More Fiscal Policy

More Fiscal Policy

How can the state use tax revenues to improve human capital?

This is quite straightforward the money raised through taxation can be spent on education, training, providing information of jobs and incentivizing people to study e.g. EMI. The more educated and trained the labour force, the more specialised they are.

What are the different types of taxation? 

• Direct and indirect 

Direct taxation is tax on incomes so it goes directly out your wallet without choice e.g. Income tax and National Insurance.

Indirect tax is a tax on goods and services which we pay because we choose to indulge in such goods and services e.g. VAT and alcohol duty.

• Progressive 

Progressive taxation tends to be % because it is a tax which increases according to the size of the income e.g. income tax, the rich pay more than the poor. This tax is usually used for promoting a fairer and more equal society.

• Regressive

Regressive taxes are like fixed taxes which don’t change if you are rich or poor so whether you ear £5 or £5million you will still pay the same in lets say alcohol duties. This means the proportion of income falls as you become richer and to quote the famous phrase this leads to the “poor becoming poorer”.

• Proportional 

These type of taxation is not subject to change when incomes change so if your income increases the taxes will not change.

How can government spending and taxation be used to reduce poverty?

The answer to this is quite simple, it is like the Robin Hood idea steal from the rich give to the poor. The government can tax the rich and use that tax revenue to fund benefits from the poor not only eradicating poverty, as the people can never get to poor due to benefits, but reducing inequality. We call such payments transfer payments, transferring tax revenue into benefits.

Laffer Curve 

The Laffer curve isn’t particularly difficult, it simply states that the taxation is only helpful in generating revenue when is it at a particular level. If the tax rate is too high or too low the government’s revenue will all and will not be at its optimum level. PajHolden’s video tutorial on this is very helpful find it below!

http://www.youtube.com/watch?v=bnyeWcA2nXo

Financing International Trade

Financing International Trade 

What are the factors influencing exchange rates? - demand and supply analysis

Video can be found here:

http://a2withkomilla.blogspot.com/2011/05/factors-determining-exchange-rates.html

What are the impacts of changes in exchange rates e.g. implications for competitiveness?

Appreciation of the £

• Raw materials become more cheaper [all imports become cheaper] 
• Consumers benefit from cheaper imports therefore better consumer welfare
• Business benefits from cheaper costs [imports] and suffer from expensive exports and raw materials
• Helps to control inflation as the average price of goods and services declines thanks to cheaper imports 
• Makes the deficit worse - current account deficit
• Due to declining exports the economy becomes less competitive given that 2 measures of competitiveness are current account and share of exports in the world market
• Economic growth can worsen through aggregate demand as X-M becomes smaller and sometimes even a negative number

Marshall Lerner Condition - as long as elasticities are greater than one therefore elastic. The J curve goes onto explain that the bettering of the current account cannot happen until it has got worse due to time lags, contracts with suppliers and consumer adjustment.

I haven’t written the effects of the depreciation of the £ as they are mere opposites

What are the costs and benefits of a monetary union - focusing on the eurozone?

Costs	Benefits
Exports are expensive which is not good for countries where traditionally exports were cheaper	Security for the countries in it - Greece example
GDP per capita is still 70% of USA it is not catching up	Macroeconomic stability for those countries involved
Performance of countries is diverging because of the ‘one size fits all’ approach	Financial stability - strong euro
UK inflation is too high so theoretically a monetary union with the EU is not possible	16m new jobs created
Difference in housing market and economic structure	Average budget deficit has fallen by 0.6% of GDP
The UK is not as flexible as the other countries like Germany at recovering from economic shock	Free trade and movement of labour makes the countries an attractive destination for FDI
The EU actually have a deflation (-0.5%) which is not something you would want to be ties down to.	European standards of living have increased drastically
Loss of control and macroeconomic policy	Exchange rate stability
Menu/Transitional costs	Promotes perfect knowledge and transparency.
Loss of national heritage

Competitiveness

Competitiveness 

What is competitiveness?

The ability of a nation to compete successfully internationally and to sustain improvements in real output and wage.

What the different measures of competitiveness?

World Economic Forum came up with nine areas of measurement.

1. Industrial relation - UK gets a high rating as employees have a good relation with the unions and this can be productive (unproductive too though).
2. Levels of R&D - innovation spurs productivity
3. Human Capital - level of education and training 
4. Capital Investment as a proportion of GDP - shows I, growth, quality
5. Current Account - Surplus is a sign of competitiveness
6. Share of exports in the world market
7. Relative unit labour costs; This affects the cost of production hence competitiveness. Relative unit costs can be calculated by diving total wages by real output. [like opp cost costs over gains]
8. Productivity levels which can be calculated by total GDP/number of workers
9. Economic growth rates

In 2008-2009 US was at the top!

What are the factors influencing a country’s competitiveness - This is similar to the different ways of measuring competitiveness but focuses on core issues such as wage rates which affect more than one method of measuring

1. Productivity rates
2. Wage rates
3. Exchange rates 
4. Regulations e.g. working hours, NMW
5. Cost of living
6. Tax
7. Availability of labour
8. Levels of R&D
9. Technology
10. Type of growth AS or AS - through C or I
11. Relative inflation rates
12. Quality of production - SR/LR
13. Level of infrastructure
14. Perhaps efficiencies 

What are the different things a government can do to improve competitiveness?

I have split the policies into supply side and non-supply side

Supply-Side policies:

1. Education and training - better human capital increases productivity hence attracting TNCs and leading to an increase in real output. - Expensive + time lags involved
2. Reducing National Minimum wage - Lower labour costs mean that more labour can be employed hence more can be produced thus attracting TNCs - unrealistic
3. Reducing trade union power - Again this works by allowing countries to make the most out of their labour making their labour more productive and attracting TNCs. - unrealistic

Other policies which can improve the competitiveness of countries.

Deregulation - this means  that there are less costs involved (Albeit time costs) which makes productivity more efficient and attracts TNCs. The consequences of this however are unknown such as deregulation of banks were somewhat the cause of the recent global downturn.

Reducing interest rates  - This attracts investment and spurs productivity. - Issues with inflation which means in terms of foreign currency a country becomes uncompetitive. 

Increasing interest rates to maintain inflation which means price wise we become competitive however this leads to lower levels of investment which makes a country uncompetitive.

Subsidies and grants - This reduces costs for domestic firms making their exports seem cheaper and thus more competitive

Artificially maintaining exchange rates at a low level - This works by making the price of exports cheaper.

Any Case Studies

India and competitiveness

Policies employed by the government

• Infrastructure Debt Fund - money to be spent over a long period of time through PPPs
• Investment in private sector
• Encouraging development of telecommunications
• Encouraging tourism

What advantages does India have in terms of leading the way with IT?

• Highly educated workforce
• Good internet access and excellent international data communication links
• Wages are one quarter or one tenth to that of Europe and America
• Governments subsidizing 

UK and Competitiveness 

Notes for this are taken by the Guardian article “Innovation: Britain’s other deficit” by James Dyson

• He emphasis on the need for real true R&D which leads to patentable products which plans such as the “Silicon Roundabout” in East London aren’t doing - we are just sticking to the likes of financial markets and Google and Facebook at best.
• He supports Obamas corporate tax cuts and increased investment in R&D for those reasons.
• He also goes on to talk about education and training being a key part in all this.

So what are the strategies to become competitive that he suggests?

1. Tax credits to encourage R&D
2. Cut corporation tax
3. Student loans to be lower and paid off
4. Maths and science teachers paid more

Issues with Dyson’s proposals

• Time lags
• Expensive especially when austerity measure are being implemented
• Opportunity costs

Poverty and Inequality Table

In this post I will examine the causes and causes of inequality and poverty in developed and developing countries.

	Developed Countries	Developing Countries
Causes of Poverty	Debt Poverty trap Lack of government support Decline in manufacturing sector - structural issues Lack of availability of suitable loans	Subsistence farming Corrupt government Poor healthcare and infrastructure Lack of technological development
Causes of Inequality	Difference in wages and salaries - skills, discrimination and location Unemployment and retirement Ownership of financial assets Tax systems Inheritance	Overcrowding in cities - urban sprawl Corruption NGOs which specifically target individual groups such as women and children Exploitation Access to credit institutions
Consequences of Poverty	Crime Constraint on growth - C Poor standards of living Unable to receive a decent education	Savings gap issues Subsistence farming Constraint on growth Poor health and standards of living
Consequences of Inequality	Constraints of growth - Capital flight and low marginal propensity to save (MPS) Increase in M - constraint on growth Social consequences like anti social behavior Crime	Constraint on growth  Exploitation Social issues like rich people having to own helipads Crime

Balance of Payments forth quarter of 2010 UK

I explain the factors influencing the size if the deficits and surpluses on the different components of the balance of payments. I also explain the significance of deficits and surpluses on the current account. 

Balance of Payments

I explain the balance of payments and its components Current Account [trade in goods, trade in services, net investment income and net international transfers], financial account and the capital account.

Strategies to Promote Growth and Development

This is a revision pack I created on strategies to promote growth and development. It is to be used hand-in-hand with the revision pack on limits to growth and development. Enjoy.

Strategies to Promote Growth and Development Revision Pack KOMILLA CHADHA

The Recent Development of India by Komilla Chadha

Here is an article I wrote on the recent economic development of India. Enjoy. 
Development of India by Komilla Chadha

Question on Inequality

This is an economics exam question I tries - thought it was quite difficult actually - I didn't do it in exam conditions just thought you might like to see.


Examine the causes of income and wealth inequality in the UK or any country of your  choice (20)

The country of my choice I wish to discuss in this answer is China. 

Income is the money received for work or investment whereas wealth is the stock of assets such as cars that a person owns. The differentiation is important when trying to suggest the reasons for inequalities of wealth and income.

One of the main reasons why income inequality exists in China is because there is no legal minimum wage. Employers are allowed to pay their employees as little as they please, cutting costs, which ultimately gives them a larger income. Employees get and smaller pay and employers get a larger one and this pushes the gap between the rich and the poor.

However, the lack of a legal minimum wage cuts costs for businesses thus allowing them to employ more people. Inequality is likely to be less than if some employees were given a high pay and most were unemployed. Particularly as China does not give any state support like the UK does.

Nevertheless, the low wages restrict how much people can spend. China is booming country where demand for large ticket items such as houses and cars is large and this pushes up the price of such assets. Many individuals on low salaries (particularly as no minimum wage exists) cannot afford assets such as houses and this causes wealth inequalities. The rich are able to buy houses not just for themselves but for investment reasons (as demand is high) pushing up house prices future and enlarging the wealth gap between the rich and the poor.

However, this is based on the assumption that houses prices are rising extremely fast and in real terms for if they are not then many would not invest in them pushing up prices of houses further and creating wealth inequalities between the rich and the poor. It depends on all other things being equal (ceteris paribus) such as steady inflation and incomes. If incomes rise every year inline with house price then this does not seem like a probable reason for inequalities between rich and poor.

Another cause for inequalities between rich and poor is the healthcare system. In China, the new healthcare reform means that people need to pay in part for healthcare services. This provides an incentive for the poor to save (in case of a rainy day) out of what money they have which makes it even more difficult for them to invest in assets such as cars and houses. The rich of the other hand have to pay the same costs as the poor for healthcare and the government pays in part of their healthcare too which furthers wealth inequalities between the rich and the poor. 

However, it depends on the magnitude of what they have to pay. If the government covers most of the costs anyway then this won’t have a significant impact on wealth inequalities as people are likely to save less for a rainy day and save more to buy assets such as houses and cars.

Another Response to Exchange Rate Question

I received this question: What do you know about the relation of exchange rates, interest rates, and how it effects exports and imports?




The answer is basically hot money is large amounts of money which people put into countries where the interest rates are highest in order to get the highest amount of return. So if interest rates are high then hot money will flow into  the country and this impacts exchange rates because hot money can cause demand for certain currencies and supply for other as it changes according to where interest rates are highest.


To understand the bond between exchange rates and exports/imports please see this video: http://a2withkomilla.blogspot.com/2011/05/response-to-question-regarding-exchange.html




Good Luck :)