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Ec102 may 16

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  • 1. INTRODUCTION TO MACROECONOMICS
    May 16, 2011
  • 2. QUIZ
    1. What were the 4 changes with EVAT?
    2. If a firm pays a tax Php2 per bottle of alcohol it sells, what kind of tax is levied on the alcohol?
    3. Difference bet. amount buyers are willing to pay for the good and amount they actually pay for it
  • 3. QUIZ
    4. Before tax producer surplus?
    5. Deadweight loss?
    BONUS:
  • 4. EFFECTS OF A TAX
    Consumer surplus – amount buyers are willing to pay for the good and amount they actually pay for it
    Producer Surplus – Amount sellers receive for a good minus their costs
    Consumer+Producer surplus measures the welfare in society
  • 5. No tax consumer surplus: A+B+C
    No tax producer surplus: D+E+F
  • 6. EFFECTS OF A TAX
    After tax, total welfare is now divided into
    Consumer Surplus and Producer Surplus
    Gov’t Tax Revenue (TQ)
    Deadweight Loss – fall in total surplus that results from a market distortion such as a tax
  • 7. Supply
    Size of tax
    Price buyers
    pay
    Price
    without tax
    Price sellers
    receive
    Demand
    Quantity
    Quantity
    without tax
    with tax
    Buyers’ PriceSellers’ price
    Quantity
    0
  • 8. Supply
    A
    Price
    buyers
    PB
    =
    pay
    B
    C
    Price
    P1
    =
    without tax
    E
    D
    Price
    sellers
    PS
    =
    receive
    F
    Demand
    Q2
    Q1
    Price
    Quantity
    0
  • 9. EFFECTS OF A TAX
    Incentive for consumers to buy less
    Incentive for producers to produce less
    Both are worse off
    Market is below optimum
  • 10. EFFECTS OF A TAX
  • 11. DETERMINANT OF DWL
    Price elasticities of supply and demand
    The greater the elasticities of demand and supply
    the larger the decline in equilibrium quantity and,
    the greater the deadweight loss of a tax
  • 12. Supply
    When supply is
    relatively inelastic,
    the deadweight loss
    of a tax is small.
    Size of tax
    Demand
    INELASTIC SUPPLY
    Price
    0
    Quantity
  • 13. When supply is relatively
    elastic, the deadweight
    loss of a tax is large.
    Supply
    Size
    of
    tax
    Demand
    ELASTIC SUPPLY
    Price
    Quantity
    0
  • 14. Supply
    Size of tax
    When demand is
    relatively inelastic,
    the deadweight loss
    of a tax is small.
    Demand
    INELASTIC DEMAND
    Price
    Quantity
    0
  • 15. Supply
    Size
    of
    tax
    Demand
    When demand is relatively
    elastic, the deadweight
    loss of a tax is large.
    ELASTIC DEMAND
    Price
    Quantity
    0
  • 16. DEADWEIGHT LOSS AND TAX REVENUE AS TAXES VARY
    With each increase in the tax rate, the deadweight loss of the tax rises even more rapidly than the size of the tax.
  • 17. Deadweight
    loss
    Supply
    PB
    Tax revenue
    PS
    Demand
    Q1
    Q2
    SMALL TAX
    Price
    Quantity
    0
    Copyright © 2004 South-Western
  • 18. Deadweight
    loss
    PB
    Supply
    Tax
    revenue
    PS
    Demand
    Q2
    Q1
    MEDIUM TAX
    Price
    When the tax rate doubles, the deadweight loss quadruples
    Quantity
    0
  • 19. PB
    Deadweight
    loss
    Supply
    Tax revenue
    Demand
    PS
    Q1
    Q2
    LARGE TAX
    Price
    Quantity
    0
  • 20. 20
    DEADWEIGHT LOSS AND TAX REVENUE AS TAXES VARY
    Tax revenue = tax rate × quantity bought and sold
    TR = T × Q
    T↑ causes Q↓
    Therefore, the effect of T↑ on TR is ambiguous
    T↑ causes TR↑ when the tax rate (T) is low
    T↑ causes TR↓ when the tax rate (T) is high
    This gives us the Laffer Curve
  • 21. T1
    LAFFER CURVE
    Note that it makes no sense at all to make the tax size bigger than T1.
    Tax
    Revenue
    Tax Size
    0
  • 22. IMPROVING TAX COMPLIANCE
    Tax Evasion – illegal means to avoid paying taxes
    Underdeclaration of sales
    Overdeclaration of claims for input VAT
    Misdeclaration of income
    Tax Avoidance – legal means to avoid paying taxes
  • 23. MACROECONOMICS
    Study of Economics in the aggregate level
    Aggregate  add up everything
    P – general price level
    Q – National output (Y)
    π – inflation (change in P)
    AS and AD
  • 24. NATIONAL INCOME ACCOUNTING
    Gross Domestic Product
    Gross National Product
    Net Domestic Product
  • 25. GROSS DOMESTIC PRODUCT
    Market value of all final goods and services produced in the country within a given period of time
    Measures the size of the economy and amount of economic activity
  • 26. GROSS DOMESTIC PRODUCT
    Market value of all final goods and services produced in the country within a given period of time
    GDP as a single measure of economic activity
    Goods are monetized  multiplied to price to be comparable
    Comparable across countries
  • 27. GROSS DOMESTIC PRODUCT
    Market value of all final goods and services produced in the country within a given period of time
    GawaDitosaPilipinas
    EVERYTHING PRODUCED
    Excludes illegal, black market
  • 28. GROSS DOMESTIC PRODUCT
    If not paid for, not counted (accounting)
    Cash-in-hand payments not included
    Examples:
    You made your own cabinet
    Payment to grocery boys
  • 29. GROSS DOMESTIC PRODUCT
    Market value of all final goods and services produced in the country within a given period of time
    Intermediate goods – inputs are not included
    If not used immediately and stored for future use, then it is included as inventory
  • 30. GROSS DOMESTIC PRODUCT
    Market value of all final goods and services produced in the country within a given period of time
    Goods – tangible products
    Services – intangible
    Ex: Nail polish and manicure service
  • 31. GROSS DOMESTIC PRODUCT
    Market value of all final goods and services produced in the country within a given period of time
    Currently produced
    Used items, second-hand items are not included
  • 32. GROSS DOMESTIC PRODUCT
    Market value of all final goods and services produced in the country within a given period of time
    Spatial limit
    As long as produced in the Philippines, counted in GDP
  • 33. GROSS DOMESTIC PRODUCT
    Market value of all final goods and services producedin the country within a given period of time
    Time limit
    Annual
    Quarterly
  • 34. EXAMPLE
    1M loaves of bread (P2 each)
    1.2M kg of flour (P10 per kg)
    100,000 kg each of yeast, sugar and salt (all sold at P10 per kg)
    The flour, yeast, sugar and salt are sold only to bakers who use them exclusively for the purpose of making bread.
    What is the value output of this economy?
  • 35. GDP per capita
    GDP/N
    Measure of standard of living
    Example
    GDP = P100M
    Rich = P80M (10M people)
    Poor = P20 M (90M people)
    GDP/N = P100M/100M = P1/person
  • 36. GROSS NATIONAL PRODUCT
    GDP + factor payments from abroad paid to domestically owned factors of production (Net Factor Income)
    NFI = income remitted in – income remitted out
    Gawa Ng Pilipino
  • 37. NET DOMESTIC PRODUCT
    GDP – depreciation
    Value of production minus value of amount of capital used up in producing that output
    Best measure but impossible to compute
  • 38. GDP MEASUREMENT
    Expenditure Approach
    Outgoing
    How we use products we produce
    Income approach
    Incoming
    Income must equal expenditure
  • 39. EXPENDITURE APPROACH
    Y = C + I + G +X – M
    C = consumption/expenditure (HH)
    I = investment
    Capital formation (Change in stock capital)
    IT = KT+1 –KT
    G = gov’t expenditure
    X-M = net export
  • 40. EXPENDITURE APPROACH
    Consumption – spending on anything
    Government – purchase of goods and services
    Investment – addition to stock of capital
    Not buying of stocks or bonds
    Physical Capital, Human Capital
    Anything that would increase production
    Gross investment
  • 41. EXPENDITURE APPROACH
    Net Exports
    Domestic spending on foreign goods (M) and foreign spending on domestic goods (X)
    Exports – addition to our demand
    Import – subtraction from demand
  • 42. INCOME APPROACH
    Y = C + S + T
    C = consumption
    S = savings
    T = tax
  • 43. GDP GROWTH RATE
    GDP Growth Rate
  • 44. NOMINAL GDP
    Measured in current prices
  • 45. NOMINAL GDP
    Nominal GDP Growth Rate
    If GDP increases, not specific whether it’s an increase in production or inflation
  • 46. REAL GDP
    Measured using constant prices (base year)
  • 47. REAL GDP
    REAL GDP Growth Rate
    Since prices are constant, growth rate reflects an increase in production
  • 48. INFLATION
    Rate of change of P
    Price Level – cumulation of past inflations
  • 49. MEASURES OF PRICE LEVEL
    GDP Deflator (GDPd)
    Consumer Price Index
    Producer Price Index
    Chain-weighted GDP
  • 50. GDP DEFLATOR
    Change in prices that has occurred between the base year and current year
  • 51. GDP DEFLATOR
    What was worth P100 in 2007 is worth P109 in 2008
    In 2008, if you want to buy the same goods and services, you need to pay P109. Back in 2007, you only paid P100 for it.
  • 52. GDP DEFLATOR
    Rate of change of GDPd
  • 53. CONSUMER PRICE INDEX
    Cost of buying a fixed basket of goods
  • 54. CONSUMER PRICE INDEX
  • 55. CONSUMER PRICE INDEX
  • 56. GDPd vs. CPI
    GDPd includes all that is produced
    CPI only includes those consumed by the average consumer
    GDP better measure for forecasting
    CPI better measure of standard of living (Dev Eco)
  • 57. GDPd vs. CPI
    GDPd differs from year to year
    CPI has same basket of goods
    GDPd does not reflect price of imports
    CPI reflects price of important imports
  • 58. GDPd vs. CPI
    GDPd increases at a slower pace
    CPI more reactive to changes in price
    Producer Price Index
    Same as CPI but basket of goods for producers

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