ECON 101 Lecture Notes - Lecture 3: Interest Rate Parity, Capital Outflow, Income Tax
1 May 2018
School
Department
Course
Professor
Economics 101
Lori Leachman
Part 3 • Lecture
• Goal 4#: OPTIMAL EXTERNAL BALANCE
o External balance measured by balance of payments (BP)
o BP = Current Account (CA) + Financial Account (FA) = 0
▪ CA = (x - m) + rn
• rn = net remittances
o Net remittances = dividend, interest income, gifts, transfers... etc
o rn = rU.S. - rworld
o Currently, rn is positive (significant past investment - receiving
payments from rest of world), but in future, will become negative
▪ Positive rn reduces current account statistic (look better)
▪ FA = (Domestic Assets - Foreign Assets) = Ad - FA
• FA > 0 - capital inflow; FA < 0 - capital outflow
o Optimal external balance for Industrialized MDC
▪ CA > 0 - export more than import; increased national income and employment (more
immediate income)
▪ FA < 0 - more foreigners investing in domestic assets; increased future wealth in interest
payments... etc
o Optimal external balance for Developing LDC
▪ CA < 0 - import more capital goods (investment for future; capital accumulation)
▪ FA > 0 - borrowing from rest of world & investing well in business creation
o When Balance of payments does not equal zero 0
▪ The exchange rate changes - only in floating currency
▪ If exchange rate is fixed (cannot adjust), Central Bank intervenes in market to buy/sell
currency to accommodate surplus/shortage
o CA creates exchange rate movement according to purchasing power parity theory (PPP)
▪ P = P* / e where e is exchange rate; change in goods/service prices cause e to change
o FA creates exchange rate movement according to interest rate parity theory (IRP)
▪ r* - r = E(e); changing returns on assets cause e to change
• Government Revenue
o Income tax - 40%
o Payroll/social security tax - 30%
o Corporate tax - 7-10% (used to be a ton more ~30% in 1950’s)
o Tariffs - 4%
o Customs duties - 4-5%
o Earnings from Fed - 2% (gonna be gone in the future)
o Estate and misc. tax - 1%
• Government Spending
o Social Security - 30-40% (completely self funding thru payroll tax + SS trust fund (80s 90s)... this
is medicare/medicaid is about 2.5tril
o Medicare (partially self funding from part of SS tax funds more than half, rest from government
fund), medicaid (not self funded, taken from general fund) - 30%
o Military - 20% => 27% bc Trump
o Interest on Debt - 6% (cannot change)
o Vet benefits - 3-4% => 5%
o Agriculture/food - 3-4%
o Educational - 3%
o Transportation - 3%
o Housing - 1%
o International affairs - 1%
o Energy & environment - 1%
• Mandatory spending
find more resources at oneclass.com
find more resources at oneclass.com
