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UNIT 61THE BUSINESS CYCLE

ALEC 33MACROECONOMICS 2

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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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www.moneymorning.com.auRevisionguru.co.uk

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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


unit 61- 63

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