Lecture 3: A Tour of the Economy

Question 1

The circular flow diagram shows_________

Answer 1

the interactions among the various actors and sectors of the economy.

Question 2

Households have two important roles in the economy:

Answer 2

households own the economic resources (land, labor, and capital) and supply them to business firms in return for income (rent, wages, and interest)
households spend part of this income on the goods and services produced by firms

Question 3

There are approximately 24 million businesses in the U.S. The most numerous are proprietorship. A proprietorship is owned _______.

Answer 3

A proprietorship is owned by one person who receives all the profits and is responsible for all the debts incurred by the business (unlimited liability).

Question 4

Economic Actor

Answer 4

An economic actor is any entity that makes an economic decision.

Question 5

Advantages and Disadvantages of Proprietorship

Answer 5

The advantages of a proprietorship are (1) the owner has complete control of the business, (2) there is little legal complication involved in starting a proprietorship, and (3) the profits of the business are part of the income of the proprietor and, therefore, are taxed under the personal income tax. The disadvantages of a proprietorship are (1) the difficulty in raising funds for the business and (2) the proprietor’s unlimited liability for the debts of the business.

Question 6

Partnership

Answer 6

A partnership consists of two or more owners who share the profits and responsibility for the firm’s losses.

Question 7

Advantages and Disadvantages of Partnership

Answer 7

A partnership has the same tax advantage as a proprietorship: the profits of the business are treated as the personal income of the partners. More owners also gives partnerships access to a larger source of funds for the business. On the disadvantage side partnerships are legally complicated: whenever there is a change in ownership the partnership is automatically dissolved. Also, the partners have unlimited liability for the debts of the business.

Question 8

Corporation

Answer 8

A corporation is a legal entity owned by shareholders whose liability for the firm’s debts is limited to the value of the stock they own (limited liability). One disadvantage faced by a corporation is that it is subject to double taxation: dividends paid to shareholders are taxed once under the corporate income tax and then again under the personal income tax. A second disadvantage is the separation of ownership from control. Those managing the corporation may not act in the best interests of the shareholders.

Question 9

Disadvantages of a Corporation

Answer 9

One disadvantage faced by a corporation is that it is subject to double taxation: dividends paid to shareholders are taxed once under the corporate income tax and then again under the personal income tax. A second disadvantage is the separation of ownership from control. Those managing the corporation may not act in the best interests of the shareholders.

Question 10

The government __________.

Answer 10

taxes, spends, and regulates

Question 11

All levels of government together purchase about __% of all the goods and services produced each year.

Answer 11

20%

Question 12

The financial sector acts as an intermediary between savers and investors. The financial sector includes___________.

Answer 12

financial markets such as stock and bond markets and financial intermediaries
-like banks, mutual funds, and insurance companies.

Question 13

International Sector

Answer 13

The American economy has extensive interactions with the rest of the world. Trade in goods, services, and income is one such interaction. Exports are products made in this country and sold abroad;

Question 14

Exports

Answer 14

Exports are products made in this country and sold abroad

Question 15

Imports

Answer 15

Imports are foreign made products purchased by Americans.