Chapter 1

Individuals and
Government
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Government
Governments are organizations formed
to exercise authority over the actions of
persons who live together in a society
and to provide and finance essential
services.

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Political Institutions
Political Institutions are rules and
generally accepted procedures that
evolve for determining what
government does and how government
outlays are financed.

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Examples of Political
Institutions
Majority rule
Representative government

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The Allocation between

Private and Government
Resources
Private

Food
Housing
Cars
Clothing

Government
National Defense
Public Schools
Police

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Government Goods and

Services per Year

Figure 1.1 A Production-Possibility Frontier

C
G2

G1

X2
X1
M
0
Private Goods and Services per Year
Copyright 2002 by Thomson Learning, Inc.

Distribution of Government
Goods and Services
Nonmarket rationing:
Prices and willingness to pay those prices
are not applicable to goods such as
national defense.

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The Mixed Economy Markets

and Politics
Pure Market Economy
Virtually all goods and services are
supplied by for-profit private firms.
Supply and demand determine price.

Copyright 2002 by Thomson Learning, Inc.

Figure 1.2 Circular Flow in the Mixed Economy

Goods & Services
Dollars

Households

Income Support
& Subsidies
Taxes, fees, charges
Government Services

Dollars
Resources
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Output
Market

Government

Input
Market

Goods & Services

Dollars

Subsidies
Taxes, fees, charges
Government Services

Dollars
Resources

Firms

Government Expenditures in
the United States
Government purchases of
labor
land
capital

Government Transfer Payments

Welfare
Social Security

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Growth in Government
Expenditures
Table 1.1 (abbreviated)
Year

GDP

Federal
Government

State
and Local
Government

Total
Government

Percentage
of GDP
Total

1930

91.3

2.5

7.5

10.0

10.95

1945

223.0

84.7

8.5

93.2

41.79

1960

527.4

85.8

34.1

119.9

22.73

1975

1635.2

345.4

152.1

497.5

30.42

1999

9256.1

1755.8

863.7

2619.5

28.30

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International Comparisons
Country

Government Current Expenditures

as a Percentage of GDP 2001

Denmark

53.5

France

50.5

Germany

46.2

Canada

40.7

United Kingdom

39.5

Japan

38.2

United States

29.7

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Figure 1.3 Total Government Expenditure as a

Percentage of GDP 1929-1999

Percentage of GDP

45
40
35
30
25
20
15
10
5
19
29
19
31
19
39
19
45
19
55
19
70
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
19
99

0
Year
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Structure of Federal
Government Expenditures
Purchases of Goods and Services
Transfer Payments
Grants in Aid to State and Local
Governments
Net Interest Paid

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Federal Expenditure by
Category, 1999
Table 1.2

Category

Percentage of Total Federal

Expenditures

Transfer Payments

42.97

Purchases

27.04

Interest

14.97

Grants to State and Local

12.84

Other

2.18

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Percentage of Total Federal Expenditure

Figure 1.4 The Distribution of Federal Expenditure, 19661999

70

Government Purchases

60
50

Transfer Payments

40
30
Grants to State and
Local Governments

20
10

Net Interest

59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99
Year

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Federal Government Expenditure by

Function
All other
5%
Veterans Benefits
3%
Transportation
3%
Education
4%

Social Security
23%

Health
9%

Net Interest
11%

Medicare
12%
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National Defense
16%

Income Security
14%

The Structure of State and

Local Government Expenditure
in the United States

Education
Civilian Safety
Transportation
Executive, Legislative, and Judicial
Income Security
Health and Hospitals
Recreational and Cultural Activities

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State and Local Government Expenditure

Recreational and
Cultural Activities
2%
Other
7%
Health and
Hospitals
3%
Income Security
5%

Education
42.71%

Executive
Legislative and
Judicial
11%

Transportation
13%

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Civilian Safety
16%

Financing Government
Expenditures in the US
Taxes:

Income (Corporate and Personal)

Payroll
Excise
Customs

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Federal Revenues
Customs Duties
1%
Excise Taxes
4%
Corporate Profits Taxes
12%

Payroll Taxes
35%

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Other
1%

Income Taxes
47%

State and Local Government Revenues

Other
8%
Sales Taxes
27%
Property Taxes
21%

Corporate Profit Taxes

3%
Payroll Taxes
1%
Nontaxes
3%

Federal Grants
20%

Income Taxes
17%
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Implications of a
Graying America

Social Security
Medicare
Medicaid

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How Much Government is

Enough?
The question of how much government
is enough is an important one in any
society. It is the tradeoff between public
and private goods. When government
gets bigger, it comes at the expense of
less private consumption.

Copyright 2002 by Thomson Learning, Inc.