1. What is a household, and what is household income and spending?

A household consists of one or more persons who occupy a unit of housing. Household spending is called consumption and is the largest component of total spending in the economy.

2. What is a business firm and what is business spending?

A business firm is a business organization controlled by a single management. Business firms can be organized as sole proprietorships, partnerships, or corporations. Business spending by firms is called investment and consists of expenditures of capital goods that are used in producing goods and services.

3. How does the international sector affect the economy?

The nations of the world can be divided into two categories: industrial countries and developing countries. The economies of industrial nations are highly interdependent. As business conditions change in one country, business firms shift resources among countries so that economic conditions in one country spread to other countries.

The international trade of the United States occurs primarily with the industrial countries especially Canada and Japan. Exports are products the United States sells to foreign countries. Imports are products it buys from other countries.

4. What does the government do?

The economic role of government can be divided into two categories: microeconomic policy and macroeconomic policy. Microeconomic policy deals with providing public goods, correcting externalities, and promoting competition. Macroeconomic policy is divided into two categories: fiscal policy and monetary policy. Monetary policy id directed toward control of money and credit, and fiscal policy is directed toward government spending and taxation.

5. How do the three private sectors-households, businesses, and the international sector-interact in the economy?

Households own the factors of production and sell them to firms in return for income. Business firms combine the factors of production into goods and services and sell them to households and the international sector in exchange for revenue. The international sector buys and sells goods and services to business firms. The circular flow diagram illustrates these relationships.

6. How does the government interact with the other sectors of the economy?

Households sell resources to the government-which uses those resources to produce government services-in return for income. Business firms sell the goods and services they produce to the firms. Taxes are the income the government receives from households and firms. In reality, the government may interact directly with foreign consumers and businesses, but most government activity with the international sector occurs when the government uses business firms as intermediaries.