Economics

04/03/2022

22/01/2022

07/12/2021

29/11/2021

✓✓ The Catch-Up Effect

The catch-up effect (or convergence theory) suggests that poorer countries will experience a higher rate of economic growth and, over time, get closer to the income levels of the developed world. In other words, there will be a reduction in the gap between the rich and the poor because low-income countries have more opportunities to experience a rapid rate of growth.

✓✓Potential reasons for the catch-up effect

1. Law of diminishing returns
The law of diminishing returns states a decline in productivity improvements from a fixed capital. When you have very low productivity in agriculture, a small investment (e.g. motorised tractor) can give a high rate of return and significantly increase output. For a developed economy, which is already highly mechanised increased investment will give smaller marginal gains.
In effect, if the Indian agriculture sector is mainly labour intensive – then there are ‘easy gains’ from a small amount of fertiliser and investment.

2. Replicate technology from other countries.
One advantage that poorer countries have is that they can replicate existing technology and working practices developed by advanced economies. For example, in Africa, many citizens never had a landline or fax machine but jumped straight to the mobile phone and with the internet can benefit from very cheap phone calls. This new technology has significantly improved communication in developing economies and skipped out levels of investment.

3. Globalisation and movement of labour and capital
The world is increasingly globalised and multinational companies in the developed world are willing to shift production to areas of lower labour costs. Therefore, developing economies have benefitted from inward investment and global companies moving manufacturing factories to the developing world. This force tends towards raising wages in the developing world.

✓✓Limitations of the catch-up effect

1. Depends on levels of social investment and basic infrastructure.
Investment in high tech equipment may prove ineffective if there is not the level of education and training necessary to make it work. It also depends on local culture and expectations. There could be resistance to certain types of investment. For example, with limited education in rural areas, there may be resistance to take up new equipment.

2. Less diminishing returns than expected The model of diminishing returns expects a declining increase in productivity in the short term, but often this ignores the long-term development of new technologies which cause unexpected rises in productivity.

21/11/2021

✓✓What Is a Deadweight Loss Of Taxation?

The term deadweight loss of taxation refers to the measurement of loss caused by the imposition of a new tax. This results from a new tax that is more than what is normally paid to the government's taxing authority. This theory suggests that imposing a new tax or raising an old one can backfire, resulting in insufficient or no gains in government revenues due to the decline in demand for the goods or services being taxed.

✓✓Illustration of a deadweight loss of taxation

Governments impose taxes to collect revenues. These funds are used to support public programs and projects, such as infrastructure, economic aid, and social services. Federal, state, and local governments frequently decide to raise taxes in order to raise revenues to cover shortfalls. Although this action may seem like a good idea, it often has the opposite effect. This is called a deadweight loss of taxation or, simply, a deadweight loss. Here's how it works. When the government raises taxes on certain goods and services, it collects that tax as additional revenue. Taxes, though, result in a higher cost of production and a higher purchase price for the consumer. This, in turn, causes production volumes (and, therefore, supply) to drop, leading to a drop in demand for these goods and services. This gap between the taxed and tax-free production volumes is the deadweight loss.

✓✓Special Considerations

Taxation reduces the returns from investments, wages, rents, and entrepreneurship. This, in turn, reduces the incentive to invest, work, deploy property, and take risks. But it also encourages taxpayers to spend time and money trying to avoid their tax burden, diverting valuable resources from other productive uses.
Most governments levy taxes disproportionately on different people, goods, services, and activities. This distorts the natural market distribution of resources. The limited resources will move from their otherwise optimal use, away from heavily taxed activities and into lightly taxed activities, which may not be advantageous to all.

✓✓Example of Deadweight Loss of Taxation

Here's a hypothetical example to show how the deadweight loss of taxation works. Let's say the mythical city-state of Braavos imposes a flat 40% income tax on all of its citizens. The government stands to collect an additional $1.2 trillion a year through this new tax. That big chunk of money, which is now going to the government of Braavos, is no longer available for spending on consumer goods and services, or for consumer savings and investment.

Suppose consumer spending and investments decline at least $1.2 trillion, and total economic output declines by $2 trillion. In this case, the deadweight loss is $800 billion—the $2 trillion total output less $1.2 trillion consumer spending or investing equals a deadweight loss of $800 billion.

22/10/2021

✓✓Balanced budget, Budget surplus and Budget deficits

•••••The phrase "balanced budget" is commonly used in reference to official government budgets. For example, governments may issue a press release stating that they have a balanced budget for the upcoming fiscal year, or politicians may campaign on a promise to balance the budget once in office.

••••••The term "budget surplus" is often used in conjunction with a balanced budget. A budget surplus occurs when revenues exceed expenses, and the surplus amount represents the difference between the two. In a business setting, a company can reinvest surpluses back into itself, such as for research and development expenses; pay them out to employees in the form of bonuses; or distribute them to shareholders as dividends.
In a government setting, a budget surplus occurs when tax revenues in a calendar year exceed government expenditures. The United States government has only achieved a budget surplus four times since 1970. It happened during consecutive years from 1998 until 2001.

••••••A budget deficit, by contrast, is the result of expenses eclipsing revenues. Budget deficits necessarily result in rising debt, as funds must be borrowed to meet expenses. For example, the U.S. national debt, which is in excess of $27 trillion as of November 2020, is the result of accumulated budget deficits over many decades.

✓✓Advantages and Disadvantages of a Balanced Budget

Proponents of a balanced budget argue that excessive budget deficits saddle future generations with untenable debt. Just as any household or business must balance its spending against available income over time or risk bankruptcy, a government should strive to maintain some balance between tax revenues and expenditures.

Most economists agree that an excessive public sector debt burden can pose a major systemic risk to an economy. Eventually, taxes must be raised or the money supply artificially increased—thus devaluing the currency—to service this debt. This can result in a crippling tax bill once taxes are eventually raised, excessively high interest rates that crimp business and consumer access to credit, or rampant inflation that may disrupt the entire economy.

On the other hand, running consistent budget surpluses tends to not be politically popular. While it may be beneficial for governments to sock away surpluses for so-called "rainy day funds" in case of a downturn in tax revenue, the government is generally not expected to operate as a for-profit business.

The existence of surplus government funds tends to lead to demands for either lower taxes or, more often, increased spending since money accumulating in public accounts makes an attractive target for special interest spending. Running a generally balanced budget may help governments to avoid the perils of either deficits or surpluses.

However, some economists feel budget deficits and surpluses serve a valuable purpose, via fiscal policy, enough so that risking the dire effects of excessive debt may be worth the risk, at least in the short run. Keynesian economists insist that deficit spending represents a key tactic in the government's arsenal to fight recessions.

03/09/2021

✓✓ Introduction of Welfare Economics

Welfare economics is defined as a branch of economics that seeks to evaluate economic policies in terms of their effects on the well-being of the community. It became established as a well-defined branch of economic theory during the 20th century.

It uses techniques from microeconomics to assess general well-being. From this assessment, it tries to find an allocation of productive factors as to desirability and economic efficiency within an economy, often relative to competitive general equilibrium.

Welfare economics typically takes individual preferences as given and tries to improve welfare in terms of Pareto efficiency. As an example, social state B is “better” than social state A, if at least one person prefers B and no one else opposes it. Another aspect of welfare treats income/goods distribution, including equality, as a further dimension of welfare.

In general, welfare economics studies how economic policies influence the prosperity of the society. It analyses costs and benefits and provides some theoretical principles for particular instruments of public economics. The criteria for evaluation of the common wealth are pretty subjective: its truthfulness or falsity cannot be determined unquestioningly and accurately.

This branch of economics was developed during the 20th century by famous scientists and economists: Adam Smith, Jeremy Bentham, Alfred Marshall, Vilfredo Pareto, Nickolas Kaldor, John Hick and many others. Vilfredo Pareto designed the concept of welfare economics theory. Since then, many economists use Pareto efficiency as their ideal efficiency goal.

Social welfare refers to the overall welfare of society. With sufficiently strong assumptions, it can be defined as the sum of the welfare of all the individuals in the society. Welfare may be measured either cardinally in terms of “utils” or dollars, or measured ordinarily in terms of Pareto efficiency. The cardinal method in “utils” is rarely used in pure theory today. Its main problem is that different kinds of “utility” cannot easily be summed up without losing the meaning of the measurement.

There are three concepts of social welfare within the subject. The first is the paternalist concept which claims that the dictator or paternalist authority applies its own concepts of social welfare. According to the Pareto concept, social welfare is a sum of the welfare of each individual who is a member of the society. And the third concept includes interpersonal comparison of utility which is made by introduction of the explicit evaluation judgments.

In applied welfare economics money-value estimates are often used. One example of applied welfare economics is cost-benefit analysis. Money-value estimates are a useful form of measurement where income-distribution effects are factored into the analysis or seem unlikely to change the analysis.

In order to measure social welfare, economists use two fundamental approaches – The New Welfare Economics approach and the neoclassical one. The issues of the welfare economics can be very helpful when it comes to developing the public policy.