Basic Macroeconomic Distribution Questions - PowerPoint PPT Presentation

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Basic Macroeconomic Distribution Questions

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  1. Basic Macroeconomic Distribution Questions • 1. How much consumption will there be today, versus how much consumption will there be in the future? (ants vs. grasshoppers) • 2. What part of output will be consumed "collectively," and what part privately? • 3. Who will get the consumption? • Old vs. young - - - Workers vs. non-workers

  2. The government role in these questions • These three questions are the important questions to ask of our government's long term policies.

  3. How does the Government influence the economy? • The following actions of Governments influence the macro-economy. • Spending (outflow) • Taxing and Borrowing (inflow) • Creating Money (Monetary Policy)

  4. Review of GDP equation • GDP = C + I + G + (X - M ) • Output for Consumption (C) 68% • Output for Investment (I) 15% • Output for Government Services (G) 18% • (Net) Output sent overseas (X - M) -1%

  5. 1. Production is for Current and Future use. • Consumption satisfies current needs. • Investment (both private and public) adds to the capital stock.

  6. Governments use output (G) for two purposes. • 1. to provide current services, GCON • 2. to invest in “social overhead” capital, that is, help the economy produce more output in the future, GINV

  7. Thus, GDP can be divided into two parts, that which is for: • for current use, • C + GCON + X, • and for future use, • I + GINV

  8. Future production will be greater because of current investment. • Private investment adds to the private capital stock. • Government investment adds to the public capital stock. • I + GINV = K + ∆K

  9. Should more output go for I or GINV? • If the return on government investment is greater than on private investment, then there will be more growth if a dollar is transferred from private investment to government investment.

  10. If return on GINV > I, then increase taxes • In this case, the government should spend more on highways and schools than private companies on new factories and equipment.

  11. 2. What part of output will be consumed "collectively," and what part privately? • This choice is between: • GCON , production of National Defense and other public services, and • C, private consumption by the households.

  12. 3. Who will get current consumption? • Consumption, C, is financed by income, wealth, and government transfers. • When transfers such as Social Security and unemployment benefits are changed, reallocation occurs.

  13. How do Governments finance their expenditures? • The outflows are: • G + Transfers + IntD • The inflows are • T + GovDef + ∆ Money Supply

  14. Changing the money supply. • Governments can finance expenses by printing more money. • This is monetary policy. • The U.S. has not use printing money as a way to finance expenses.

  15. Taxes or borrow. • After deciding the level of expenditures , • G + GovTr + IntD • governments must decide how to finance them, either with taxes or borrowing.

  16. Are Taxes too high? • In the United States, total taxes as a percent of income are lower than most countries. • What is the "burden" of a tax? If you pay $5,000 in state taxes and receive a $5,000 subside to attend Miami University, are you "burdened?"

  17. Tax Rates by Country.

  18. Deficits and Surpluses. • At present we have a surplus • but deficits have been the rule. • [6] GovDef= G + GovTr + IntD - Tb - Th • [6’] GovSur = Tb + Th - G - GovTr - IntD

  19. Types of Deficits • The Cyclical Deficit. • Because of a recession. • The Structural Deficit. • A deficit when GDP is at potential GDP.

  20. Debt is the accumulation of Deficits • [9] GovDEBT = ∑{GovDef} • A surplus will reduce the debt.

  21. How "bad" is our Debt? • Deficits and Debt need to be compared to the level of income. • Is a $150 debt large or small? It depends on your income.

  22. Do we want to pay off the Debt? • Who owns the debt? (look at table in course packet) • Government bond are a safe asset that individuals and institutions like to hold. • The interest on the Federal debt amounts to over $200 billion dollars.

  23. Did you learn? • What are the three Macroeconomic Distribution Questions? • What are the three methods governments can pay for expenditures? • What things should be considered when deciding the share of collective consumption be compared to private consumption? • How do we decide if government investment is more valuable than private investment? • What is the relative burden of taxes in the U. S.? • How we decide the burden of our Debt?