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Econ 337 book notes.docx

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Concordia University
ECON 337

CHAPTER 1 Microeconomic functions of government the way government affects the allocation of resources and the distribution of income The macroeconomic functions of government the use of taxing spending and monetary policies to affect the overall level of unemployment and price level Public finance economists analyze not only the effects of actual government taxing and spending activities but also what these activities ought to beThe legal framework The first recorded taxes under the French regime were export taxes on furs As trade increased taxes on imports customs duties or tariffs and excise taxes on items such as tobacco supplanted export taxes as the main source of government revenuesFederal government Section 91 of the 1867 Constitution Act gives the federal government the power to make laws for the peace order and good government of CanadaIncludes the power to raise money by any system or mode of taxation section 25 prevents federal govt from levying taxes on provincial lands and propertyIntent was to balance responsibilities with revenues To achieve this the federal govt provided statutory subsidies to provinces for general govt justice education welfare and internal transport servicesProvincial and local governments The 1867 Constitution Act limited to the use direct taxation within the province in order to raise revenue for provincial purposes Direct tax imposed on the individual who is expected to bear the tax Taxes on gasoline and motor vehicle licenses were introduced by the 1920s as a way to finance the road systems because of increasing use of automobiles and trucksThe size of governmentThree types of approaches to measure the size of govt by the volume of its annual expenditures Purchases of goods and services the govt buys a wide variety of items everything from fighter planes to services provided by forest rangersTransfers of income to people businesses or other govtsthe govt takes income from some individuals or organizations and gives it to others Examples are welfare programs such as Guaranteed Income Supplements under the Old Age Security Act and farm programs that guarantee prices for certain commoditiesInterest payments the govt often borrows to finance its activities and like any borrower must pay interest for the privilege of doing soAccounting issuesA loan guarantee in finance is a promise by one party the guarantor to assume the debt obligation of a borrower if that borrower defaults A guarantee can be limited or unlimited making the guarantor liable for only a portion or all of the debt By making loan guarantees now the govt is committing itself to some expenditures in the future Govt pension plans including the Canada and Quebec Pension Plans CPP and QPP also result in contingent liabilities Govt should also fully account for contingent liabilities associated with contaminated sites and the contingent liabilities of aboriginal claimsThe size of the official govt budget depends on some rather arbitrary accounting decisions concerning whether and how certain items are to be included Considerable caution is required inn interpreting budgetary figuresHidden costs of government Regulations ensuring sanitary conditions in slaughterhouses dairies and bakeries were among Canadas early health regulations that raised costs for businesses Permit and inspection fees increase the price of housingTax expenditures refer to the value of incentives and preferences given through the tax system for purposes that could be achieved through direct expendituresExpenditures 1Health and social welfare2Education3Transportation communication and protection of persons and property Much of the govt budget consists of socalled entitlement programs programs whose cost is determined not by fixed dollar amounts but by the number of people who qualify
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