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Ch01 Government Activity In The Modern Mixed Economy 2015

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Chapter 1

GOVERNMENT ACTIVITY IN THE
MODERN MIXED ECONOMY
Public Finance, 10th Edition
David N. Hyman
Adapted by Chairat Aemkulwat
for Public Economics 2952331

Chairat Aemkulwat, Public Economics 2952331

Outline: Chapter 1 GOVERNMENT ACTIVITY IN THE
MODERN MIXED ECONOMY

1. Individuals, Society, and Government
2. The Mixed Economy, Markets, and Politics
3. Circular Flow in the Mixed Economy
4. Government Expenditures in Thailand and the United States 5. Financing Government Expenditure in Thailand and the United States 6. Aging Populations: Implications for Public Finance

Chairat Aemkulwat, Public Economics 2952331

2

Allocation of Resources
1. Individuals, Society, and Government

Resources are allocated between government and private use:
• For government use:
- Roads
- Schooling
- Fire Protection

• For private use:
- Food
- Clothing

• Units of private goods and services are forgone by
individuals so that government can provide goods and
services.
Chairat Aemkulwat, Public Economics 2952331

3

Production Possibility Curve
1. Individuals, Society, and Government

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4

5

ANS.
5. The increased allocation of resources to government provision of health services implies that fewer resources can be used for other goods and services.
The student should plot health care services on one of the axes and “all other goods and services” on the other axis.
As production of health care services increases, given fixed resources and technology, production of other goods and services must decline.

7

7. Given a point on the old production possibility curve,
the outward shift allows movement in the northeast
direction to a point on the new production possibility curve corresponding to an increase in production of both private
and government goods and services.

6

ANS.
6. This answer is more in the form of an opinion, but
should be based on Figure 1.1. The key observation in
the student’s answer is that all the spending
cuts/additions suggested should still proportionately add
to 100% with justifications for increases and decreases
in spending.

The Mixed Economy
2. The Mixed Economy, Markets, and Politics

Characteristics of a mixed economy:
1. Government supplies many goods and services
2. Government regulates private economic activity
3. Government expenditures equal 1/5 to ¼ of GDP
4. Government participates in markets as a buyer of
goods and services

Chairat Aemkulwat, Public Economics 2952331

8

Circular Flow
3. Circular Flow in the Mixed Economy

Chairat Aemkulwat, Public Economics 2952331

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Circular Flow

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Circular Flow
3. Circular Flow in the Mixed Economy

11

Chairat Aemkulwat, Public Economics 2952331

Government Expenditures in the U.S.
3. Circular Flow in the Mixed Economy

• Government purchases divert productive resources
from private use:
- National defense
• Steel, labor

• Government transfer payments redistribute
purchasing power among citizens:
- Social benefits
• Social Security, Medicare

Chairat Aemkulwat, Public Economics 2952331

12

Government Expenditures in the Thailand
4. Government Expenditures in Thailand and the United States

50.0%

2,500.0
2553, 2,303.6

45.0%

รัฐCentral
บาลกลาง
Government
2,000.0

40.0%

รัฐLocal
บาลท้Government
องถิน่

2553, 1,937.9

General
ภาครั
ฐบาลGovernment

1,500.0

30.0%
2553, 22.8%

GG/GDP
ภาครั
ฐบาล/GDP
1,000.0

35.0%

25.0%
20.0%

2503, 12.7%

15.0%
500.0

2553, 365.7

10.0%
5.0%

2503, 6.8
0.0

0.0%

2503

2508

2513

2518

2523

2528

2533

2538

2543

2548

2553

Source: www.fpo.go.th
Chairat Aemkulwat, Public Economics 2952331

13

Government Expenditures in the U.S.
4. Government Expenditures in Thailand and the United States

Chairat Aemkulwat, Public Economics 2952331

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Structure of Government Expenditure in
Thailand
4. Government Expenditures in Thailand and the United States

2012

Share

Compensation of employees

998,248

42.8%

Use of goods and services

715,658

30.7%

Subsidies

163,985

7.0%

Interest

139,724

6.0%

Social benefits

125,754

5.4%

Other expense

113,990

4.9%

Consumption of fixed capital

70,704

3.0%

Grants

1,792

0.1%

2,329,855

100.0%

EXPENSE

EXPENSE

Source: http://dw.mof.go.th/foc/gfs/
Chairat Aemkulwat, Public Economics 2952331

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Structure of Federal Government Expenditure
4. Government Expenditures in Thailand and the United States

Chairat Aemkulwat, Public Economics 2952331

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Source: http://dw.mof.go.th/foc/gfs/
4. Government Expenditures in Thailand and the United States





The Public Finance Data is compiled by the Public
Finance Analysis Section of the Fiscal Policy Office,
based on the standard described on the International
Monetary Fund's Dissemination Standards Bulletin Board
(DSBB).
There are three main categories:
1) Central Government Data
2) General Government and Nonfinancial Public
Corporations (Quarterly)
3) General Government and Nonfinancial Public
Corporations (Annually).
17

Chairat Aemkulwat, Public Economics 2952331

Structure of Government Expenditure in
Thailand
4. Government Expenditures in Thailand and the United States

OUTLAYS BY FUNCTIONS OF GOVERNMENT

2012

Share

General public services

594,505.5

21.4%

Economic affairs

524,998.3

18.9%

Education

461,228.6

16.6%

Social protection

457,181.8

16.5%

Health

241,229.5

8.7%

Defense

167,405.8

6.0%

Housing and community amenities

166,662.8

6.0%

Public order and safety

133,269.0

4.8%

25,408.6

0.9%

2,453.9

0.1%

2,774,343.9

100.0%

Recreation, culture and religion
Environmental protection
TOTAL OUTLAYS

Source: http://dw.mof.go.th/foc/gfs/
Chairat Aemkulwat, Public Economics 2952331

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Structure of Government Expenditure in
Thailand
4. Government Expenditures in Thailand and the United States

Public order and
safety, 4.8%

Recreation, culture and
religion, 0.9%

Environmental
protection , 0.1%

Housing and community
amenities , 6.0%
Defense , 6.0%
General public services ,
21.4%
Health , 8.7%
Economic affairs , 18.9%
Social protection ,
16.5%

Education , 16.6%

Source: http://dw.mof.go.th/foc/gfs/
Chairat Aemkulwat, Public Economics 2952331

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Structure of Federal Government Expenditure
4. Government Expenditures in Thailand and the United States

Chairat Aemkulwat, Public Economics 2952331

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Structure of Federal Government Expenditure
4. Government Expenditures in Thailand and the United States

Chairat Aemkulwat, Public Economics 2952331

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State and Local Government Expenditures
4. Government Expenditures in Thailand and the United States

Chairat Aemkulwat, Public Economics 2952331

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State and Local Government Expenditures
4. Government Expenditures in Thailand and the United States

Chairat Aemkulwat, Public Economics 2952331

1

Ans.
1. Social Security pensions are government
transfers. Except for a small amount of purchases
for personnel and other resources to administer
the transfer, no government purchases are
required.

23

3

3. The debt accumulated by past budgets amounts to
many times more than the amount of federal spending.
It will take many years to retire the outstanding debt.
The interest on the outstanding debt will have to be paid
for many years until the debt is retired. Running a
budget surplus would accelerate the rate of debt
repayment

2

Ans.
2.
A slowdown in the economy during the recession in 2007 to 2009 sharply reduced tax collections for many state governments. During the booming 1990s, many state governments also cut tax rates. As income tax collections and sales tax collections have fallen budget deficits have increased.

Also contributing to the deficits were sharp increases in state government spending for medical assistance to the poor.
Because state governments are required by law to balance their budgets, they must either raise taxes, cut spending, or find other ways of generating revenue when a deficit is forecast.
State governments rely heavily on both income taxes and sales taxes. Sales taxes are typically not levied on services and because services as a share of consumer spending has been rising, sales tax collections have been growing more slowly than expected.

Thailand: Financing Government Expenditures
5. Financing Government Expenditure in Thailand and the United States

• Central Government—Taxes and Non-Tax Revenues
REVENUE

2012

Taxes
Social contributions

1,877,178.4

80.6%

84,231.3

3.6%

1,899.5

0.1%

365,180.6

15.7%

55,317.4

2.4%

2,328,489.8

100.0%

Grants
Other revenue
Miscellaneous and unidentified revenue
REVENUE

Share

Source: http://dw.mof.go.th/foc/gfs/
Chairat Aemkulwat, Public Economics 2952331

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Thailand: Financing Government Expenditures
5. Financing Government Expenditure in Thailand and the United States

• Central Government—Taxes and Non-Tax Revenues
Miscellaneous and
unidentified
revenue, 2.4%
Grants , 0.1%
Social contributions,
3.6%

Other revenue,
15.7%

Taxes , 80.6%

Source: http://dw.mof.go.th/foc/gfs/
Chairat Aemkulwat, Public Economics 2952331

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Thailand: Taxes by Central Government
5. Financing Government Expenditure in Thailand and the United States

• Central Government—Taxes
Individual Income Tax
Corporation Income Tax
Value Added Tax
Excise Tax
Specific Business Tax
Customs and other import duties
Taxes on exports
Profits of fiscal monopolies
Other Sales Tax
Other Taxes
Taxes

2012
184,343.1
659,273.0
457,917.0
396,907.4
40,318.7
115,388.3
320.6
5,663.7
3,659.6
13,387.0

Share

1877178.39

100.0%

9.8%
35.1%
24.4%
21.1%
2.1%
6.1%
0.0%
0.3%
0.2%
0.7%

Source: http://dw.mof.go.th/foc/gfs/
Chairat Aemkulwat, Public Economics 2952331

29

Thailand: Taxes by Central Government
5. Financing Government Expenditure in Thailand and the United States

Taxes on exports , 0.0%
Customs and other import
duties , 6.1%

Profits of fiscal monopolies , Other Taxes, 0.7%
0.3%

Other Sales Tax, 0.2%

Individual
Income Tax,
9.8%

Specific Business Tax, 2.1%

Excise Tax, 21.1%
Corporation Income Tax,
35.1%

Value Added Tax, 24.4%

Source: http://dw.mof.go.th/foc/gfs/
Chairat Aemkulwat, Public Economics 2952331

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Financing Government Expenditures
5. Financing Government Expenditure in Thailand and the United States

• Federal Government—Taxes

Chairat Aemkulwat, Public Economics 2952331

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Financing Government Expenditures
5. Financing Government Expenditure in Thailand and the United States

Chairat Aemkulwat, Public Economics 2952331

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Thailand: Financing Government Expenditures
5. Financing Government Expenditure in Thailand and the United States

• local governments —Taxes and Grants
REVENUE

2012

Share

Taxes

165,241.3

33.1%

Grants

320,477.2

64.2%

Other revenue

13,452.7

2.7%

2,813.1

0.6%

499,171.2

100.0%

Miscellaneous and unidentified revenue

REVENUE

Source: http://dw.mof.go.th/foc/gfs/
Chairat Aemkulwat, Public Economics 2952331

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Thailand: Financing Government Expenditures
5. Financing Government Expenditure in Thailand and the United States

• local governments —Taxes and Grants
Other revenue ,
2.7%

Miscellaneous and
unidentified
revenue, 0.6%

Taxes , 33.1%

Grants, 64.2%

Source: http://dw.mof.go.th/foc/gfs/
Chairat Aemkulwat, Public Economics 2952331

34

Thailand: Local Taxes
5. Financing Government Expenditure in Thailand and the United States

• local governments —Taxes
2012

Share

Local Maintenance Tax and Building and Land Tax

22,080.9

13.4%

Fee for right registrations and juristic act on the properties

26,399.9

16.0%

Value Added Tax

49,648.5

30.0%

Other Sales taxes

4,082.7

2.5%

Excise Tax

35,293.1

21.4%

Specific Business Tax

557.2

0.3%

Motor vehicles taxes

23,209.5

14.0%

Other Taxes

3,969.5

2.4%

165,241.3

100.0%

Total Local Taxes

Source: http://dw.mof.go.th/foc/gfs/
Chairat Aemkulwat, Public Economics 2952331

35

Thailand: Local Taxes
5. Financing Government Expenditure in Thailand and the United States

• local governments —Taxes
Other Taxes, 2%

Specific Business Tax, 0%

Motor vehicles taxes,
14%

Local
Maintanence Tax
and Building and
Land Tax, 13%

Fee for right
registrations and
juristic act on the
properties, 16%
Excise Tax, 21%

Value Added Tax, 30%

Other Sales taxes , 2%

Source: http://dw.mof.go.th/foc/gfs/
Chairat Aemkulwat, Public Economics 2952331

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Financing Government Expenditures
5. Financing Government Expenditure in Thailand and the United States

• State and local governments—Taxes, Federal Grants

Chairat Aemkulwat, Public Economics 2952331

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Financing Government Expenditures
5. Financing Government Expenditure in Thailand and the United States

Chairat Aemkulwat, Public Economics 2952331

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Functions of Government
5. Financing Government Expenditure in Thailand and the United States

• Provide items we cannot easily make available for
ourselves or purchase from others in markets
- Law enforcement and courts

• Redistribute income and economic opportunity
- Income support for elderly, unemployed, poor

• Stabilize economic fluctuations
- Inflation

• Regulate production and consumption
- For improved health, elimination of excessive
monopolistic control over prices
Chairat Aemkulwat, Public Economics 2952331

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How much government is enough?
5. Financing Government Expenditure in Thailand and the United States

How much should
governments do, and
how much should be left
to private enterprise and
initiative through market
sale of goods and
services?

Chairat Aemkulwat, Public Economics 2952331

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Aging Populations & Public Finance
6. Aging Populations: Implications for Public Finance

• Percentage of U.S. residents age 65 or older:
1950 – 8.3%; 2000 – 12.3%; 2050 – 21.1%
• Thailand 2010 – 9.2% SOURCE: CIA World Factbooks
• Significant effects on Social Security and
government-funded health care expenditures
• Tax rates to finance programs must increase or
benefits to recipients must decline to avoid causing
large federal budget deficit

Chairat Aemkulwat, Public Economics 2952331

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Population Aging
6. Aging Populations: Implications for Public Finance

Chairat Aemkulwat, Public Economics 2952331

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Old-Age Dependency Ratios
6. Aging Populations: Implications for Public Finance

Chairat Aemkulwat, Public Economics 2952331

4

4. Even though many programs are federally funded, such as,
Medicare, programs such as Medicaid are partially state funded. Consequently, the aging population will increase state expenditures as Medicaid and other healthcare programs become more expensive due to increased demand.

The aging population will also impact state government revenue as the population leaves the workforce and contribute less and less in the form of personal income tax, sales tax and property tax.

43

‘Recap: Chapter 1 GOVERNMENT ACTIVITY IN THE
MODERN MIXED ECONOMY



Individuals, Society, and Government



The Mixed Economy, Markets, and Politics



Circular Flow in the Mixed Economy



Government Expenditures in Thailand and the United States



Financing Government Expenditure in Thailand and the United States



Aging Populations: Implications for Public Finance

Chairat Aemkulwat, Public Economics 2952331

45

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