Week 10: macro indicators Flashcards
Welfare Society
- the general health of a society’s economy
- transfer payments and personal income taxes
Transfer payments
- rich people’s income transferred to poor people to stimulate economy
- redistributing money creates jobs
- based on the principle of means testing rather than universality
Means testing
do they have the means to provide for themselves
Universality
everyone should have the same min income enough to buy basic needs
Productive assets
making stuff that gives people work (unlike stocks)
Principles of taxation
- benefits received
- ability to pay
Benefits received
ex. gasoline taxes for roadwork, walmart for using 18 wheelers
Ability to pay
ex. personal income tax
Progressive taxes
increase as a proportion of income as income rises
ex. 10% taken from everyone’s income
Proportional taxes
stay constant as a proportion of income as income rises
Regressive taxes
decrease as a proportion of income as income rises
ex. poor people paying more taxes
Personal income taxes
- progressive
- the proportion of income paid in tax rising significantly with a household’s income level
Gross Domestic Product (GDP)
- the total dollar value of all final goods and services produced in an economy during a particular period
- economic activities that happen domestically (in boarders)
How GDP is calculated
- the income approach
- the expenditure approach
GDP identity
states that GDP expressed as total income is identical to GDP expressed as total spending
Income approach
- wages and salaries
- corporate profits
- interest income
- proprietors’ incomes and rents
Corporate profits
retained earnings, dividends, corporate income tax
Interest income
interest paid on business loans and bonds
GDP calculated with the expenditure approach
- indirect taxes
- depreciation
- statistical discrepancy
The Expenditure Approach
- is the sum of purchases in product markets
- is based on value added at each production stage to avoid double counting
- excludes financial exchanges and second-hand purchases
GDP formula
C + I + G + (X – M)
4 Components of the Expenditure Approach
- Personal consumption (C)
- Gross investment (I)
- Government purchases (G)
- Net exports (X – M)
Personal consumption (C)
consists of household purchases of services and nondurable and durable goods
Gross investment (I)
represents business and government purchases of real capital (including added inventories) and is financed through retained earnings and personal saving
Government purchases (G)
exclude transfer payments and are financed through taxes and borrowing
Net exports (X – M)
equals exports (foreign purchases of Canadian products) minus imports (Canadian purchases of foreign products)
Capital stock
the total value of productive assets that provide a flow of revenue
Calculation example from slides
Net investment
- the annual change in an economy’s capital stock
- = gross investment - depreciation
Positive Net investment
= growing economy with an increasing capital stock
Negative Net investment
= a declining economy with a decreasing capital stock
Sources of funds for investment
- businesses’ retained earnings (profit)
- personal saving (S)
- these are inflows into financial markets, while investment is an outflow
Financial inflows to government
- household taxes minus transfer payments
- business taxes minus subsidies
- government borrowing
Government purchases
a financial outflow from government
Connections with the Rest of the World
exporting more than importing grows economy and revenue flow
Per capita GDP
- GDP per person
- = GDP divided by population
ex. economy $1b, population 1b
GDP = $1
Per capita real GDP
- inflation adjusted GDP per person
- expressed in constant dollars from a given year
- used to compare living standards in a given country over time
Limitations of GDP
does NOT:
- include nonmarket activities
- fully capture improvements in product quality
- indicate the composition of output
- indicate the distribution of income
- indicate how much leisure is enjoyed by a country’s citizens
- distinguish between activities that are and are not harmful to the environment
Gross National Product (GNP)
- the total income acquired by Canadians both within Canada and elsewhere
- = GDP - net investment income to the rest of the world
ex. doesn’t matter where just has to be a Canadian frim
