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UNIT 61
THE BUSINESS CYCLE
ALEC 33 MACROECONOMICS 2

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ALEC 33 MACROECONOMICS 2

CHARACTERISTICS OF CYCLES
Peak or boom national income is high, consumption and investment will be high,wages and profit increased,inflationary pressure is high Downturn output and income fall,consumption and investment fall, unemployment rises, tax revenues fall and government spending rises. Recession/Depression/trough/slump bottom of the cycle, economy in recession, economic activity is at low, mass unemployment exists, investment and imports will be low,lower inflationary pressure Recovery/expansion national income and output begin to increase, unemployment fall,consumption and investment and imports begin to rise.

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ALEC 33 MACROECONOMICS 2

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ALEC 33 MACROECONOMICS 2

Output Gaps -Measures the difference between the actual level of output and its trend
level. Negative (recession) and positive (boom)

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ALEC 33 MACROECONOMICS 2

AD and AS analysis
Boom AD shifts to the right, wage rates and other factor prices will rise lead to an upward shift in AS Recession productions drop. AS shifts downward Recovery increase in AD (shift to the right) and AS shift upward Boom consumer and business confidence returns, spending further increases push the AD rightward and AS shifts upwards to produce downturn in economy
*Refer to figure 4 page 406*

UNIT 62
TAXATION
ALEC 33 MACROECONOMICS 2

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ALEC 33 MACROECONOMICS 2

REASONS FOR TAXATION

To pay for government expenditure To correct market failure such as externalities To manage the economy as a whole To redistribute income

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ALEC 33 MACROECONOMICS 2

DIRECT AND INDIRECT TAXES

Direct tax tax levied directly on an individual or organisation. Eg; income tax and corporation tax Indirect tax tax on good and service. Eg; Value added tax (VAT), council tax (tax on notional value of property)

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ALEC 33 MACROECONOMICS 2

STANDARDS OF TAXATION
Adam Smith in his book argued that the characteristics of a good tax are: 1. Cost of collection should be low 2. Timing of the collection and the amount to be paid should be clear and certain 3. Means of payment and the timing of the payment should be convenient to the taxpayer 4. Taxes should be levied according to the ability to pay of the individual taxpayer These standards relate to efficiency (cost) and equity (ability)
Adam Smith: An Inquiry into the Nature and Causes of The Wealth of Nations, 1776

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ALEC 33 MACROECONOMICS 2

STANDARDS OF TAXATION
Economists today argued that in addition to Smiths, a good tax should be one which: 1. Leads to the least loss of economic efficiency or increases it 2. Is compatible with foreign tax systems; EU tax regimes 3. Automatically adjusts to changes in the price level These criteria relate to economic efficiency

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ALEC 33 MACROECONOMICS 2

TAXATION, INEFFICIENCY AND INEQUALITY

Tax will lead to a fall in both supply and demand of the product and service being taxed. VAT and excise duties on a product push the supply curve to the left and a fall in quantity demanded Income tax is likely lead to a fall in the labour supply Corporation tax is likely lead to a fall in the supply of entrepreneurs Taxes distort the markets but sometimes it might be beneficial in the markets which produce negative externalities Taxes may lead to a loss of efficiency (cost increased)

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ALEC 33 MACROECONOMICS 2

TAXATION, INEFFICIENCY AND INEQUALITY

However the loss should be outweighed by the gain in economic efficiency from the provision of public and merit goods by the government Taxes are raised to ensure a redistribution of resources within economy Welfare will increase resulting from the distribution of resources Thus, welfare losses from the taxation should be outweighed by the welfare gains

UNIT 63
GOVERNMENT SPENDING
ALEC 33 MACROECONOMICS 2

ALEC 33 MACROECONOMICS 2

SIZE OF THE STATE

Efficiency the state should produce goods and services which can provide more efficiently than the private sector Equity governments can have an obligation to spend in any way to reduce inequality Burden of taxation level of government spending must take into consideration the welfare implications of different tax levels Government borrowing government spending must be low enough Trade cycle government should spend more if the economy were in depression to increase AD, however they must ensure that the government spending falls again when economy recovers

ALEC 33 MACROECONOMICS 2

STATE PROVISIONS OF GOODS AND SERVICES

Models: Public sector may both physically produce and provide goods and services Public sector may provide a good and service but not produce it Government may produce a good and service but sell it to the private sector (privatisation) State is involved in neither the provision nor funding of services ;Figure 1 page 420

ALEC 33 MACROECONOMICS 2

STATE PROVISIONS OF GOODS AND SERVICES

Privatisation sale of state owned companies and assets to the private sector Outsourcing asking another producer to provide goods and services Internal markets where different public sector providers compete amongst themselves (eg; schools compete for students) Public/private sector partnerships government and private sector become partner to share the revenues and costs Abandonment of provision government may attempt to abandon paying for a service (eg; motorists need to pay toll)

ALEC 33 MACROECONOMICS 2

PUBLIC SECTOR VS PRIVATE SECTOR PROVISION

Productive efficiency - ability to produce using the available resources and at a lower cost. Eg; (concept of economies of scale)public health service provide lower cost for the patient, (diseconomies of scale) unable to control costs and utilise resources efficiently eg; public sector monopolist Allocative efficiency state production is unlikely to create much consumer choice. Choice is much greater in private sector Distribution of resources transfer of resources from public sector to the private sector. Eg; subsidy/grant