Chapter 4 The US Economy
The U.S. Economy: Private and Public Sectors
ANSWERS TO END-OF-CHAPTER QUESTIONS
4-1
4-2
4-3
Distinguish between the functional and personal distribution of income. Which is being referred to in each of the following statements? “The combined share of wage income and proprietary income has remained remarkably stable at about 80 percent since the Second World War.” “The relative income of the richest households is higher today than in 1970.”
The functional distribution of income shows the sources of income, i.e., as payments to the four factors of production: labor, entrepreneurs, physical capital, and land (natural resources). The breakdown is: wages and salaries, proprietors’ income, corporate profits, interest, and rents.
There are five categories whereas there are only four factors of production, because proprietors’ income includes profits as well as wages, interest, and rents.
The personal distribution of income shows how income, regardless of its source, is divided by quintiles among all the families in the country. Whereas the worst-off 20 percent of families, the lowest quintile, gets most of its income from wages and transfer payments, the best-off 20 percent gets considerable income from profits, interest, and rent.
The first statement refers to the functional distribution of income; the second refers to the personal distribution of income.
(Key Question) Assume that the five residents of Econoville receive incomes of $50, $75, $125,
$250, and $500. Present the resulting personal distribution of income as a graph similar to Figure
4.2. Compare the incomes of the lowest and highest fifth of the income receivers.
The distribution of income is quite unequal. The highest 20 percent of the residents receive 10 times more income than the lowest 20 percent.
Distinguish clearly between a plant, a firm, and an industry. Contrast a vertically integrated firm, a horizontally integrated firm, and a conglomerate. Cite an example of
ANSWERS TO END-OF-CHAPTER QUESTIONS
4-1
4-2
4-3
Distinguish between the functional and personal distribution of income. Which is being referred to in each of the following statements? “The combined share of wage income and proprietary income has remained remarkably stable at about 80 percent since the Second World War.” “The relative income of the richest households is higher today than in 1970.”
The functional distribution of income shows the sources of income, i.e., as payments to the four factors of production: labor, entrepreneurs, physical capital, and land (natural resources). The breakdown is: wages and salaries, proprietors’ income, corporate profits, interest, and rents.
There are five categories whereas there are only four factors of production, because proprietors’ income includes profits as well as wages, interest, and rents.
The personal distribution of income shows how income, regardless of its source, is divided by quintiles among all the families in the country. Whereas the worst-off 20 percent of families, the lowest quintile, gets most of its income from wages and transfer payments, the best-off 20 percent gets considerable income from profits, interest, and rent.
The first statement refers to the functional distribution of income; the second refers to the personal distribution of income.
(Key Question) Assume that the five residents of Econoville receive incomes of $50, $75, $125,
$250, and $500. Present the resulting personal distribution of income as a graph similar to Figure
4.2. Compare the incomes of the lowest and highest fifth of the income receivers.
The distribution of income is quite unequal. The highest 20 percent of the residents receive 10 times more income than the lowest 20 percent.
Distinguish clearly between a plant, a firm, and an industry. Contrast a vertically integrated firm, a horizontally integrated firm, and a conglomerate. Cite an example of