2.3 Macroeconomic Objectives Flashcards
1
Q
What is unemployment?
A
When people are willing and able to work and actively seeking unemployment but unable to find work.
2
Q
Why is low unemployment a key macroeconomic objective?
A
- Compliments economics growth - higher employment leads to greater national expenditure, tends to increase standards of living in economy.
- Increases tax revenues, income tax from employment, sales taxes from increase expenditure, stamp duty from sale and purchase of property.
- Reduces tax burden on government - less of a need for taxpayer to fund welfare benefits as more people are working.
- Prevents a brain drain from economy where skilled workers pursue better employment in other countries.
3
Q
What does the unemployment rate calculate?
A
Percentage of labour force that is unemployed.
4
Q
How is the unemployment rate calculated?
A
(number of unemployed people)/(labour force) x 100
5
Q
Whom does the labour force consist of?
A
Consists of employed, self employed, unemployed - all those in work and actively seeking employment.
6
Q
What does the United Nations International Labour Organisation (ILO) state the minimum age to enter the labour force?
A
15 is the minimum age to enter the labour force, no official upper limit.
7
Q
How does the ILO measure a country’s unemployment?
A
Based on number of people who are:
- Willing to work but unable to find it
- Actively looking for work -looked for a job in last 4 weeks, able to start work in next 2 weeks
- Waiting to start a new job in next 2 weeks.
8
Q
Why is unemployment bad for a country?
A
Represents inefficient use of scarce resources, hindering its potential national output.
9
Q
What is hidden unemployment?
A
Some people escape official measure of unemployment - an underestimation of true rate of unemployment.
10
Q
What are some examples of hidden unemployment?
A
Discouraged workers - not wiling to work so are excluded from the calculation.
Overstaffing - workers who are not fully utilised.
11
Q
What is underemployment?
A
People are inadequately employed - employed but in jobs that do not fully use skills or abilities eg involuntary part time workers, overqualified workers education, experience and skills and qualifications beyond requirements of job.
12
Q
How do regional disparities make measuring unemployment difficult?
A
Measurement of unemployment is average measure so ignores disparities in regional rates of unemployment.
13
Q
How do ethnic disparities make measuring unemployment difficult?
A
Ethnic minority groups suffer from higher than average rates of unemployment for longer periods.
14
Q
How do age disparities make measuring unemployment difficult?
A
Unemployment rates among the young and older people are higher than those officially reported for the nation.
15
Q
How do gender disparities make measuring unemployment difficult?
A
Females tend to experience higher average rates of unemployment than men. Men also re enter the labour market quicker.
16
Q
What are some economic consequences of unemployment?
A
A loss of GDP Loss of tax revenues Increases cost of unemployment benefits Loss of income for individuals Greater disparities in the distribution of income
17
Q
How does a loss of GDP affect the economy?
A
Lower GDP (negative economic growth) has detrimental consequences on the economy including a fall in its international competitiveness.
18
Q
How does a loss of tax revenues affect the economy?
A
Unemployment results in lower income and expenditure thus resulting in lower tax revenues for the government.
19
Q
How does increased cost of unemployment benefits affect the economy?
A
Unemployment creates an increased opportunity cost of government expenditure on unemployment benefits. Prolonged periods of high unemployment can therefore lead to increased government debts.
20
Q
How does a loss of income for individuals affect the economy?
A
Unemployment results in lower household incomes with negative consequences for individuals and their families. If prolonged unemployment can cause or increase poverty in the economy.
21
Q
How does greater disparities in the distribution of income affect the economy?
A
As women, the youth, ethnic minority groups and those living in rural areas tend to suffer more form prolonged periods of unemployment the result will be greater discrepancies in the distribution of income and wealth.
22
Q
What are some social consequences of unemployment?
A
Stress
Crime
Indebtedness
Social deprivation
23
Q
How does stress from unemployment affect people?
A
Suffer from stress, depression, health problems and low self esteem. Prolonged periods of unemployment can lead to homelessness and family breakdowns such as arguments, separations and divorce.
24
Q
How does crime from unemployment affect people?
A
Can cause deprivations and desperation thus leading to increased crime such as theft and vandalism.
25
How does indebtedness from unemployment affect people?
Lower income caused by unemployment leads to increase indebtedness for individuals, firms and the government. Indebtedness can cause bankruptcy leading to apostle poverty, hunger, disease and homelessness.
26
How does social deprivation from unemployment affect people?
The local community can differ if there is mass unemployment for example poverty and increased crime rates.
27
What is frictional unemployment?
Occurs when people are in transition between jobs due to the time delay between leaving a job and finding or starting a new one. Always present because it takes time for the labour market to match available jobs with suitable candidates.
28
What is structural unemployment?
Occurs when the demand for products in a particular industry continually falls thus reducing the demand for particular labour skills. Also be caused by changes in geographical locations of industries for cost advantages and labour market rigidities such as he unwillingness of workers to accept lower wage rates.
29
What is seasonal unemployment?
Caused by regular and periodical changes in demand for certain products.
30
What is cyclical unemployment?
Mmost severe type of unemployment as it can affect every industry in the economy. It is caused by a lack of AD which causes a fall in national income.
31
What are government policies to deal with frictional unemployment?
Improving information services to aid job seekers. However imperfect information in the labour marker can worsen frictional unemployment as people are unaware of available jobs.
32
What are government policies to deal with seasonal unemployment?
Improving the skills of seasonally unemployed workers helps to reduce occupational immobility. Policies to improve education and training will give these people a better chance of reemployment and the incentive to find work.
33
What are government policies to deal with structural unemployment?
Governments can introduce a broader range of vocational training programmes greater access to university courses to allow people to retain and offer more job training opportunities. However this comes at an opportunity cost to taxpayers.
34
What are government policies to deal with cyclical unemployment?
Government might choose to use expansionary fiscal policy and or expansion policy to stimulate economic activity and hence to reduce the level of unemployment.
35
What is expansionary fiscal policy and how does it reduce unemployment?
A reduction in taxes and or increased government expenditure should all other things being equal boost AD and hence the derived demand for labour.
36
What is expansionary monetary policy and how does it reduce unemployment?
A cut in interest rates and or a devaluation of the currency should stimulate consumer and business confidence levels alongside increase consumption and net exports. In time this will boost the derived demand for labour in the economy.
37
What are supply side policies?
Government policies used to deal with imperfections in the labour market and to reduce unemployment caused by supply side factors.
38
What are some examples of supply side policies?
Investment in education and training - helps unemployed to gain new skills to find employment.
Reduction in trade unpin powers - mean that labour unions are not in such a strong bargaining position for higher wages in excess of inflation. Government intervention to reduce the influence and power of trade unions can help to reduce unemployment.
Employment incentives - offered to firms for training and hiring the long term unemployed eg the government can offer these firms tax allowances and or subsidies to reduce their costs of training and hiring workers.
Reviewing of unemployment benefits - ensure that there are incentives to seek employment rather than to rely on state welfare benefits. By making it more difficult for people to claim unemployment benefit people become more proactive in searching for jobs.
39
What are protectionist policies?
Trade barriers such as tariffs and quotas can be used to safeguard domestic jobs from the threat of international competition.
40
What is inflation?
Sustained rise in the average price level in an economy over time. On average the prices are rising. Governments set a target inflation rate as a key macroeconomic objective.
41
What is deflation?
Persistent fall in the average price level in an economy over time ie. the inflation rate is negative. Caused by a continual decline in aggregate demand and or an increase in aggregate supply caused by technological progress.
42
What is disinflation?
A fall in the rate of inflation ie. the prices are still rising but at a slower pace rather than an actual ball in the general price level. Can lead to deflation if not controlled with negative consequences for the economy and standards of living in the country.
43
How is deflation shown diagrammatically?
Deflation results in lower average prices, there is a fall in AD so the AD curve shifts to the left which causes national output to drop and the average price level also drops.
44
How is disinflation shown diagrammatically?
Disinflation is shown by a smaller proportional increase in average prices so an increase in AD where it shifts to the right causes national output to rise as well as prices rising. Disinflation occurs when the the of increase in AD slows down so the AD curve shifts again but by a smaller amount which reduces the rate of increase in the average price level.
45
How are inflation and deflation measured?
By using consumer price index (CPI).
46
What does CPI measure?
Measures the change in prices of a representative basket of goods and services consumed by the average household in the economy. Different statistical weights are applied to reflect the relative importance of the average household's expenditure.
47
How are weightings of CPI decided?
Based on the proportion of the average household's income spent on the items in the representative basket. Therefore items of expenditure that take a greater proportion of income are assigned a larger weighting.
48
When is a review or update required in the CPI?
Change in fashions and trend such as household expenditure on smartphones and tablet computers require a review or update of the weighting in the CPI.
49
What are the limitations of CPI?
Only considers expenditure of the average household whatever this might actually mean in a multicultural society in the real world.
Different income earners can experience a different rate of inflation because their pattern of expenditure is not necessarily or accurate reflected by the CPI. Eg. the average pensioner or university student will have different spending habits from a typical family household.
Inflation figures and calculations may not accurately reflect changes in consumptions patterns due to time lags in collecting data to compile the CPI.
50
What is the underlying rate of inflation or the core rate of inflation?
An adjusted measure of inflation that eliminates sudden volatile fluctuations in prices of essential items of expensive such as oil, food and energy.
51
What is the produce price index (PPI)?
Useful for predicting inflation or deflation by measuring changes in the prices of manufacturers and producers rather than retails who sell to consumers.
52
What three price indices does the PPI consist of?
Raw materials such as crude oil and copper.
Intermediate goods such as components and other semi finished goods sold to manufacturers and producers.
Finished goods that are sold to retailers.
53
How are menu costs a consequence of inflation?
Inflation impacts on the prices charged by firms. Catalogues, price lists and menus have to be updated regularly and this is costly to businesses.
54
How are shoe leather costs a consequence of inflation?
Inflation causes fluctuations in price levels so customers spend more time searching for the best deals be it physically or online. They might also have to make more regular cash withdrawals. Shoe leather costs therefore represent an opportunity costs for customers.
55
How are consumers affected by inflation?
The purchasing power of consumers declines when there is inflation ie there is a fall in their real income because money is worth less than before. Therefore as the cost of living increases consumers needs more money to buy the same amount of goods and services.
56
How are savers affected by inflation?
Lose out from inflation assuming there is no change in interest rates for savings. Hence inflation discourages savings as money becomes less effective as a store of value.
57
How are lenders affected by inflation?
Lose from inflation. This is because the money lent out to borrowers becomes worth less than before due to inflation.
58
How are borrowers affected by inflation?
Gain from inflation as the money they need to repay is worth less that when they initially borrowed it.
59
How are fixed income earners affected by inflation?
Fixed incomes earners such as salaried workers and pensioners whose pay does not change with their level of output are worse off than before as the purchasing power of their fixed incomes declines with higher prices.
60
How are low income earners affected by inflation?
Inflations harms the poorest members of society far more than those on high incomes. They tend to have a high price elasticity of demand for goods and services. By contrast those on high incomes and accumulated wealth are not so affected by higher prices.
61
How are exporters affected by inflation?
The international competitiveness of a country tends to fall when there is domestic inflation as exports become less price competitive. This causes a drop in profits, leading to a fall in export earnings, lower economic growth and higher employment.
62
How are importers affected by inflation?
Imports become more expensive for individuals, firms and the government due to the decline in the purchasing power of money. Hence inflation can cause problems for countries without many natural resources such a petroleum, steel, rice and coffee.
63
How are employers affected by inflation?
Workers are likely to demand a pay rise during times of inflation to maintain their level of real income. As a result, labour costs of production rise and profits margins decline ceteris paribus.
64
How are business confidence levels affected by inflation?
The combination of uncertainty and the lower expected real rates of return on investment due to higher costs of production tends to lower the amount of planned investment in the economy.
65
How does a wage price spiral occur during times of inflation?
When trade unions negotiate higher wages to keep income in line with inflation, but this simply fuels inflation as firms raise prices to maintain their profit margins.
66
Overall why is inflation bad for an economy?
High inflation makes conditions far less predictable for economics stability, there is greater uncertainty for consumers, producers and the government.
67
What is benign deflation?
Generally positive as the economy is able to produce more (outwards shift of the LRAS curve) thus boosting national output and employment with an increase in the general price level.
68
How is benign deflation shown diagrammatically?
Can be caused by higher AS levels ie. increased productive capacity of the economy, this drives down the general price level of goods and services whilst increasing national income. Such deflation is called benign deflation (non threatening deflation) perhaps caused by higher productivity or technological process.
69
Why is malign deflation bad for the economy?
Generally harmful to the economy due to a decline in AD for goods and services often associated with an economic recession and rising levels of unemployment.
70
How is malign deflation shown diagrammatically?
Deflation can be caused by a leftwards shift of the AD curve, this reduces national income and forces the general price level down. This causes malign deflation, deflation that is harmful to the economy.
71
How is cyclical unemployment a consequence of malign deflation?
As deflation usually occurs due to a fall in AD in the economy, this causes a fall in the derived demand for labour ie. deflation can cause huge job losses in the economy.
72
How are bankruptcies a consequence of malign deflation?
Consumers tend to spend less during periods of deflation so firms suffer from lower sales revenues and profits. This makes it more difficult for them to pay their costs and liabilities (debts such as mortgages) thus causing a large number of bankruptcies.
73
How is lower investment expenditure a consequence of malign deflation?
Firms have less of an incentive to invest because they receive lower profits and hence profitability. This can have a detrimental impact on economics growth.
74
How is a rise in the real value of debts a consequence of malign deflation?
The real costs of debts (borrowing) rises when there is deflation because real interest rates rise when the price level falls.
75
How is a fall in the value of wealth a consequence of malign deflation?
Due to declining profitability share prices fall during times of deflation. This means that dividends and the capital returns on holding shares also fall thus reducing the wealth of shareholders.
76
How is government debt a consequence of malign deflation?
With more bankruptcies, unemployment and lower levels of economic activity, tax revenues fall whilst the amount of government spending rises due to the economic decline associated with malign inflation. This can create a budget deficit for the government.
77
How are declining confidence levels a consequence of malign deflation?
With deflation and the subsequent rising real value of debts both consumer and business confidence levels falls further adding to the economic problems in the country for example consumers may postpone their spending and firms postpone their investments.
78
What is demand pull inflation caused by?
Triggered by higher levels of AD in the economy which drives up the general price level. Hence an increase in any determinant of AD will cause demand pul inflation eg higher GDP per capita, income tax cuts or lower interest rates.
79
How is demand pull inflation shown diagrammatically?
During an economic boom consumption of goods and services increases due to higher GDP per capita and higher levels of employment. This is shown by a rightwards shift go the AD curve raising national incomes and increasing the general price level.
80
What is cost push inflation caused by?
Triggered by higher costs of production thus shifting AS to the left and forcing up average prices. Causes of cost push inflation include higher imported prices fro are materials, components (semi finished goods) and finished goods for sale, higher wages in the economy, increased corporation taxes and soaring rents for commercial properties.
81
How is cost push inflation shown diagrammatically?
Higher raw material costs, increased wages and soaring rents heft the AS curve leftwards. This forces up the average price level upwards but reduces national incomes.
82
What is creeping inflation?
Occurs when prices are rising slightly ie. very low rates of inflation up to around 3% per annum. It is the mildest form of inflation and presents few problems for the economy. More economically developed countries tend to experience creeping inflation.
83
What is moderate inflation?
Refers to single digit inflations rates (less than 10% per year). It can be argued that moderate inflation represented a stable rate of inflation and is not a serious economic problem.
84
What is strato inflation?
Refers to double digit and often triple digit rates of inflation. It occurs if moderate inflation persist (continues to increase) and is not controlled. Prolonged periods of strato inflation sometimes referred to as chronic inflation can lead to hyperinflation.
85
What is hyperinflation?
Refers to extortionately high and uncontrollable rates of inflation.
86
How can inflation be controlled?
By limiting the factors that cause demand pull inflation and cost push inflation.
87
What are some policies to deal with demand pull inflation?
Deflationary fiscal policy to reduce AD.
Contractionary monetary policy.
Supply side policies to boost national output.
Import controls to reduce the chances of experiencing imported inflation caused by higher import prices of essential goods and services such as oil and financial services.
88
What are some policies to deal with cost push inflation?
Negotiations with labour unions to match any annual wage rises with higher productivity levels thus limiting inflationary pressures by boosting AS.
Government intervention to limit annual nominal wage increases thus preventing a potential wage price inflationary spiral.
Subsidising production to moderate costs, and hence prices.
Revaluation of the currency on the foreign exchange market as the higher exchange rate helps to lower the cost of imported raw materials, components and finished goods.
89
How are governments most likely to combat inflation?
Governments are likely to use a combination of contractionary monetary policy, deflationary fiscal policy and supply side policies to combat inflation.
90
What are the consequences of contractionary policies?
Likely to reduce the level of economic activity thus possibly harming encomium growth, employment opportunities and international trade.
91
What is economic growth?
An increase in a country real GDP over time.
92
Why is sustained economic growth an important macroeconomic objective?
Because it is the most practical measures of standards of living in a country, economic growth represents the long term expansion in the productive capacity of the economy ie. the annual percentage change in GDP.
93
How can economic growth be shown diagrammatically?
By a rightwards shift of the LRAS curve or an outwards shift of the production possibility curve.
94
When does economic growth occur?
When there is an increase in the quantity and or quality of the factors of productions such as an increase in labour productivity or improvements in the state of technology.
95
What does negative economic growth result in?
A recession in the business cycle.
96
What does economic growth show on the PPC?
Economic growth occurs when there is an increase in the actual output of the economy. This can results from the use of unemployed resources or from improves factor utilisation and increase productive efficiency.
97
What are factor endowments?
The quantity and quality of a country factors of production.
98
What are the factors that increase economic growth?
Discovery of raw materials.
The size and skills of the labour force .
The mobility of labour - refers to the extent to which workers are willing and able to change jobs (occupational mobility) and move to different locations for employment (geographical mobility). The more mobile workers are the greater the economic growth tends to be.
Labour productivity - refers to the output produced in a given time period. It is determined by servers interrelated factors such as the qualifications, experience, training, skills and motivation of the labour force. Higher productivity tends to lead to lead to economic growth.
Investment expenditure - in capital and human resources is vital for long term competitiveness and economic growth as it boosts the country productive capacity.
99
How does economic growth positively affect standard of living?
Tends to lead to higher standards fo living for the average person. Higher real income per head enable people to spend more money to meet their needs and wants thus helping to eliminate absolute poverty in the country.
100
How does economic growth positively affect unemployment?
Leads to higher levels of employment in the economy. This helps to raise consumption and encourage further investment in capital, helping to sustain growth in the economy.
101
How does economic growth negatively affect inflation?
If the economy grows rapidly due to excessive AD in the economy there is the danger of demand pull inflation. This can lead to the prices of goods and services rising to unstable levels with a negative impact on the economy's international competitiveness.
102
How does economic growth negatively affect income distribution?
Often creates greater disparities in the distribution of income and wealth widening the gap between rich and poor. However economic growth also leads to greater tax revenues enabling the government to redistribute income and wealth.
103
How does economic growth positively affect the current account?
Current account of the balance of payments tends to improve with economic growth to due to a higher value of net exports ( a component of AD).
104
How does economic growth negatively affect sustainability?
Usually creates problems for the sustainability of scarce resources and economic wellbeing such as resource depletion, pollution, congestion, damage to ecosystems, land erosion and climate change.
105
What does equity mean?
Fairness such as those with higher levels of qualifications skills and experience being paid more so justified inequalities exist.
106
What is equality?
Parity in income (earnings) between individuals ie everyone is paid equally so no inequalities exist.
107
How does equity differ from equality in the distribution of income?
Equity is based on the argument that income inequalities are needed to create incentives for people to study and work harder. Equality means equal distribution of income in the economy.
108
Why do economies face inequitable distribution of income?
Due to the natural unequal ownership of factors of production in a free market economy.
109
How do deciles measure the degree of income equality?
Refer to the statistical method of splitting data into tenths with each part accounting for 10% of the population.
110
How do quintiles measure the degree of income equality?
Used to divide statistical data into fifths with each part representing 20% of the population.
111
What is the Lorenz curve?
A graphical representation of income distribution in a country. It shows the degree of income inequality. The 45 degree line shows perfect equality in income distribution.The Lorenz curve shows the actual income distribution in a country. The greater the area between the 45 degree line of total income equality and the Lorenz curve the greater the income inequality in the country.
112
What is the Gini coefficient?
A statistical tool that measures income inequality with the outcome ranging from 0 (completed equality) to 1 (total inequality).It is a numerical representation of a country's Lorenz curve.
113
How is the Gini coefficient calculated?
By the ratio of the area under the Lorenz curve to the area under the 45 degree line of complete equality.
114
Which countries have a high or low Gini coefficient?
Low income countries or those that suffer from a high degree of corruption.
High income countries tend to have a low Gini coefficient.
115
How can the governments use the Gini coefficient too strive for greater income equality over time?
They can use the Gini coefficient to measure whether income distribution is increasing or decreasing.
116
What is absolute poverty?
Exists when people are deprived of basic human needs for human survival. Those in absolute poverty suffer from malnutrition, hunger, a lack of clean water, poor healthcare and inadequate shelter.
117
What is relative poverty?
Refers to incomes and hence consumption below the social norm within a country. It can lead to damaging effects on individuals and families including social exclusion. It is a comparative measure so relative poverty will differ from country to country.
118
What is poverty?
Refers to the state of an individual, household or country being extremely poor ie. not having enough money to meet basic humans needs such as food, clothing, shelter, healthcare and education.
119
Why are definitions of poverty relative?
Because it varies considerably depending on the situation in different countries. Different degrees of poverty also exist within the borders of a country.
120
How is relative poverty in a country determined?
By examining the percentage of the population with earnings less than a predetermined percentage of the median income within that country.
121
Why is tackling poverty a key economic issue?
Apart from humanitarian reasons it represents economic inefficiency preventing people and economies from reaching their full potential.
122
How does low income cause poverty?
Without sufficient money, households will not be able to meet their basic human needs.
123
How does unemployment cause poverty?
Without a job people are unlikely to be able to sustain their standard of living. The consequences of unemployment include low self esteem, depression and higher rates of crime and homelessness.
124
How does a lack of human capital cause poverty?
The lack of sufficient provision of and investment in education and training leads to mass poverty. Without the necessary knowledge and skills the workforce will be unproductive and national income will be significantly lower than its potential.
125
How does overpopulation cause poverty?
The lack of population control means that GDP per capita will tend to decline thus causing greater poverty in the country. Larger families also tend to suffer from relative poverty.
126
How does gender inequalities cause poverty?
More women tend to suffer from poverty than men mainly due to social prejudice against females. Women are less likely to be in paid employment on a fully time basis and tend to earn less than men. This represents an inefficient use of labour resources.
127
How does corruption and conflict cause poverty?
Highly corrupt countries and those in political turmoil tend have a high Gini coefficient causing mass poverty for the majority of the population.
128
How does a lack of natural resources cause poverty?
The lack of natural resources and or the poor management of these resources will generally reduce a country's potential net export earnings.
129
How does natural disasters cause poverty?
Major disasters such as tsunamis and earthquakes can wipe out much of a country scarce resources thus creating mass poverty. Countries can struggle to fully recover from major natural disasters.
130
What are the main causes of poverty?
Low living standards - those in either relative or absolute poverty experience a low quality of life as they are unable to meet their basic needs of to experience a better standard of living.
Lack of access to healthcare and education - poverty stricken people are unable to afford quality healthcare and education. This hinders the human capital of the entry and thus compromises prospects of economic growth.
Conflict and war - poverty often leads to political instability and can even lead to war in extreme cases. This can lead to other issues such as a mass emigration of the population which undermines the countries ability to recuperate from poverty.
131
Why is poverty bad for an economy?
Hinders the ability of governments to achieve other macroeconomic objectives such as economic growth and low unemployment.
132
What is a direct tax?
A government levy on income such as income tax and corporation tax.
133
What is an indirect tax?
A government levy on expenditure such as goods and service tax.
134
What is the role of taxation?
Promote income equality by redistributing income to help relatively less well off in society.
135
What is the difference between indirect and direct taxes?
Direct taxes on earnings.
Indirect taxes on spending.
Direct taxes rather than indirect taxes are used to redistribute income from the rich to the poor.
136
Why are individuals granted a personal tax allowance?
To create incentive to work, can earn up to a certain amount before they are taxed, allowance tends to rise with inflation.
137
What are indirect taxes used for?
Often used to moderate spending on demerit goods.
138
What is progressive taxation?
Charges a higher percentage tax as an individuals income rises.
139
What is regressive taxation?
Charges a greater proportion of tax on lower income earners eg VAT and GST.
140
What is proportional taxation?
charges the same flat rate percentage tax irrespective how much an individual earns. Whilst more tax is paid in absolute terms as an individuals income rises the percentage tax paid is fixed.
141
What are disadvantages of using proportional and progressive taxation to redistribute income?
Can create disincentives to work thereby harming economic efficiency and economic growth.
142
How is government spending used to enable socially desirable foods and services to be provided?
By directly providing the services or by subsiding their output.
143
How do subsidies promote equity?
Enable firms to provide socially desirable goods and services in order to redistribute income, by making merit goods available to everyone.
144
How does the provision of essential infrastructure promote equality?
Access to saltation and clean water supplies help promote equality for those on low incomes and eradicate absolute poverty.
145
How to transfer payments promote income equality?
By government making payments to less affluent without any corresponding exchange or change in output.
146
What are the three main ways if government intervention to potatoes equality?
Taxation policy, government expenditure and transfer payments.
147
What are the downsides of using taxation to promote equality?
It puts extra pressure on taxpayers and can cause disincentives to work.
148
How can the effectiveness of a country taxation police be evaluated?
Equitable - taxes should be based on principle of taxpayers ability to pay otherwise create huge disincentive effects.
Economic - cost of collecting tax should be small proportion of tax yield.
Convenience - methods and timing of tax payments should be made as easy as possible to pay.
Certainty - amount and deadline of tax should be clear thus limiting late payments and number of tax evaders.
149
What is the problem with transfer payments?
Costly and drain limited budget of governments. Can also cause laziness amongst workforce.
150
What is the problem with using direct provision of goods and services to redistribute income?
There is an opportunity cost.
151
What is the problem with subsidies?
Costly to taxpayers, can encourage firms to become reliant on government funding hindering economic efficiency in allocation of resources.
