ECON 102 Final Flashcards
Why measure economic growth with real GDP per capita rather than other measures (Nominal, Real GDP, etc.)?
- Separates growth in quantities of g+s produces from rising price levels.
- Isolates the economic changes’ effects on population’s standard of living
Why is the typical Chinese or Indian HH far poorer than Canadian although they have much higher economic growth rates?
Their population is enormous, thus their wealth must be divided b/w a growing large population, leaving each HH with less compared to a Canadian one.
Rule of 70
Number of Years for X real GDP per Capita to Double = 70/Annual Growth Rate
More accurate → Average Annual Growth = A(1+r)^t=B
How does employment websites new software impact unemployment rate over time?
Reduces frictional unemployment.
How does employment websites the encourage discouraged workers to start looking again impact unemployment rate over time?
EDITS NEED TO BE MADE: Initially increases labor force participation rate & unemployment rate. Assuming those individuals find jobs unemployment rate would decrease over time.
Microeconomics vs Macroeconomics
Microeconomics: analyzes the behavior & consequence of individual & firm action: consumer, producer or government action in individual markets. Issues such as what, where & how much to buy & produce, opportunity cost, single-market or demographic, gains in trade, efficient allocation of resources, supply & demand
Macroeconomics: analyzes the overall functioning/performance of an economy through variables that aggregate in nature. Issues of unemployment level, total number of jobs, currency value, policies preventing & understanding economic slumps, inflation, international macroeconomics, long-run economic growth
* Can draw on microeconomics but requires expanded frame of reference & additional set of tools
Classical Macroeconomics
Before Great Depression spurred economists to search how such things could happen, how to prevent them & how to measure them: economies are self-regulating through the “invisible hand”, government intervention would ineffective or worse
Keynesian Macroeconomics + Successes
A depressed economy is the result of inadequate spending & problems will be solved by the market forces, but only eventually in long run: but possible to reduce the pain & suffering by implementing Keynesian government policies → managing the economy is a government responsibility
* Monetary Policy: changing quantity of money to alter the key interest rate=cost of borrowing controlled by the central bank, which affects the overall level of spending
* Fiscal Policy: direct government involvement in the market by adopting appropriate tax policy through direct income tax or indirect gst tax to affect overall spending
Major catastrophes avoided
The Great Recession 2008-2009 tracking to do worse than the GD, interest rates slashed, shore up loans, aids, guarantees, increases in spending to sustain spending, opposite was done during the GD.
Why is Macroeconomics’ whole great than the sum of its parts?
The actions of individuals in an economy can compound upon one another leading to outcomes that magnify the actions of individuals. Analyzing micro behavior to solve macro issues is not sufficient.
Multiplier Effect: an initial action can cause an infinite loop of events
Paradox of Thrift: reducing expenditure could be rational for individuals but can lead to bad outcome for the economy, a self-fulfilling prophecy
* When families & firms are optimistic they spend more stimulating economy, leading to good times for all
Business Cycle + 4 Features
Natural up & down, recession & recovery, trend of economic activities, production of goods & services (GDP or industrial production), employment, etc., in which macroeconomics endeavors to regulate.
- Expansion or recovery economic activities shows sign of growth
- Recession or contraction economic activities shows sign of downfall, unagreed definition, either period of 2 consecutive quarters (many countries) or duration+amplitude+scope that is pronounced, pervasive & persistent decline (C.D Howe Institute)
- Peaks (local maximums, expansion→recession)
- Troughs (local minimums, recession→expansion)
X-axis=year/time, Y-axis=employment or production
Why is recession in business cycle bad?
Recession increases widespread job loss → unemployment, hard to find new jobs, standard of living reduce in households, rise in people living below the poverty line & those who lose their homes unable to afford the mortgage payments, firm’s profits fall, many small businesses fail too rapid and prolonged growth is also troublesome (Milton Friedman)
How are Recessions Compared?
Industrial production measured as a percentage of its level at the recession’s start
Long Run Economic Growth + Importance
Most important issue. Sustained rise in the quantity of goods & services the economy produces (potential), measures the speed & direction of growth per real GDP as it is a good measure of improvement of standard of living in the economy, direct effect.
* Recession: inability to maximize potential output, falling behind
Most important problem to sustain steady growth, if achieved increases income, production, import, standard of living, consumption possibilities (ex. Telephone: 1912=1/200 people, 2023=everybody).
Growth benefits (improves standards of living) & costs (negative externalities), distribution of income
Determines public’s sense of economic progress & key policy questions; country’s ability to bear & recover from future costs of govt programs, social security, health care
Price stability: overall level of prices is changing only slowly as a desirable goal
Growth Accounting
1 Year: A+interest rate*A = A(1+i)
2 Year: A(1+i)+(A(1+i))i = A(1+i)(1+i) = A(1+i)2
3 Year: A(1+i)3
or
%Change(y) = %A + %K + %L + %H = %Y - %L
Log Proof
Inflation in ST + LT + Problem + Calculated
A rise in the overall level of prices, explains why although wages increased living standard didn’t as cost of living increased as well.
In the short run: Tends to fall when the economy is booming inflation rises, when the economy is depressed+jobs are hard to find inflation tends to fall (ex. Prices fell during GD)
In the long run: overall price levels are mainly determined by changes in the money supply, total quantity of assets readily used to make purchases
Problem: discourages people from holding onto cash as it loses value over time if the overall price level is rising, g+s one can buy falls with a given amount of cash, extreme cases people stop holding cash altogether & turn to barter
Calculated by:
1. CPI Inflation
2. IPPI Inflation
3. GDP Deflator
Supply & Demand vs Inflation
Supply & demand can only explain why a particular g+s becomes more expensive relative to others g+s
Only inflation can explain why overall price levels have risen in spite that g+s production has become substantially cheaper & efficient
Deflation
A fall in the overall level of prices, a main concern of macroeconomics
Problem: holding onto cash becomes more attractive than investing as cash gains value of time as price level is falling which can deepen a recession, g+s that can be bought with given amount of cash increases over time
Views on Managing Trade Balance
Macroeconomic phenomena determined by decisions about investment spending & savings; high investment spending relative to savings run trade deficits & vice versa
* Old Dominant View: trade surplus is wanted as revenue is greater than expenses, with a store of gold+silver in case of crisis
* Now Dominant View: trade deficit is wanted as higher level of consumption = higher standard of living, stabilized & increasing consumption level in economy preferred
Greece Trade Balance
TBD
* 2000-2006: adopted euro earning foreign investments, savings & a healthy trade deficit, fueled rapid economic expansion
* Great Recession 2008-2009: investors lost confidence, trade deficit shrinks in comparison to GDP, severe recession, unemployment, forced to run a surplus
Trade Surplus vs Trade Deficit
Trade Surplus: value of the g+s bought from rest of world is smaller than the value of the g+s it sells abroad = value of g+s bought from foreigners is less than the value of g+s sold to them
x>m → Nx=x-m > 0
Trade Deficit: value of g+s bought from rest of world is larger than the value of g+s produced in country sold abroad= value of g+s bought from foreigners is more than the value of the g+s sold to them
x<m → Nx=x-m < 0
International (Im)balance
International Imbalance = Net Export Value (Nx) = Export (x) - Import (m)
Open Economy: economy that trades g+s with other countries due to comparative advantages
Export: value of the g+s sold to the foreign buyers altogether
Import: total value of the g+s purchased from the foreign seller
National Accounts
All countries calculate the National Income & Product Accounts following the flows of funds between sectors of the economy, the accuracy & reliability indicts the state of economic development.
Flow Variable & Quantity of Stock Variable
Flow Variable: have a time dimension per unit of time
* GDP, investment, demand, income, export, import
Quantity of Stock Variable: meaningfully measured at a point of time
* Capital, population, inventory, money in circulation
Gross Domestic Product (GDP)
(Y) Measures the size of economic activities within an economy for a time span of quarter or year
Definition: the total market value of all final g+s produced within the boundary of an economy in a specific period of time (usually a year)
* Goods & services purchased/produced outside of country not part of GDP, import revenue of g+s not included, export revenue from in country produced g+s included
* Final G+S: sold to the final user
* Intermediate G+S: inputs for production of final g+s
Measurement Methods
Every country will compare the calculations of all 3 methods to find discrepancies & make adjustments/corrections to around the same value
1. Value Added
2. Income Approach
3. Total Expenditure
Value Added Approach
Sum of Firm Payments for Factors of Production
Add the values of all final g+s produced in the economy. Intermediate g+s not included to not overestimate/double count as they’re values are aggregated in the final price.
Government collect info from every firm, find input resources & revenue to calculate intermediate cost
Equation:
Payments to the firm’s factors of production = sales value - intermediate g+s value
ex. $2+$(5-2)+$(10-5)+$(15-10)=15
Income Approach
Sum of income from Factors of Production
Total value of outputs in the economy is equal to total factor income earned by households from firms in the economy (factor payments) & income earned by federal government from production (non-factor payments); ideally if we add (gross) wages, rents, interests & profits that should add up to the value of g+s produced within the economy
* Don’t Include: inputs, used goods, financial assets, import spending, non market transactions, negative externality
Eqn: GDP = Wages + Interest + Rents + Dividends + Non-Factor Payments (indirect tax + capital depreciation)
Total Expenditure
Eqn: GDP= C + I + G + NX
g+s produced & bought within the economy (adjustments are required to factor in trade), by adding the expenditures on domestically produced final g+s in the economy
Consumption Expenditure (C)
* Households’ purchase of new goods & services
* Imputed rents for self-owned homes (value of owner-occupied housing)
* Newly built homes not included
Investment Expenditure (I)
Plants & Equipment, not inputs
Newly built residential & non-residential structures
Inventory adjustments: cost for storage for supply as safeguards
ex. Prod-100 Sold-90 Storage-20+10->30 = GDP+10
ex. Prod-100 Sold-110 Storage-20-10->10 = GDP-10
Government Expenditure (G):
Government purchase/borrowing of goods & services are included
Government transfer payments are not included as will be accounted for in consumer expenditure
Net Export (X-IM) = exports - imports, income leaked across national borders
Closed economy with a government that borrows 10bn has an income flow of 600bn, the government collects a lump sum tax of 20bn & transfers a fixed 10bn to the households. If the household sector saves a fixed 20% of their disposable income (income left net of tax & transfer), then what is the size of firm investment in this economy?
GDP = C + I + G
I = GDP - C - G
C = Disposable Income - Savings
Disposable Income = GDP-Tax-Transfer
Savings = Percentage Saved * Disposable Income
G = Tax - Transfer + Borrowing
I = 600 - (600-20-10)*(1-0.2) - (10+10)
I = 600 - 472 - 20
I = 108
Circular Flow Diagram
- Interdependence between income & goods & services
Green = ‘real’ economy, flow of funds associated with production & sales of g+s
Blue = ‘financial’ economy, borrowing, lending & other flows of funds, indirect effect on production - Spending = Income = Value of factors of production = Output of firms = Spending
4 Buyers/Flows
* (1)Government Purchases of Goods & Services-education, defense (2)Transfer payments-social security, job insurance
* Households engage in consumer spending/consumption: purchasing goods & services through the goods & services market
* Firms: engage in investment spending-buying goods & services from each other, productive capital, machinery & construction of buildings
* Rest of the World: comes from net exports-imports, goods & services sold to residents of other countries
* * Financial Markets: provides financial instruments (loans, bonds) spent for investment. Government uses household savings that collect interests to borrow & invest, while firms compete
Nominal GDP vs Real GDP
Difference is in Real GDP prices are kept constant, in nominal GDP prices vary according to each year.
Nominal GDP: measuring GDP/aggregate output at current prices, overtime can overestimate or underestimate growth of economic activities as nominal GDP can increase even if output/quantities do not or even decrease due to price changes
Real GDP (Fixed Prices of Base Year): measured to make adjustment to price changes in nominal GDP, measures aggregate output/quantity produced in a year
Definition: total value of final goods & services produced in the economy during a given year, calculated using the prices of a selected base year
Growth Rate (g)
A(1+g)^t=B → g=(B/A)^1/10 - 1
Growth Rate vs Percent Change
Percent change represents the relative change in size between x across a time period. Growth rate represents the average amount of change per year or per month of x across a time period.
x could be Real, nominal GDP (per Capita), productivty, human capital per labor, etc.
Growth Rate: A(1+g)^t=B
Percent Change: (2-1)/1 * 100%
- Find Nominal GDP of 2007 & 2012
- Real GDP base year 2007 & 2017
- Growth rate of GDP base year 2007 & 2017
E: 2007(Q80, P40) –> 2017(Q100, P50)
P: 2007(Q90, P11) –> 2017(Q80, P10)
T: 2007(Q15, P90) –> 2017(Q20, P100)
Nominal GDP 2007 = 5540
Nominal GDP 2017 = 7800
Real GDP 2007 (base 2007) = 2007Q x 2007P = 5540
Real GDP 2017 (base 2007) = 2017Q x 2007P = 6680
Growth Rate (base 2007) = (6680/5540)^1/10 - 1 = 1.889%
Real GDP 2007 (base 2017) = 2007Q x 2017P = 6400
Real GDP 2017 (base 2017) = 2017Q x 2017P = 7800
Growth Rate (base 2017) = (7800/6400)^1/10 -1 = 1.998%
Chained Dollar Real GDP
In Chained Dollar Real GDP, the average real GDP growth between every pair of consecutive years are treated to be the growth rate.
Growth Rate (g) = (B/A)^1/t -1
Average Annual Growth Rate = (g1+g2)/2
Step 1: Find Real GDP of both years with both base years.
Step 2: Find average annual growth rate
Step 3: Choose a base year & calculate its nominal GDP
Step 4: Calculate real GDP for all years based on the growth rates
Real GDP per Capita + Purpose
(Y) Real GDP per Capita = Real GDP/Population, measure of an economy’s average aggregate output per person, those with high can afford its citizens to be healthy, education, in generally a good quality of life
* % in Real GDP per Capita =% in Real GDP - %Population
* %Z=%x-%y, Z=x/y
Real GDP/Population = Labor Productivity * Avg. Hour Per Worker * Proportion of Population that Work = Real GDP per Capita x Population = A * F(K, H, L)
* *Labor Productivity =Real GDP/Employed=Total Output/Workers or Hours Worked= y=Y/L=Af(KL,HL), output of the avg worker produces in an hour
* **Avg Hr **= Total HoursTotal Employment= hours avg. worker spends at the job
* EPR (Employment-population ratio) =EmploymentPopulation fraction of the population working
* Size of Population
Economic activities (defined by GDP) grow generally with the increase in population, therefore GDP doesn’t necessarily represent a better standard of living for the economy. Compare country to country. Only if GDP grows outpacing the growth rate of population, then at least improvement on average in the standard of living can be claimed
Should GDP be the meaning of life?
- No sufficient measure of human welfare, growth in real GDP per capita is no appropriate policy goal, although income is higher, will it be used to improve quality of life, useful summary of economic progress over time
- Richer countries on average have a higher life satisfaction
- Money matters less as you grow richer
- Middle-income nations seem more satisfied with their lives than richer nations, money isn’t everything
Disinflation vs Deflation
Disinflation: bringing down the level of inflation
- Difficult & costly when high inflation has become well established in economy as it requires a temporary but large increase in the unemployment rate
- Best to avoid high inflation in the first place, must respond forcefully to signs that inflation may be accelerating
Deflation: fall in overall price level or negative inflation
Increase in price level isn’t same as rate of change in price level. Worsens standard of living.
How to Monitor Inflation + Issues + Solution
- Compare all prices of each year
- Compare averages of all prices as observed in the market
Issues: not all goods are equally valuable/important or accurately represent the cost of living. Ex. 100% increase in housing prices is much more important than 100% increase in electric vehicles
Solution: Price Indexes
1. Consumer Price Index - inflation
2. Industrial Producer Price Index - inflation
3. GDP Deflator
Consumer Price Index + 3 Components
Changes in aggregate price level are measured by the cost of buying a particular market basket during different years.
Consumer Price Index (fixed Q): monitors cost of living based on consumer expenditure survey every 4 years representing average urban household’s typical consumption & monthly price surveys, differs country to country, poorer spend high proportion for food, Japan more fish less beef
* 3 components creating a price index: a market basket, a base year & normalization
CPI = (Cost of Market Basket in Given Year/Cost of Market Basket in Base Year)*100
Find CPi 2019, 2020, 2022, base year 2002
B: 2002(Q10, P5) –> 2020(Q8, P6) –> 2021(Q7, P8)
P: 2002(Q12, P20) –> 2020(Q3, P22) –> 2021(Q54, P24)
M 2002(Q2, P18) –> 2020(Q43, P23) –> 2021(Q34, P20)
CPI in 2019 = not possible, P Q needed for 2 consecutive years
CPI in 2020 = 370/326100 = 113.5
CPI in 2021 =408/326100 =125.15
Why Log CPI
Same rise in slope does not correlate to same inflation
CPI + IPPI Based Inflation Rate
Percent change in a price basket (Q)= (price index 2 - price index 1)/price index 1 * 100
- CPI is used to calculate official inflation rate estimate that adjusts transfer payments/tax brackets+bands yearly & private contracts (COLAs cost of living allowances), has more direct+immediate impact than GDP; transfer payments rise or fall when CPI rises or falls
- IPPI Based Inflation Rate: early indicator as primary commodity prices move faster than retail prices bought by consumers, changes/responds quick to inflationary or deflationary pressures than CPI & when they perceive a change in overall demand for their goods
Cost of Living + Market Basket
- Cost of Living: how much do we need to spend on a fixed consumption bundle =i=1nPiQi=P1Q1+P2Q2+… PnQn, Q held constant
- Market Basket: {Q1, Q2,… Qn}, Q held constant, hypothetical consumption bundle used to measure changes in overall price leve
Industrial Producer Price Index (IPPI)
Industrial Producer Price Index (IPPI): measures the cost of a typical basket of g+s bought by producers, used to measure inflation based on commodity prices of raw materials
GDP Deflator
Current weighted price index, ratio of nominal GDP & Real GDP for that year, measure to monitor economy wide price changes, broader list of items compared to market basket
=Nominal GDP for given year/Real GDP (P base) for the same year * 100
Relationship b/w change in CPI, IPPI & GDP Deflator
- All 2 price indexes fluctuate closely together
- PPI most volatile as it has less prices to incorporate into an average
- GDP deflator most stable as it has most prices to incorporate into an average
Goal of Macroeconomic Policy
Focuses mainly on mitigating high unemployment & high inflation, goals are low unemployment & price stability which can be in conflict, important to consider tradeoff as well as sources of each, their danger & length of time
Employment Rate + Working Age People + Labor Force + Labor Force Participation
Employment Rate: those who are employed full time or part time
=people employed/working age population*100
Working Age People: 15-64
Labor Force: =employed+unemployed sum people that either
* Has a parttime or fulltime job
* Person is not employed then looked for jobs within last 4 weeks
* Available for work, no disability
Labor Force Participation =labor forceworking age groupx100: percentage of working-age population in labor force
Unemployment Rate
Total number of people 15-60 actively looking, available but currently aren’t employed, very good indicator of economic changes that have impact on lives, imperfect indicator of labor market conditions, how easy or difficult it is to find a job in given state of the economy, contradictory to quit rate
* Without work, looking for work in past 4 weeks, and available/abled for work
* Maternity+paternity leave is still employed
* Temporary layoffs or waiting for new jobs are unemployed
* Monthly Labour Force Survey, interviewing random sample of 56,000 HH, ask if their employed or unemployed, scaled to total population
=number of unemployed/number people in labor force * 100
How is unemployment rate overstated & understated
UE Overstate True Level of UE difficulty: confident worker who has not accepted position is counted as unemployed & normal for job search
UE Understate the True Level of UE/Measure of Labour Underutilization: those who would like to work but aren’t working don’t get counted as unemployed Underestimation is worst than overestimation, doesn’t include
* Discouraged workers (searching within 1 year): people who have given up searching
* Marginally attached worker: stopped looking waiting for employment to begin, hopeful but waiting for recall, replies, new job in 5+ weeks
* Underemployment: work not to desired capacity.
Visibly Underemployed Workers: work fewer hours than wanted (ex. Part-Time, want Full-Time)
Invisibly Underemployed Workers: work in jobs that don’t use skills fully, substandard to human capital (ex. Low wage, disadvantages, Immigrant, doctors, lawyers)
How can Unemployment rate vary?
- Varies across regions (Atlantic vs Alberta), demographic groups (Young vs Old, Men vs Women), ethnicity (Black vs White), gender (Men vs Women in manufacturing vs service sector), macroeconomic conditions (commodity prices rising) & time/history (COVID)
- Overall unemployment rate low, jobs are hard to find for some groups
- On average, post-secondary educated have lower unemployment rates than highschool educated, especially during economic downturns
GDP Growth vs Unemployment Rate
Strong Negative Relationship GDP Growth vs UE: as economic growth increases, unemployment decreases, but growth must be very high for unemployment rate to fall
Jobless Recovery/Growth Recession: GDP growing below-avg rate & unemployment rising, typically following a deep recession
Job Loss recessions create lowers standard of living of many families
Natural Unemployment vs Actual Unemployment Rate
Natural Unemployment
Frictional Unemployment + Structural Unemployment = Unemployment present at peaks of business cycles
Continual job creation & destruction are features of modern economies, making naturally occurring unemployment inevitable.
Can be affected by government policies, changes over time.
Actual Unemployment Rate
Actual Unemployment = natural + cyclical
Frictional Unemployment
Voluntary, due to job search, lack of connection, constant churning in labor market, reduced through internet, exists even when D=S, no surplus of workers
* UE is mainly frictional: low UE→short avg. waiting period
* Limited amount may be good, more productive economy if workers take time to find well-matched jobs
Structural Unemployment + 4 Causes
Unemployment caused by structural change in the economy, more workers with a particular skill/wage than jobs available using that skill/wage, labor markets face constant changes, skill & wage mismatch as new technologies emerge & consumer’s tastes change, persistent surplus of labor even when economy is at peak.
* Mainly Structural: low UE, long avg. waiting time
* Unions: organization of workers that collectively bargain for better wages & benefits by threatening labor strikes, refusal to work, countered with lockouts, period in which union workers are unemployed hiring replacement workers, same results as minimum wage, wages pushed above minimum wage
* Minimum wage: government floor ensure people can earn enough income to afford a minimally adequate standard of living, irrelevant if below equilibrium wage, above equilibrium, binding minimum wage, leads to labor surplus S>D, takes work from workers willing to work for lower wages, more people working minimum wage than before minimum wage
* Efficiency wages: wages set above equilibrium to avoid moral hazard problem-incentivize better performance & address adverse selection problem-avoid quality problem/attract highly skilled
Higher wages pool more workers to that job, causing shortage
* Government policy side effects: employment insurance, emergency response benefit, reduces incentives to quickly find a new job
Cyclical Unemployment
Actual rate - natural rate of unemployment, government regulates using fiscal & monetary policy to bolster demand, arises from the downturns of the business cycle, enough capacity, not enough demand for output
* UE cyclical>frictional: high UE → jobless longer periods of time
Job Seekers>Jobs Available. What unemployment is most at work here.
structural or cyclical
3 Changed in Natural Rate of Unemployment
- Changes in Labor Force Characteristics: gender, age (ex. Women in the labor force incr., -25 decr., baby boom)
- Changes in Labor Market Institutions: Unions, temporary employment agencies, gig economy, technological change, skill mismatch
- Changes in Government Policies: jobless insurance, high minimum wage, job training programs, employment subsidies (financial incentive to accept job)
Inflation Rate
Rate of change/percent increase in overall prices per year level measured by price index
= (Price Index 2 - Price Index 1)/Price Index 1 * 100
How is Standard of Living Measured
Real Wage= Nominal Wage/ Current CPI
Real Income = Nominal Income/ Current CPI
Interest Rate + Real Interest Rate + Nominal Interest Rate
Interest Rate: return a lender receives for use of their funds for a year with consideration to inflation rate that would occur in that period of time
Nominal interest rate: stated interest rate actually paid for a loan.
Real interest rate: nominal interest rate minus the rate of inflation
r=i-r^e, Real Interest Rate (adjusted for inflation) = Nominal Interest Rate - Inflation Rate (Expected/Actual)
3 Costs of High Rates of Inflation
Shoe-Leather Costs - Increased Costs of Transactions - Wear & Tear of Running: money held in a wallet or bank during high inflation losses its purchasing power as prices rise. Avoiding holding money, moving funds into assets that will hold value,
* Unproductive employment of force with frequent transferring, larger bank branches
* Loss of real resources
Menu Costs: cost of changing a listed price, to avoid constantly changing prices they switch to a more stable currency or artificial unit/set prices relative to one another, this has been reduced with electronically changing prices online
* Unproductive employment of force: requires sending clerks/workers very often to change listed price with each item
* No longer listing prices, multiplied by a number on a chalkboard
Unit-of-Account Costs: costs of money as unreliable unit of measurements
Financial planning impossible
Reduces quality of economic decisions
* Less efficient use of resources from uncertainty
* Distorts measures of income & taxes collected
* Pay phantom gains in productive investments (an investor’s portfolio declines in value but they’re still required to pay capital gains taxes)
* Gain phantom losses (reduced tax bills) in unproductive investments
* Discourages long-term contracts & investments