2. QUIZ 1. What were the 4 changes with EVAT? 2. If a firm pays a tax Php2 per bottle of alcohol it sells, what kind of tax is levied on the alcohol? 3. Difference bet. amount buyers are willing to pay for the good and amount they actually pay for it
4. EFFECTS OF A TAX Consumer surplus – amount buyers are willing to pay for the good and amount they actually pay for it Producer Surplus – Amount sellers receive for a good minus their costs Consumer+Producer surplus measures the welfare in society
5. No tax consumer surplus: A+B+C No tax producer surplus: D+E+F
6. EFFECTS OF A TAX After tax, total welfare is now divided into Consumer Surplus and Producer Surplus Gov’t Tax Revenue (TQ) Deadweight Loss – fall in total surplus that results from a market distortion such as a tax
7. Supply Size of tax Price buyers pay Price without tax Price sellers receive Demand Quantity Quantity without tax with tax Buyers’ PriceSellers’ price Quantity 0
8. Supply A Price buyers PB = pay B C Price P1 = without tax E D Price sellers PS = receive F Demand Q2 Q1 Price Quantity 0
9. EFFECTS OF A TAX Incentive for consumers to buy less Incentive for producers to produce less Both are worse off Market is below optimum
11. DETERMINANT OF DWL Price elasticities of supply and demand The greater the elasticities of demand and supply the larger the decline in equilibrium quantity and, the greater the deadweight loss of a tax
12. Supply When supply is relatively inelastic, the deadweight loss of a tax is small. Size of tax Demand INELASTIC SUPPLY Price 0 Quantity
13. When supply is relatively elastic, the deadweight loss of a tax is large. Supply Size of tax Demand ELASTIC SUPPLY Price Quantity 0
14. Supply Size of tax When demand is relatively inelastic, the deadweight loss of a tax is small. Demand INELASTIC DEMAND Price Quantity 0
15. Supply Size of tax Demand When demand is relatively elastic, the deadweight loss of a tax is large. ELASTIC DEMAND Price Quantity 0
16. DEADWEIGHT LOSS AND TAX REVENUE AS TAXES VARY With each increase in the tax rate, the deadweight loss of the tax rises even more rapidly than the size of the tax.
18. Deadweight loss PB Supply Tax revenue PS Demand Q2 Q1 MEDIUM TAX Price When the tax rate doubles, the deadweight loss quadruples Quantity 0
19. PB Deadweight loss Supply Tax revenue Demand PS Q1 Q2 LARGE TAX Price Quantity 0
20. 20 DEADWEIGHT LOSS AND TAX REVENUE AS TAXES VARY Tax revenue = tax rate × quantity bought and sold TR = T × Q T↑ causes Q↓ Therefore, the effect of T↑ on TR is ambiguous T↑ causes TR↑ when the tax rate (T) is low T↑ causes TR↓ when the tax rate (T) is high This gives us the Laffer Curve
21. T1 LAFFER CURVE Note that it makes no sense at all to make the tax size bigger than T1. Tax Revenue Tax Size 0
22. IMPROVING TAX COMPLIANCE Tax Evasion – illegal means to avoid paying taxes Underdeclaration of sales Overdeclaration of claims for input VAT Misdeclaration of income Tax Avoidance – legal means to avoid paying taxes
23. MACROECONOMICS Study of Economics in the aggregate level Aggregate add up everything P – general price level Q – National output (Y) π – inflation (change in P) AS and AD
25. GROSS DOMESTIC PRODUCT Market value of all final goods and services produced in the country within a given period of time Measures the size of the economy and amount of economic activity
26. GROSS DOMESTIC PRODUCT Market value of all final goods and services produced in the country within a given period of time GDP as a single measure of economic activity Goods are monetized multiplied to price to be comparable Comparable across countries
27. GROSS DOMESTIC PRODUCT Market value of all final goods and services produced in the country within a given period of time GawaDitosaPilipinas EVERYTHING PRODUCED Excludes illegal, black market
28. GROSS DOMESTIC PRODUCT If not paid for, not counted (accounting) Cash-in-hand payments not included Examples: You made your own cabinet Payment to grocery boys
29. GROSS DOMESTIC PRODUCT Market value of all final goods and services produced in the country within a given period of time Intermediate goods – inputs are not included If not used immediately and stored for future use, then it is included as inventory
30. GROSS DOMESTIC PRODUCT Market value of all final goods and services produced in the country within a given period of time Goods – tangible products Services – intangible Ex: Nail polish and manicure service
31. GROSS DOMESTIC PRODUCT Market value of all final goods and services produced in the country within a given period of time Currently produced Used items, second-hand items are not included
32. GROSS DOMESTIC PRODUCT Market value of all final goods and services produced in the country within a given period of time Spatial limit As long as produced in the Philippines, counted in GDP
33. GROSS DOMESTIC PRODUCT Market value of all final goods and services producedin the country within a given period of time Time limit Annual Quarterly
34. EXAMPLE 1M loaves of bread (P2 each) 1.2M kg of flour (P10 per kg) 100,000 kg each of yeast, sugar and salt (all sold at P10 per kg) The flour, yeast, sugar and salt are sold only to bakers who use them exclusively for the purpose of making bread. What is the value output of this economy?
35. GDP per capita GDP/N Measure of standard of living Example GDP = P100M Rich = P80M (10M people) Poor = P20 M (90M people) GDP/N = P100M/100M = P1/person
36. GROSS NATIONAL PRODUCT GDP + factor payments from abroad paid to domestically owned factors of production (Net Factor Income) NFI = income remitted in – income remitted out Gawa Ng Pilipino
37. NET DOMESTIC PRODUCT GDP – depreciation Value of production minus value of amount of capital used up in producing that output Best measure but impossible to compute
38. GDP MEASUREMENT Expenditure Approach Outgoing How we use products we produce Income approach Incoming Income must equal expenditure
39. EXPENDITURE APPROACH Y = C + I + G +X – M C = consumption/expenditure (HH) I = investment Capital formation (Change in stock capital) IT = KT+1 –KT G = gov’t expenditure X-M = net export
40. EXPENDITURE APPROACH Consumption – spending on anything Government – purchase of goods and services Investment – addition to stock of capital Not buying of stocks or bonds Physical Capital, Human Capital Anything that would increase production Gross investment
41. EXPENDITURE APPROACH Net Exports Domestic spending on foreign goods (M) and foreign spending on domestic goods (X) Exports – addition to our demand Import – subtraction from demand
47. REAL GDP REAL GDP Growth Rate Since prices are constant, growth rate reflects an increase in production
48. INFLATION Rate of change of P Price Level – cumulation of past inflations
49. MEASURES OF PRICE LEVEL GDP Deflator (GDPd) Consumer Price Index Producer Price Index Chain-weighted GDP
50. GDP DEFLATOR Change in prices that has occurred between the base year and current year
51. GDP DEFLATOR What was worth P100 in 2007 is worth P109 in 2008 In 2008, if you want to buy the same goods and services, you need to pay P109. Back in 2007, you only paid P100 for it.
56. GDPd vs. CPI GDPd includes all that is produced CPI only includes those consumed by the average consumer GDP better measure for forecasting CPI better measure of standard of living (Dev Eco)
57. GDPd vs. CPI GDPd differs from year to year CPI has same basket of goods GDPd does not reflect price of imports CPI reflects price of important imports
58. GDPd vs. CPI GDPd increases at a slower pace CPI more reactive to changes in price Producer Price Index Same as CPI but basket of goods for producers
