unit 61- 63
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UNIT 61THE BUSINESS CYCLE
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CHARACTERISTICS OF CYCLES Peak or boom national income is high, consumption
and investment will be high,wages and profitincreased,inflationary pressure is high
Downturn output and income fall,consumption andinvestment fall, unemployment rises, tax revenues falland government spending rises.
Recession/Depression/trough/slump bottom ofthe cycle, economy in recession, economic activity is at
low, mass unemployment exists, investment and importswill be low,lower inflationary pressure
Recovery/expansion national income and outputbegin to increase, unemployment fall,consumption andinvestment and imports begin to rise.
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www.monevator.com
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Output Gaps
-Measures the difference between the actual level of output and its trendlevel. Negative (recession) and positive (boom)
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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 shiftsdownward Recovery increase in AD (shift to the right) and
AS shift upward Boom consumer and business confidence
returns, spending further increases push the ADrightward and AS shifts upwards to producedownturn in economy
*Refer to figure 4 page 406*
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UNIT 62TAXATION
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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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DIRECT AND INDIRECT TAXES
Direct tax tax levied directlyon an individualor 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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Adam Smith: An Inquiry into the Nature and Causes of The Wealth of Nations, 1776
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Adam Smith in his book argued that thecharacteristics of a good tax are:
1. Cost of collection should be low2. Timing of the collection and the amount to be paid
should be clear and certain3. Means of payment and the timing of the payment
should be convenient to the taxpayer
4. Taxes should be levied according to the ability topay of the individual taxpayer
These standards relate to efficiency (cost) and equity(ability)
STANDARDS OF TAXATION
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Economists today argued that in addition toSmiths, a good tax should be one which:
1. Leads to the least loss of economic efficiency orincreases it
2. Is compatible with foreign tax systems; EU taxregimes
3. Automatically adjusts to changes in the pricelevel
These criteria relate to economic efficiency
STANDARDS OF TAXATION
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TAXATION, INEFFICIENCY AND INEQUALITY
Tax will lead to a fall in both supply and demand ofthe product and service being taxed.
VAT and excise duties on a product push the supplycurve 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 bebeneficial in the markets which produce negativeexternalities
Taxes may lead to a loss of efficiency (costincreased)
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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
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UNIT 63GOVERNMENT SPENDING
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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 differenttax levels
Government borrowing government spending must below enough
Trade cycle government should spend more if theeconomy were in depression to increase AD, however theymust ensure that the government spending falls again wheneconomy recovers
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STATE PROVISIONS OF GOODS ANDSERVICESModels:
Public sector may both physically produce andprovide goods and services
Public sector may provide a good and service butnot produce it
Government may produce a good and service butsell it to the private sector (privatisation)
State is involved in neither the provision norfunding of services ;Figure 1 page 420
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STATE PROVISIONS OF GOODS ANDSERVICES 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; schoolscompete for students)
Public/private sector partnerships government
and private sector become partner to share the revenuesand costs
Abandonment of provision government mayattempt to abandon paying for a service (eg; motoristsneed to pay toll)
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PUBLIC SECTOR VS PRIVATE SECTORPROVISION
Productive efficiency - ability to produce usingthe available resources and at a lower cost. Eg;
(concept of economies of scale)public health serviceprovide lower cost for the patient, (diseconomies ofscale) unable to control costs and utilise resourcesefficiently eg; public sector monopolist
Allocative efficiency state production is
unlikely to create much consumer choice. Choice ismuch greater in private sector
Distribution of resources transfer ofresources from public sector to the private sector.Eg; subsidy/grant
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