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Ec102 may 16

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

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