The Circular Flow And The Public Sector

Government buys products from the product market and employs resources from the resource market to provide public goods and services to households and businesses. Government finances its expenditures through the net tax revenues (taxes minus transfer payments) it receives from households and businesses.

(1) Money income (rents

(1) Money income (rents

Circular Flow Model And Public Sector

(3) Revenue

(3) Consumption

(3) Revenue

(3) Consumption

Part One • An Introduction td Economics anc the Economy government purchases of resources. The federal government employs and pays salaries to members of Parliament, the armed forces, lawyers, meat inspectors, and so on. Provincial and municipal governments hire and pay teachers, bus drivers, police, and firefighters. The federal government might also lease or purchase land to expand a military base and a city might buy land on which to build a new elementary school.

Government then provides public goods and services to both households and businesses as shown by flows (9) and (10). To finance those public goods and services, businesses and households are required to pay taxes, as shown by flows (11) and (12). These flows are labelled as net taxes to indicate that they also include "taxes in reverse" in the form of transfer payments to households and subsidies to businesses. Thus, flow (11) entails various subsidies to farmers, ship builders, and airlines as well as income, sales, and excise taxes paid by businesses to government. Most subsidies to business are "concealed" in the form of low-interest loans, loan guarantees, tax concessions, or public facilities provided at prices below their cost. Similarly, flow (12) includes both taxes collected by government directly from households and transfer payments such as welfare payments and social insurance benefits paid by the government.

We can use Figure 4-2 to review how government alters the distribution of income, reallocates resources, and changes the level of economic activity. The structure of taxes and transfer payments significantly affects income distribution. In flow (12), a tax structure that draws tax revenues primarily from well-to-do households, combined with a system of transfer payments to low-income households, reduces income inequality.

Flows (5) through (8) imply that government diverts goods and resources away from private sector consumption or use and directs them to the public sector. This resource reallocation is required to produce public goods and services.

The Structure of The Canadian Economy and Its Evolution over Time

Table 4-1 sets out the contribution to Canadian domestic output (GDP) by each sector and industry. An economy consists of three main sectors: rimary, secondary, and tertiary. The primary sector consists of agriculture and natural resources, including fishing and mining. The secondary sector includes manufacturing, construction, transportation and communication, and the utilities. The tertiary, or service, sector makes up the rest of the economy, and is now by far the largest part of the Canadian economy.

Sectoral Shifts over Time

Sectors have been continually changing over time, as some have shrunk in size while others have expanded. For example, the primary sector, and agriculture in particular, has been shrinking since the onset of industrialization in the nineteenth century. Table 4-2 shows the employment share of each sector and subsector. Agriculture's employment has fallen from about a quarter of the labour force in 1947 to under percent in 2000. Manufacturing has also experienced a decline in employment share, but the decline is less pronounced. The service sector has done the opposite—its employment share has more than doubled since World War II.

These intersectoral shifts occur primarily because of technological advance, which brings about increases in productivity. For example, while there has been a cHapter Four • an overview df the MArket system and the canaDian econoMY

PRODUCTION SHARES BY SECTOR, SELECTED YEARS 1S70-2000

% OF GROSS DOMESTIC PRODUCT AT FACTOR COST

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