econ extra bits

what is fiscal drag

Fiscal drag is a "stealth tax" occurring when inflation or wage growth pushes taxpayers into higher tax brackets because tax thresholds are frozen or not adjusted. As wages rise, more income is taxed at higher rates, increasing the government's tax revenue without increasing headline tax rates. This reduces personal disposable income. This can act as a coolant to inflation but it can also prevent economic growth

what is another distinction between progressive and regression tax

a higher BURDEN falls on high or low income earners. remember, it is not the amount of tax but the RATE or PROPORTION

how do tariffs affect consumer and producer surplus

a domestic tariff on foreign goods e.g. us tariff on foreign steel. this will increase producer surplus but decrease consumer surplus for US steel market - because US steel producers can push up prices

what is deadweight/social welfare loss

Deadweight loss (DWL) is the loss of total economic efficiency—encompassing both consumer and producer surplus—that occurs when the free-market equilibrium is not achieved, resulting in inefficient resource allocation. It represents wasted welfare that is not captured by anyone, caused by market distortions such as trade barriers, taxes, subsidies, price controls (floors/ceilings), or monopoly power.

• Graphically, deadweight loss is shown as a triangle between the supply and demand curves, representing the lost welfare from unrealized transactions.

what is crowding out

Crowding out is an economic theory where increased government spending and borrowing (deficit spending) reduces, or "crowds out," private sector investment. By borrowing heavily, governments increase demand for loanable funds, which raises interest rates, making it more expensive for businesses and individuals to borrow and invest.

As government spending increases, private investment may decrease or "crowd out".

The effect of crowding out can also occur through the use of monetary policy. When the central bank increases the money supply to finance government spending, it can lead to inflation and higher interest rates. This can make borrowing more expensive for private investors and reduce their ability to invest in new projects and businesses.

Depends on the state of the economy on the LRAS curve - if the economy is at full employment and resources are scarce, the crowding out effect is more likely to happen, while if the economy is in a recession and resources are idle, the crowding out effect is less likely to happen.

what are the effects of fiscal deficit vs national debt

Fiscal deficit is a cause for concern:

● Government will have to borrow more money to finance the fiscal deficit

● Will increase the size of the national debt

● Reduce government’s ability to spend in the future

● Can be inflationary

● Risk of being unable to borrow in future / lose trust / credit default

National debt is a cause for concern:

● Result in crowding out – resource and/or financial

● Opportunity cost of interest payments on the debt

● Reliance on willingness of borrowers to keep lending to the government (reference to credit rating)

● May reduce business confidence in the UK economy

● May result in the depreciation of the currency, making imports relatively more expensive

● Could lead to future tax rises and spending cuts

● Could result in a default on the debt, and need for IMF assistance

● Intergenerational conflict

what is crowding in

Crowding in is the opposite of crowding out. It is a Keynesian economic theory that suggests that an increase in government spending can lead to an increase in private investment.

The theory argues that higher government spending can stimulate economic activity and create a more favourable macro-economic environment for private capital investment.

The idea behind crowding in is that government spending can boost aggregate demand (C+I+G+X-M) which can lead to increased real economic growth, higher employment and higher real incomes.

This, in turn, can increase consumer and business confidence (an improvement in animal spirits) leading to increased private investment in new projects and businesses.

The crowding-in effect can also happen through monetary policy. For example, when the central bank lowers interest rates to stimulate economic activity, it can make borrowing cheaper for private investors and encourage them to invest in new projects and businesses

"Crowding in" is an economic theory where increased government spending boosts private sector investment, rather than replacing it. It occurs when public investment improves infrastructure, boosts confidence, or lowers business risks during a recession, creating a higher return on investment and encouraging private firms to expand.

how do governments finance borrowing

Most government borrowing is done through bonds. These bonds come with a promise from the government to repay the borrowed amount at a specified future date, along with regular interest payments throughout the lifespan of the bond. These bonds are considered to be safe investments because they’re backed by the government’s credit. Pension funds, investment funds, banks and insurance companies are the main buyers of bonds. Bonds give them a reliable way to earn interest while keeping their investments relatively safe.

Government borrowing can also be done by quantitative easing, which is when the Bank of England buys government bonds. By doing this, the Bank of England injects money into the economy, which can help to encourage economic activity and keep things running smoothly.

selling bonds to financial institutions

what are bonds

who came up with theory of comparative advantage

david ricardo