers in resource or factor markets

Firms are sellers in final product markets

What firms pay out for the use of resources must ultimately accrue as “income” to resource owners.

National Income (NI)

National income includes:

$Wages and salaries

$Proprietors’ income

$Rental income of persons

$Corporate profits

$Net interest

NI is called “earned income”because it is income received

for the sale of resources--that is, income resulting from the production of goods and services

National Income in 1996National income by type, 1997

billions of dollars

Source: Economic Report of the President

425.10 / 6.8%

735.90 / 11.8%

146.30 / 2.3%

520.30 / 8.3%

4426.90 / 70.8%

interest

profits

rental income

proprietors' income

wages and salaries

National Income, 1975-97

billions of dollars

Source: Economic Report of the President

Year

1997199519901985198019751970

Nati

onal In

com

e

8000

7000

6000

5000

4000

3000

2000

1000

0

Consumption

Household spending for newly-produced goods and services is defined as consumption. We distinguish between 3 categories or types:

Spending for consumer durables

Spending for consumer nondurables

Spending for consumer services.

Category

Spending in1997

(billions)Percentof Total

Durables $659.4 12

Nondurables 1,592.7 29

Services 3,236.5 59

Source: Economic Report of the President

Consumer Spending by Type, 1997 (in billions)

Total spending byU.S. households

in 1997 was astaggering $5.5

trillion

Consumption Expenditure in the U.S., 1970-97

Source: Economic Report of the President

Year

1997199519901985198019751970

bill

ion

s6000

5000

4000

3000

2000

1000

0

Forms of Business Organization

Proprietorship

Partnership

Corporation

Business Statistics, 1997

Legal Form NumberPercent of Total

Proprietorship 15,848,000 74

Partnership 1,467,000 7

Corporation 3,965,000 19

Most corporations aresmall (revenues lessthan $1 million).The

top 17 percent ofcorporations account for

94 percent of corporate revenue

Source: Statistical Abstract of the U.S.

There are morethan 21 million

business enterprises in the U.S.

Business Firms As Spending Units

Investment is defined as

All spending by business firms for newly built equipment and business structures.

All changes in business inventories of raw materials, semifinished articles, and finished goods.

All spending by households for newly constructed residential housing

Business Fixed Investment, 1982-97

billions of chain-weighted 1992 dollars

Source: Economic Report of the President

Year

199719941991198819851982

bill

ion

s of

19

92

dolla

rs1200

1100

1000

900

800

700

600

500

Components of Business Fixed Investment, 1982-97

billions of chain-weighted 1992 dollars

Source: Economic Report of the President

Year

199719941991198819851982

billions

of

1992 d

ollars

700

600

500

400

300

200

100

0

Structures

Durable equipment

Computers

The Simple Circular Flow

Assumptions

•No public sector; hence, no taxes, government spending, or transfer payments.

•No investment spending

•No exports or imports

Factor markets

Product markets

Costs of p

roduction

Productive f

actors

Sales revenue

Land, labor, capital

National income

ConsumptionGoods

Goods

Note: Goods includes consumer services