ECON 102 Chapter Notes - Chapter 22: Unemployment Benefits

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Published on 18 Apr 2013
School
UBC
Department
Economics
Course
ECON 102
Professor
TEXTBOOK NOTES 2/21/2013 1:51:00 PM
INTRODUCING GOVERNMENT
- a governments fiscal policy is defined by its plans for taxes and spending
Government Purchases
- government purchases are apart of aggregate desired expenditure because
they add directly to the economy’s demand
- transfer payments (welfare & employment insurance) add to the desired
aggregate expenditure, but indirectly
increases household disposable income, increases household
consumption, increase in aggregate expenditure
- now we assume that government purchases are autonomous to GDP
Net Tax Revenues
- taxes reduce household income in relation to national income
- transfer payments increase household income in relation to national
income
- Net taxes is the total tax revenue received by the government minus the
total transfer payments made by the government
- because transfer payments are smaller than tax revenue, net tax is
positive
- net tax revenues vary with the national income (GDP) but tax rate remains
autonomous
- GOVERNMENT NET TAX REVENUES: T = tY
t = net tax rate / marginal propensity to tax
o the net tax rate is the increase in net tax revenue generated
by an increase in national income by $1
The Budget Balance
- the budget balance is difference between total government revenue and
total government expenditure
equal to T - G
- budget surplus T>G
- budget deficit T<G
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- balanced budget T=G
- when the government runs a deficit, it must borrow (bonds or treasury
bills)
- when the government runs a surplus, it pays back outstanding government
debt
Provincial and Municipal Governments
- the federal government raises the same amount of tax revenue as the
provincial & municipal governments but transfers most of it back to the
provinces
- when measuring the overall contribution of government to desired
aggregate expenditure, all level of government must be considered
INTRODUCING FOREIGN TRADE
Net Exports
- exports change according to the decision of foreign households, not
Canadian GDP
- exports are an autonomous expenditure
- imports change according to spending decisions of local households and
firms
- almost all consumption goods have an import content
- increase in GDP = increase in consumption = increase in imports
- IM = mY
- m = marginal propensity to import
Net Exports:
NX = X- mY
- since exports are autonomous to Y, but imports are positively related to Y,
net exports is negatively related to Y = net export function
Shifts in Net Export Function
- held constant:
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foreign national income
international relative prices
- if not held constant, causes a parallel shift
increase exports = parallel shift up
decrease exports = parallel shift down
- not constant
domestic national income
- proportion of income spent on import changes results in slope change of
the net export function
Changes in Foreign Income
- increase foreign income = upward shift in X = upward NX shift
- decrease foreign income = downward shift in X = downward NX
shift
Changes in International Relative Prices
- increase in CAN prices = downward shift of X/increase slope of IM
= decrease in NX slope (steeper)
- decrease in CAN prices = upward shift of X/decrease in IM =
increase in NX slope (less steep)
- changes in exchange rate is the most important cause of change in
international relative prices
increase in CAN$ = downward shift of X/increase slope of IM
= decrease in NX slope (steeper)
decrease in CAN$ = upward shift of X/decrease in IM =
increase in NX slope (less steep)
EQUILIBRIUM NATIONAL INCOME
- when net taxes are positive, disposable income is less than national
income
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