Download unit 5 econ.

Unit 5: The Government and the
Economy
Topic 1:
Money and the Government
Where does money come from??
TAXES
Income taxes
Tax based on the “income” a person earns
Americans pay an income tax to:
1. The federal government
2. The state government
3. The local government
These taxes appear on a person’s pay check stub
The purpose of filing taxes at the end of the year is to
determine if a person has overpaid or underpaid their
taxes
EXAMPLE OF PAYCHECK STUB
Countries with the highest income tax
rates
Country
Tax rate
Kicks in at….
Aruba
58.9%
$165,000
Sweden
56.6%
$81,000
Denmark
55.4%
$76,000
Netherlands
52%
$72,000
Austria
50%
$80,000
Belgium
50%
$46,900
Japan
50%
$217,000
United Kingdom
50%
$231,000
Finland
49.2%
$91,000
Ireland
48%
$43,900
U.S. = 23rd; at 39.6% at $400,000
*Source: CNBC
Other Major taxes Americans pay
2. FICA tax (social security)
3. Sales tax- tax based on the sale of an item
4. Property tax- tax based on the value of
property
• Stossel goes to Washington: segment 1
(7:40)
State and Local revenue
Federal Government revenue
• Where does the Federal
Government get its
money???
Taxes fall into 1 of 3 types of
categories:
• 1. progressive
• 2. regressive
• 3. proportional
• 1. Progressive - higher incomes pay a greater
% of income
example: income taxes
$100,000
$45,000
28% tax rate
15% tax rate
pay $28,000
pay $6,750
• 2. Regressive - lower incomes pay a greater %
of income
example: sales taxes
$100,000
$45,000
Spend $4500 in taxes
Spend $4500
Pay 4.5% of income tax
Pay 10% of income in tax
• 3. Proportional - all incomes taxed at same % rate
Example: school tax
$100,000
$45,000
2% tax rate
2% tax rate
pay $2,000
pay $900
• Where does the
State and local
government spend
money???
Where does the federal government
spend money ?
• everything else includes
education, veterans
benefits, national
resources, foreign aid,
Immigration, response
to natural disasters
Military spending around the world
http://www.sipri.org/research/armaments/milex/factsheet2010
What is the national debt???
• Debt occurs when government revenue
(primarily from taxes) is less than government
spending.
Therefore debt will rise whenever..
– revenue falls
– spending increases
Debt in the past decade
•
•
•
•
•
•
•
•
•
•
2001: $5.8 trillion
2002: $6.2 trillion
2003: $6.8 trillion
2004: $7.4 trillion
2005: $7.9 trillion
2006: $8.5 trillion
2007: $9.0 trillion
2008: $10.0 trillion
2009: $11.9 trillion
2010: $13.6 trillion
• DEBT CLOCK
It would take 200,000
years to count to 1
trillion!!!!!
The National Debt: CNBC explains
• 1. What is the difference between deficit
spending and the national debt?
• 2. What is the DEBT CEILING?
• 3. If the government borrows $, how does it
get the money it needs?
• 4. Who/what is the largest holder of U.S.
debt?
Countries with the largest debts
17-20
Countries with largest debt as
compared to GDPs
How does the Government get the
$ it borrows?
• People and businesses lend the government
money when they buy SAVINGS BONDS
What is a government bond???
IOU from the government – GOVERNMENT
pays back with interest after a set time period
Ownership of the Debt
Topic 2: What does government do in
a market economy?
Set the Rules
Protect consumers
Promote competition
Correct for Externalities and Market Failures
Provide public goods
Promote Economic Growth and Stability
The Roles of Government:
1. Setting Rules/laws for the economy
Examples:
– Setting minimum wage
– Setting pollution standards
The Government protects
Intellectual Property
•
Intellectual Property includes:
secret formulas, ideas, inventions (products
and processes), industrial designs, literary and
artistic works (novels, films, music,
architectural designs and web pages)
Intellectual property is protected by:
1. Patents
2. Copyrights
3. Trademarks
Patents
• legal right to exclude anyone else from
manufacturing or marketing an invention
• Last for 20 years.
Strange patents ???
• Anti-eating face mask
• Gerbil shirt
Copyrights
protect written or artistic
expressions - novels,
poems, songs or
movies.
Lasts for the life of the
author plus 50 years.
Famous copyright cases
S. Victor Whitmill v.
Warner Bros.
Entertainment
Inc. Tatoo (like Mike
Tyson’s) in The
Hangover Part 2.
Warner Bros. and
Whitmill worked out
an agreement of
undisclosed terms.
The Happy Birthday
Song
The copyright belongs
to Warner Music
Group, and the
company regularly
charges up to $30,000
to anyone who wants
to use the song for
profit
Can You Name These Copyrighted Logos??
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
Trademarks
Name, phrase, sound or
symbol used in
association with
services or products.
Famous Trademarks
“You’re Fired!”
• “Fear the brow”
• “Let’s get ready to
rumble”
• “There’s an app for
that”
• “BAM!”
Roles of the government:
2. protect consumers
Federal Regulatory Agencies: Agencies
set up by federal government
to regulate (watch over) business
Federal Trade Commission
Regulates product
warranties and
advertising fraud
Issues product recalls
Food and Drug Admin.
• Regulates the safety
of foods,drugs
Federal Communication
commission
• Regulates TV and radio
broadcasting
Securities and Exchange
commission
• regulates the stock market
Equal Employment
Opportunity Commission
• Works to reduce workplace
discrimination
Environmental Protection
Agency
• enforces
environmental
standards
Occupational Safety and
Health Administration
regulates workplace
safety
Roles of the Government:
3. Promote competition
Why is it important to promote competition???
Video clip: high cost of generic drugs
Roles of Government:
4. Correct for Externalities
Externalities - the effect of a decision on a third
party not taken into account by the decision
maker.
2 TYPES of externalities: POSITIVE AND NEGATIVE
Negative Externality
• “Bad” for society
ex. Pollution, smoking
Society wants LESS of these
Video example
Negative Externalities
What should the Government do???
Government will tax companies that create
negative externalities
Positive Externalities
• “Good” for society
Example: Vaccinations, education
• Society wants MORE of these
Video Example
Positive Externalities
• What should the government do to get
companies to produce MORE positive
externalities???
Government will offer subsidies to firms that
create positive externalities
Subsidy = Financial aid given to a company to
produce a product
The Roles of Government
5. Provide for Public Goods
Public goods include national defense, police,
roads, education etc…
Public goods are NON-EXCLUSIVE
South Park and tragedy of the
commons
Tragedy of the Commons
Resources that are shared by everyone are used at a rate that
exceeds the resources’ sustainable limit.
•Goods that are available to everyone (common resources) are
often polluted/destroyed since no one has an incentive to keep
them clean
•Ex: Over-fishing in the Ocean
Is there a solution to tragedy of the
commons???
• Stossel: Public goods video clip
What is the problem with Public
Goods???
• Lead to a FREE RIDER problem
A situation where some people either
consume more than their fair share of a good,
or pay less than their fair share
What is the problem with public
goods???
Video examples:
20/20 Freeloaders segment #1 and #3
Segment #1 start at 1:18
Bailouts and Bull: segment #2
(6 minutes)
The Roles of Government
6. Promote economic growth and price stability
The government promotes growth and price
stability through FISCAL POLICY
Topic 3:Economic stability
In order to be stable, the economy needs:
1. Economic growth (increasing GDP)
2. Full employment (unemployment under 6%)
3. Price Stability (if prices rise, they do so by
only 4% or less)
The economy becomes unstable if:
1. Unemployment over 6%
2. Recession
3. Inflation
4. STAGFLATION = Recession and inflation
occurs at same time
How does the government promote
economic stability???
By using FISCAL POLICY:
Policy that uses government spending and
taxation to stabilize the economy
• The government will implement FISCAL
POLICY to “fix” the economy
Expansionary Fiscal Policy
• Implemented during RECESSION
• Goal is to SPEED UP economy without causing too
much inflation
Video example of expansionary
fiscal policy
How can the government speed up the
economy????
1. Increase government spending (public goods,
roads, schools etc.)
2. Decrease income taxes
(Consumers will have more $, so they will
spend more)
* government can increase its spending, decrease taxes
or do both
• Expansionary policy will result in a DEFICIT BUDGET
• Deficit Budget: the government spends more $ than
what they take in
Contractionary Fiscal Policy
Implemented during INFLATION
Goal is to SLOW DOWN economy without causing
recession
How can the government slow down
the economy???
1. Decrease government spending
2. Raise personal taxes
• Government can decrease its spending,
raise income taxes or both
• Contractionary Policy results in a
SURPLUS BUDGET
• Surplus Budget: the government spends
less $ than what they take in
Topic 4: The Multiplier Effect
Why do cities want the Superbowl in their
stadium?
69
The multiplier effects
• Anytime the government changes its spending
or changes taxes, they have to account for the
MULTIPLIER EFFECT
• 2 types of multipliers:
spending multiplier
tax multiplier
MULTIPLIER EFFECT
• Someone’s spending will always become
someone else’s income
• The person who receives the income will turn
around and spend it and the cycle continues
• Because of this there is a multiplied impact of
spending on the economy.
Marginal Propensity to Consume
(MPC)
•How much people consume when there is a
change in income.
MPC=
Change in Consumption
Change in Income
Examples:
1. If you received $100 and spent $50.
2. If you received $100 and spent $80.
3. If you received $100 and spent $90.
72
Marginal Propensity to Save
(MPS)
•How much people save when there is a
change in income.
MPS=
Change in Saving
Change in Income
Examples:
1. If you received $100 and save $50. MPS?
2. If you received $100 and save $30. MPS?
73
MPC + MPS = 1
Why is this true?
Because people can either save or consume
If MPC is .8, what is MPS?
If MPS is .1, what is MPC?
74
How is Spending “Multiplied”?
Assume the MPC is .9 for everyone
Assume the Super Bowl comes to town a family spends $100
at Ashley’s restaurant
Ashley now has $100 more income. Ashley will spend .9 and
save .1 of this $100
Ashley spends $90 at Carl’s salon. Carl will spend .9 and
save .1 of this $90
Carl spends $81 at Dan’s fruit stand. Dan will spend .9 and
save .1 of this $81
Dan spends $72.90 at Ted’s sporting goods
***This continues until every penny is spent or saved
How multiplier effect works
• new income of $100: MPC = .9
* remember someone’s spending becomes
someone else’s income
Round
• 1
• 2
• 3
income
$100
$90
$81
spending
$90
$81
$72.90
savings
$10
$9
$8.10
Spending multiplier
»If an increase in spending = more $ goes
into the economy
1/MPS
»If a decrease in spending = less $ goes
into the economy
- 1/MPS
Practice
• 1. If MPC is .8, what is the spending multiplier
if spending decreases???
• 2. If the MPS is .1, what is the spending
multiplier if spending increases???
The smaller the MPS, the greater the spending
multiplier will be!!!
Example of Spending Multiplier Effect:
spending multiplier X change in spending
If Spending increases by $3 million, and the MPC is .8 How much
will the economy change by?
How figured:
1. find spending multiplier
1/MPS = 1/.2 = 5
2. Multiply the spending multiplier by the change in
spending:
3 X 5 = $15
Economy will increase by a total of $15 million (3 X 5)
Tax Multiplier
• looks at the impact of taxes on the entire economy
If taxes go down:
If taxes go down, people have more $ to spend
MPC/MPS (if decrease in taxes)
If taxes go up:
If taxes go up, people have less money to spend
- MPC/MPS (if increase in taxes)
Practice
• MPC is .9, and taxes go up, what is the TAX
multiplier???
• MPS is .2, and taxes go down, what is the TAX
MULTIPLIER???
Example of tax multiplier
Tax multiplier X change in TAXES
If the government decreases taxes by $50 million, and the
MPC is .8 by how much will the economy change by?
How figured:
1. Find Tax multiplier
.8/.2 = 4
2. Multiple tax multiplier by change in taxes
4X50 = $200
economy will increase by $200 million
Practice #1
Spending decreases by $2 million and MPC is .8.
•What is the spending multiplier in this
example?
-1/MPS = -1/.2 = -5
•What will be the impact on the entire
economy?
-5 X 2 = -10 million
#2
Taxes increase by $1 million and MPS is .1.
• What is the tax multiplier in this example?
-MPC/MPS = -.9/.1 = -9
• What will be the impact on the entire
economy?
-9 x 1 = -9 million
#3
• Taxes decrease by $5 million and MPC is .8.
• What is the tax multiplier in this example?
MPC/MPS = .8/.2 = 4
• What will be the impact on the entire
economy?
4 X 5 = 20 million
#4
Spending increases by $4 million and MPC is .9.
• What is the spending multiplier in this
example?
1/MPS = 1/.1 = 10
• What will be the impact on the entire
economy?
10 X 4 = 40 million