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webnote 317 The BIG ideas! Syllabus 3.1 Syllabus Focus 3.1 I.b Syllabus 3.1: International Trade Syllabus 133-138 • • • • • • 310: Powerpoint summary 311: Laffer 252: 253: Sample Exam Question – see slide 2 244: Exam Questions Webnote 317 1 Exam Focus SL paper 1 2006-Nov 3a Explain why countries trade with each other. 10/25 marks 3b Given the benefits of trade, evaluate the economic arguments in favour of protectionism. 15/25 marks Webnote 317 2 Web note 330: Laffer Curve http://[email protected] A tax rate of 0r1 Diagram 1: Laffer Curve maximises tax A revenue because tax revenue more people want to work and firms will be inclined to expand 0 Webnote 317 r1 B r2 average tax rate % Q 3 http://[email protected] Web Fiscal policy and taxes For full details please see webnote 331 in section 2.4 tax paid 714 note see 331 Diagram 1: Progressive, regressive and proportional P taxation (Direct taxes) R t4 t3 P = progressive as average rate of tax increases as income Y increases Oy1 to Oy2 the tax paid increases from 0t1 to 0t2 Pro R = average rate of tax decreases as income Y increases. As income increases Oy1 to Oy2 the total tax paid increases from 0t3 to 0t4. Webnote 317 t2 t1 0 y1 y2 Q Income (Y) 4 Web note 330: Laffer Curve http://[email protected] Critics of the Laffer curve argue that a cut in tax Diagram 2: Backward bending supply curve rates would in all probability lead to a fall in tax revenue. wages A Idea here is based on backward bending supply curve whereby at higher B wage rates workers may offer less hours of labour i.e. workers value leisure time more that additional hours at work subject of Supply of labour course to some minimum required standard of living 0 Webnote 317 for Labour Q hours worked 5 syllabus 119 + 117 119 (weight = 5) Evaluate the effectiveness of fiscal policy through consideration of factors including the ability to target sectors of the economy, the direct impact on aggregate demand, the effectiveness of promoting economic activity in a recession, time lags, political constraints, crowding out, and the inability to deal with supply-side causes of instability. Webnote 317 117 Explain how factors including the progressive tax system and unemployment benefits, which are influenced by the level of economic activity and national income, automatically help stabilize short-term fluctuations. 6 Exam November 2014 4a Using an appropriate diagram, explain how a recession might lead to more poverty. (10 marks) Webnote 317 4b Evaluate the view that attempts to achieve greater equity in the distribution of income will reduce economic efficiency (15 marks) 7 http://[email protected] Web note 330: Laffer Curve Reading: See Glanville p.334 and McGee ‘The Good, the bad and the economist’ p.455 End Webnote 317 8