Macro 25 Markers Flashcards
Global oil prices fell from a 2008 peak of $147 a barrel to $27 in 2016
Evaluate the likely macroeconomic consequences of a significant fall in global oil prices (25)
Real household incomes after essential costs should increase, as large amount of goods will fall in price. This may increase Consumption -> component of AD -> LRAS AND AD SHIFT RIGHTWARDS DIAGRAM. -> Boosts RNO
However, no guarantee individuals increase consumption in the economy, may save which withdraws from circular flow of income. Further impacts may be increased remittances, £7.7billion in 2017
Lower input costs for firms: SHIFT IN SRAS TO THE RIGHT -> may mean greater revenue due to greater output -> greater corporation tax rev for Gov. Moreover, expanding firms and sectors may increase demand for labour, boosting real wages -> Increased gov revenue. Can go towards balancing budget deficit or reinvested into the economy to simulate Long Run Growth, education etc.
However, in recent years there has been an incentive to invest in ‘green’ and renewable energy sources to reduce impact of global warming and negative externalities. Reduced oil prices may reduce this incentive, with firms delaying sustainable energy projects and governments with their plans e.g. Only electric cars sold by 2035
Oil importing nations, such as India who import 75% of their oil, will benefit through reduced balance of payments deficit, which can reduce likelihood of future austerity measures which can worsen poverty.
However, oil exporting nations will not benefit, greater sovereign debt for them, such as Venezuela, Saudi Arabia. Russia underwent recession due to falling oil prices in 2014
In conclusion, falling oil prices and its impact will differ depending on whether the nation is an oil net exporter or importer. Additionally, while falling oil prices may aid short term growth through AD, it is likely that the potential impact on backtracking environmental targets may negatively affect all nations in the long run through pollution.
In 2012, it was estimated that Japan’s national debt was equal to 214.3% of its GDP,
and Greece’s national debt was equal to 161.3% of its GDP.
Evaluate the likely impact of measures that a government could take to reduce
the economy’s national debt. Refer to a developed economy of your choice in your
answer.
National Debt is the total amount of money that a country’s government has borrowed, built up over many years.
Austerity measures, running a Fiscal surplus. This reduces debt as government revenue should exceed expenditure. Could be done by tax increases, or reduction in transfer payments. Appeals to Neoclassical economist who state gov. expenditure shouldn’t be used, like Hayek. Has been done since 2010 in the UK to deal with the Financial Crisis.
However, may result in poverty trap, reducing incentive to work as greater income tax. Thus individuals stay on benefits and maintain lower standard of living. Happened in Greece, in 2010 20% unemployment after bail out. DRAW LORENZ CURVE, worsening of the Gini-Coefficient
Opposition parties may offer the alternative of increased fiscal stimulus, which should increase LRAS and AD, leading to long-run growth. Draw LRAS CURVE SHIFT RIGHT AND LRAS. As Component of AD is Gov Spending, + multiplier effect. Thus government revenue should increase as firms have greater revenue and individuals have greater median income.
However, will increase fiscal deficit in the short-term, and requires government has perfect information to invest in areas that will boost LRAS.
Finally, gov could use exchange rate devaluation in a fixed or managed exchange rate system, reducing value of their currency against a baseline, often gold or the USD. Egypt reduced value of Egyptian Pound by 14% vs USD IN 2016. This should make imports more dear, reducing withdrawals from circular flow of income, and exports more competitive. This should result in greater government revenue from corp tax and FDI. FDI may also generate employment, further reducing budget deficit.
However, devaluation can lead to cost-push inflation as domestic firms import prices increase, may have to increase prices to cover greater total costs. This can lower investment through lower uncertainty, and also makes exports less internationally competitive.
In judgement, many of the policies can have potential negative impacts on the economy as well. Austerity is often the most employed method, having been used in UK since 2010 and Greece after the 2013 Bailout. Ultimately worsens inequality and poverty, moves Gini-coefficient towards 1, UK’s is 0.35. However, alternative of defaulting on sovereign debt will worsen inequality even further, so may be deemed as ‘a necessary evil’.
In 2018, the United States Government cut the corporation tax rate (tax on company profits)
from 35% to 21%. Income tax rates for US citizens were also reduced: for example, the top rate of income tax was cut from 39.6% to 37%.
Evaluate the likely impact of cutting tax rates as a policy to increase economic growth (25)
Tax Definition - a compulsory contribution to state revenue. Corp tax is levied by the government on firms. Income tax is levied by the government on individuals/consumers
Economic Growth Def - An increase in value of Real GDP, which means an increase in the value of national output
One impact of cutting tax rates may be increased supernormal profits for firms -> Increased investment -> Component of AD (C+I+G+X-M) -> Thus Increase in growth (Draw LRAS & Rightwards AD Shift diagram).
Additionally, this reinvestment may lower relative unit labour costs for firms -> More internationally competitive > More demand for exports -> Improvement in Balance of Payments / Reduction in Fiscal Deficit.
However, firms may not always reinvest increased profits. May increase dividends payments. Moreover, extraneous factors can affect likelihood of investment, such as business confidence. For example, Business Confidence Index at only 96.5 in June 2020, lowest in over a decade, so cutting tax rates likely to be ineffective at that point.
Cutting Tax Rates may mean lower incentive for tax evasion/offshoring e.g. Cayman Islands, and increases likelihood of FDI. FDI can increase employment through TNCs requiring workers, and his also results in the multiplier effect (estimated to be between 2-3 in the US during a recession) as employees spend earnings from working for the TNC. For example, Irelands low corp. tax rate of 12.5%, compared to the UK’s 25%, has encouraged FDI (Amazon) that has led to vast economic growth in the last decade: GDP per Capita rose from $44k in 2010 to $89k in 2020, unemployment decreased from 15% to 5.5%. Moreover, lowered income tax rates over a certain rate can decrease capital flight. DRAW LAFFER CURVE. Art Laffer theorised this threshold was roughly 50% Income Tax Rate.
However, cutting tax rates may cause higher government debt due to reduced tax revenue. This may result in crowding out as the government funds current expenditure on interest repayments.
Cutting tax rates may negatively impact the economy as it could worsen inequality, move gini coefficient towards 1, Lorenz curve away from line of perfect equality, lowered living standards. Moreover, consumers may instead choose to save any extra disposable income that has been generated through lower income tax -> withdrawal from the circular flow of income -> potentially reducing AD -> has an enhanced detrimental effect due to the multiplier.
However, increased disposable income will theoretically increase consumption, a component of AD (C+I+G+X-M), especially as the US has high relative Marginal Propensity to Consume (change in spending/change in income). This was the theory behind Reagan’s Reagonomics / Trickle-down economics in the 1980s, resulting in 92 months of economic growth, the longest in US peacetime ever at that point. Moreover, the Harrod-Domar model says higher savings ratio = higher growth
In judgement - it is likely that reduced tax rates should increase real GDP. Lower corp tax may attract FDI, such as in Ireland, and lower income tax will serve to increase AD through greater consumption, also possible reducing the chance of offshoring and capital flight of high wealth individuals. However, Art Laffer theorised that only cuts at over 50% income tax will serve to increase government revenue, although the benefits of tax cuts below this rate may serve to increase gov revenue in the long run through economic expansion.
In terms of income distribution and wealth distribution Brazil is one of the most unequal countries in the world. Its income Gini coefficient is 0.449 and it is ranked number 2 in the world for its wealth inequality.
Evaluate possible economic causes of income and wealth inequalities within a country such as Brazil. (25)
Economic inequality def. - the unequal distribution of income and opportunity between different groups in society
One cause may be a lack of redistributive taxation and welfare policy. E.g. gov may use regressive taxation systems to a greater extent than more progressive systems such as income tax that can take a greater percentage of income from more wealthy individuals. Moreover, this may be combined with an inefficient welfare system. For example, in the USA progressive taxation system is used, yet a flawed welfare system means vast income inequality still exists, as those on the lowest incomes or unemployed struggle to receive viable transfer payments. Welfare and progressive tax systems may be able to move the gini coefficient towards 0, and the Lorenz curve towards the Line of Perfect Equality DRAW LORENZ CURVE
However, this inequality could be solved in the long-run as the Brazilian economy grows and real national income can rise. Brazil is recognised as one of the BRICS countries of fast-growing economies.
A second reason for this income inequality may be a rural-urban divide. Those in urban areas in brazil , such as those in Rio de Janeiro and Sao Paulo, may have a much larger access to high paying jobs and education levels than those in rural areas around the Amazon, such as the booming fintech industry in Sao Paulo. Poor level of education hinders social mobility and results in low levels of human capital in rural areas, making employees undesirable to firms, resulting in a lack of demand in employees from these regions. Moreover, there is a lack of quality infrastructure across the huge country, meaning those in Western and Northern Brazil may struggle with geographical mobility to financial hubs like Rio and Sao Paulo on the Eastern Coast.
However, Brazil gov. has invested in infrastructure projects such as the SP-160 highway, attempting to increase geographical mobility to Sao Paulo.
Inequality in Brazil may also be caused by a savings gap. The Harrod-Domar model states that the higher savings ration in a country, the higher economic growth. Often LEDCs, which Brazil is often categorised as, lack a high savings ratio which hinders intergenerational wealth through inheritance among other things. E.g. in Africa savings ratio is only 17%, compared to 31% in middle-income countries. Germany’s ‘save to spend’ culture is one of the reasons why it has the largest economy in Europe.
However, the savings gap may be less important in Brazil as racial inequality in causing income inequality, as thee savings gap of 15% is actually superior to the USAs 13.5% as of 2019. In Brazil there is a strong racial divide between white Brazilians and afro-brazilians, with white Brazilians 2/3 more likely to have access to higher levels of education. This has led to some comparisons between Brazil and apartheid South Africa, in which the gini-coefficient of 0.65 places it as one of the worlds most unequal nations.
