4. Government and the macroeconomy Flashcards
On which levels does the government act
Locally, Nationally and Internationally
Local government
An organisation that has the authority to implement policies within its local geographical area.
Authority to take on public activities, collect taxes and implement a local budget.
Local budgets are taken out of texes collected, toll charges and often, financial grants from the national government.
Government’s role at the national level
As an employer - Employs people for public sector + increases productivity of it’s employees by providing training + pension schemes.
As a producer - Provides public services such as roads, healthcare etc.
As a consumer - Demands certain goods to be able to provide public + merit goods.
Government’s role at an international level
- Ability to form trading blocs
- Placing trade restrictions such as tariffs and quotas.
Macroeconomic aims of the government
Trade - Balance of payments
Inflation - Low and stable (+/-2%)
Growth - Strong, Sustained, Sustainable
Emplyments - Full employment/ Low unemployment
Redistribution of income - Progressive tax system
Sustainability - Keep all TIGER at a stable level
TIGER
Aggregate demand
Total amount of demand in an economy.
C + I + G + (X - M)
C - Consumption
I - Investment by firms on capital goods
G - Government spending
X - Exports
M - Imports
Aggregate Supply
Total amount of goods / services porduced in an economy over a period of time at a given price level.
Balance of payments
A record of all money flowing into and out of a country from trade during a specific period of time.
Progressive taxation
A type of taxation levied on firms and individuals. As income increases, the percentage of tax also increases.
Aims to redistribute income in a country.
Increased economic growth can lead to….
Increased price inflation
Increase pollution + depletion of natural resources.
Increased employment can lead to….
Increased price inflation
Decresaed balance of payments (Increased demand for imports)
Decreased price inflation can lead to….
Increased unemployment
Government budget
A financial plan of how much tax revenue will be collected and where it will be spent over a period of time (usually one year).
Budget defecit
When government expenditure is greater than government revenue.
Budget surplus
When government revenue is greater than government expenditure.
Reasons for government spending
- Providing essential services
- Providing welfare programs, scholarships, free education etc… (redistribution of income)
- To correct market failures
Direct tax
A type of tax directly paid to the government by the taxpayer. It is a percentage levied on a person’s income and wealth, and on profits of businesses.
Personal income tax
Tax levied on personal incomes, that is, on salaries, wages, interest, rent and dividends.
Direct tax
Corporate income tax
Tax levied on the profits of businesses and firms.
Direct tax
Wealth tax
Tax levied on the total value of personal assets. It is a tax on the profit made by selling an asset at a higher price than the original price at which it was bought.
Direct tax
Capital gains tax
Tax levied on money earned from investments, such as buying private property or buying shares.
Direct tax
Inheritance tax
Tax levied on the transfer of wealth and income, such as money, property or wealth passed on to another person.
Direct tax
Windfall tax
Tax levied on individuals and firms when they earn an unexpected amount of money, such as winning a lottery or a firm gaining from a takeover bid.
Direct tax
Payroll tax
Tax levied on employers and employees. Payroll taxes are taxes on individual earnings but are paid by the employers.
Direct tax
Indirect tax
Taxes imposed by the government on spending to buy goods and services.
Sales tax
A consumption tax imposed by the government on the sale of goods and services.
Indirect tax
Excise tax
Tax levied mostly on the production of demerit goods such as alcohol, cigarettes, petrol and soft drinks.
Indirect tax
Customs duty (tariffs)
Tax levied on imports of goods and services into the country.
Indirect tax
Carbon tax
Tax levied on producers who emit more than a set percentage of carbon during production. These taxes are also levied on manufacturers of vehicles.
Indirect tax
Stamp duty
A type of progressive tax paid on the sale of a property.
Indirect tax
Regressive tax system
A system where the proportion of income tax decreases as income increases. This means that as someone’s income or profits increase, they will have to pay a lower proportion (percentage) of their income or profit as tax.
Proportional tax system
A system where the proportion of income deducted as tax stays the same whatever the income level of the individual or the profits of a business.
Qualities of good tax
Certainty - Easy to calculate tax rate
Equitable - Should be fair based on ability to pay
Economical - Cost of collecting tax should be lower than revenue generated by it.
Convenience - Should be easy to pay
Efficiency - Performance of the economy should increase with the implementation of taxes.
Flexibility - Taxes should be flexible following changes in the economic activity in the economy.
Expansionary fiscal policy
Decreasing taxes and increasing government spending to boost total demand in the economy. This policy is mostly introduced at times of recession.
Contractionary fiscal policy
Increasing taxes and decreasing government spending to decrease total demand in the economy. This policy is mostly introduced at times of inflation.
Monetary policy
Controlling the money supply in an economy by changing interest rates and the amount of currency in circulation.
Interest rates
Determines the price of borrowing money or the return from saving money in the bank.
Exchange rate
The price of one currency in terms of another.
Expansionary monetary policy
A monetary policy tool that influences the level of total demand in the economy by decreasing the rate of interest and increasing the supply of money to expand economic activity.
Contractionary monetary policy
A monetary policy tool that influences the level of total demand in the economy by increasing the rate of interest and decreasing the supply of money to contract economic activity.
Supply-side policies
Macroeconomic concept that refers to total supply within an economy and the government policies that would affect it. Supply-side policies aim to increase the quality and quantity of the factors of production in the long term.
Focuses on improvements in education, trainigh programmes, improving tech + infrastructure etc.
Supply-side policy measures
Education + training - Increases labour skills
Research and development - Increases production of capital goods + increase potential output in the long run
Infrastructure - Well developed infrastructure attracts foreign businesses to invest in the economy
Small + medium-sized enterprises - providing low-interest or interest-free loans.
Encouraging competition - Privatisation transfers ownership from the public sector the private sector
Incentive-related policies - Direct tax cuts acts as incentive for workers + firms to increase their supply.
Economic growth
An increase in the amount of goods and services produced in an economy over a period of time (usually one year). Economic growth is a quantitative measure of a country’s output.
Gross Domestic Product
The value of the goods and services produced within a country’s borders in one calendar year.
Employment
Refers to the use of the factors of production (such as labour) in an economic activity.
Unemployment
The number of people in an economy who are actively seeking work but cannot find it, expressed as a percentage of the total labour force.
Unemployment rate
The measure of the amount of unemployment in the economy expressed as a percentage.
(Number of people unemployed / Total workforce) * 100
Frictional unemployment
A type of short-term unemployment when people are between jobs.
Seasonal unemployment
A type of unemployment that occurs when the demand for certain skills is based on seasonal changes, when people do specific job types that are only required during certain times of the year.
Structural unemployment
Form of unemployment caused by a mismatch between the skills that workers can offer and the skills that employers demand. Due to technological changes in the structure of industries, many skills become obsolete and are no longer in demand.
Cyclical unemployment
A type of unemployment that occurs when there is not enough demand in the economy. It is also known as demand-deficient unemployment.
Consequences of unemployment (For people, government, firms? etc.)
- Loss of GDP
- Loss of tax revenue
- Increased cost of unemployment benefits
- Loss of income for individuals
- Increased crim rates
- Increased stress levels
- Increased debt, homelessness and family breakdown
Inflation
Sustained increase in the general level of prices over a period of time.
Deflation
Sustained decrease in the general level of prices over a period of time.
Disinflation
A fall in the rate of inflation. It means that prices are still rising in the economy, but at a slower pace than the year before.
Hyperinflation
A very high increase in the prices of goods and services. The average level of prices rises more than 50% per month.
Consumer price index
The weighted price index of goods and services in the economy over a period of time. It is used to measure the cost of living of an average household.
Demand-pull inflation
When inflation is caused due to an increase in total demand in the economy.
Cost-push inflation
Occurs when total supply falls due to an increase in the costs of production for firms or the unavailability of factor resources.
Imported inflation
A general and sustainable price increase due to an increase in costs of imported products.
Consequences of inflation
Greater unertainty - Businesses aren’t willing to invest.
Extra costs to firms
Redistributive effects - inflation will affect low income households more
Less saving - Bc of lower interest rates
Damage to export competiveness - Foreign prices may be rising less
Purchasing power
The value of a sum of money - How much you can buy with a sum of money.
Can differ year to year as prices change due to inflation/ deflation.
Wage-price spiral
Inflation increases.
Workers want higher wages.
Wages increase.
Companies pass on prices of wages to the consumer
Inflation increases again (cost-push)
Cycle continues.
