The Harmful Effects of Inflation - Assignment Example

Economics Assignment Prepared by Author Date Explain the meaning of GDP and the ways in which it can be measured. “GDP is the abbreviation of gross domestic product. In other words, it is acknowledged as the sum of all the final goods and services produced in a country within a fiscal time of that country usually one year” (Brezina, 2011). However, for the GDP, only the goods and services manufactured in a country are included. Its formula is: GDP=GNP-NFP The GDP can be measured using the following three ways (Macdonald, 1999): Expenditure method Production method Income method Expenditure method This includes the GDP as total spending on final goods and services produced in a nation. This includes consumption, investment, government purchases and net exports (Macdonald, 1999). Production method This method computes GDP by summing up the value added of all products. It adds up prices on which they are kept in consumption area, of all the goods and services produced excluding the production of goods at intermediate stages (Macdonald, 1999). Income method It calculates GDP by including the income attained by the workers and producers including profit and taxes paid to the government. The concept of national income is included in this approach (Macdonald, 1999). Explain the harmful effects of inflation and contrast them with the potential effects of deflation Inflation feeds on itself. It is difficult to control on a very low rate. Following are its harmful effects (Barter, et al., 2000; Brezina, 2011): Increase in the cost of living: Wages do not rise at the rate prices are raising. Those sectors of economy that have fixed income get issues in attaining basic needs. Decrease in savings: As a big part of income is spend in consumption there is a low rate of saving. Less exports more imports: Balance of payment is badly affected due to inflation as the cost local goods increases these prices are costly for foreigners. Production investment falls: When prices rise hoarding is encouraged. People not selling goods for few days make huge amount of profit so the businessman become rich. Such a condition is only fruitful for some but major part of economy suffers. Income inequalities increases: When prices rise wage earners become losers and businessman become gainers and become landlord. As a result rich-poor gap increases. Contrast with the potential effects of deflation: Same as that in inflation the wage rate does not increase as companies are not in a condition to afford high rate of wage. There are imports but they are expensive as foreign currency is worth domestic currency. As there is no increase in prices there is no as such economic growth. Give evidence, show how it may be argued that inflation is a subjective experience Inflation is experienced as subjectively. As the price increases there is seen a fluctuation in demand and supply and the equilibrium is disturbed. Inflation affects every economic activity subjectively. The subjective experiences are important in decisions making (Hirstein, 2009). As there is fluctuation in prices the economy suffers and the prices are held above the attainment point that is unbearable for the consumers. This situation is not fruitful as only some are gainers and others are losers (Macdonald, 1999; Mankiw, 2006). Give two examples of a flat tax and, using Adam Smith’s cannon of taxation, assess their merits and demerits Flat tax is a tax that is same for everyone no matter what is their income. This makes a attaining surrounding for the better flow of free market (Forbes, 2005) Adam Smith explains simplicity through the cannon based on flat tax. Examples Income tax Tax on polling station; roads bridges etc Merits These are easy and fair. All form of tax in which a person pays double tax is demolished from the economy. This encourages more investment and results in self employment tax reduction. This encourages a person to be more productive in economic activity. It removes loopholes. There is an increase in the revenue of the country due to low tax rate. Demerit Due to flat tax there develops a gap between rich and poor. The one earning high income will pay same and the person earning low will also pay same. This will result in unbalanced condition in an economy. The poorer will get poorer and the richer will become landlord. This is injustice (Hirstein, 2009). Define the term ‘tax burden’ and illustrate the UK position over the past decade in an appropriate statistical manner Tax burden is the sum of tax paid by people, industry or any other sector compared to the other people or sector of economy. It is divided between the producer and seller. All the tax collected from individual to collective level taxis included. This includes general sales taxes, property tax etc are included in it. UK is the one of the country that has largest economy in world. It is seen successful among many countries. If we see the past decade there is seen that UK entered recession in the year 2008. But soon it got recovered. It faced shrinkage of 7.2% from peak to trough. This made a record of longest recession. David Cameron made achievement in attaining seats during elections of 2010. Steps were taken in order recover loss that had occurred over last government. In the passage of 3 years there was seen loss in jobs of public sector and at the end of 2013 2.5 million people faced unemployment. According to the estimation UK growth in 2014 was 0.7 % and GDP was 3.4% (Pettinger, 2014; Department of International Development, 2014). Differentiate between a progressive a regressive and a proportionate tax system and say which will you to be most fair The difference between 3 types of tax system is given below (Rittenberg, 2008): Regressive tax system Progressive tax system Proportionate tax system Tax system in which the tax is on higher percentage of income as the income falls. The consumer of low level income spends more income on inferior goods and the taxes paid by low income consumers represent big amount from their income and as a result are regressive. Example: Tax on inferior goods. Tax system in which tax is taken on higher percentage of income as the income rises. The families having high income level face a high rate of tax. Example: Federal income tax Tax system in which tax is taken on fixed percentage of income. This is also sometimes called flat tax. It does not affect what the income is , it is same for every level of income. Example : Sales tax I think progressive is the fair one in which the rich have to pay high rate of tax on high income level. This does not indicate injustice to the poor. Explain why VAT has become a regressive tax in the decades since it was first introduced VAT is a form of consumption tax but now it is now almost admitted universally that VAT is a regressive tax. As the direct tax rise in the proportion of income as income increases, VAT and indirect taxes combined do the different functions. In simple words as people earn more there is less amount of proportion of tax payable on them on the amount of their income. This will profit people more in case they earn more and produce more in order to maximize their income and pay less proportion as tax. Explain how a reduction in marginal rates of income tax may result in an increase in tax revenue Income tax is the tax that is imposed on the personal income of a person. It is a direct tax. The impacts of reduction in it are not only on individual level but also on economy level. As the marginal rate of income tax decreases there is seen increase in tax revenue. This is explained by Laffer curve. As there will be lower income tax rate from a big part of GDP there will be an increase in tax revenue. Differentiate between claimant count and labour force survey measures of unemployment and why economist prefer the use of latter Claim count is the sum of all the people who are in order of social security benefit, notably unemployment benefit. (Barter, et al., 2000). Whereas labor force survey is the method of measuring unemployment by conducting surveys. In this method one goes to different group of people and ask question based on unemployment. This is carried out quarterly in some countries and some conduct annually. (Mankiw, 2006) There is a big difference of facts and figures in the claimant count and labour force survey measures of unemployment. One major difference is the impact of male and female composition in unemployment. Economist prefer latter as it gives proper figures after conducting surveys. In this way exact number of people employed and unemployed are known. Explain how unemployment may be disaggregated according to its causes and say why it is important to do so. Unemployment can be disaggregated by the sources of its causes. According to frictional view the cause is due to time. It is because the data is not given and it takes time to calculate to find the work. Then there is a structural unemployment in which the cause is because of the lack of skill of labor in the right place. This includes occupational and geographical factors. I the competitive market the labor supply and demand is not proper which causes instability and another form or cause of unemployment. The wage rate differs which becomes point of inequitable distribution. If there is no demand of certain type of job or vacancy in economy but supply is present so this supply is idle and is providing no use to the country and is a cause of unemployment for that certain group. References Barter, J., Hope, T. & Kidd, W., 2000. sociology in perspective. chicago: Heimann Educational Publishers. Brezina, C., 2011. understanding the gross domestic product and the gross national product. New York: The rosen public group. Department of International Development, 2014. UK Performance Over the Past Years. [Online] Available at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/43313/11-720-uk-trade-performance.pdf [Accessed 18 March 2015]. Forbes, S., 2005. Flat Tax Revolution. United States: Regnery Publishing. Hirstein, W., 2009. Confabulation: Views from Neuroscience, Psychiatry, Psychology, and Philosoph. UK: Oxford University Press. Macdonald, N. T., 1999. Macroeconomics and business : an interactive approach. 1st ed. s.l.:Cengage Learning EMEA. Mankiw, N., 2006. economics. Bedford london: Cengage learning . Pettinger, T., 2014. Unemployment Stats and Graphs. [Online] Available at: http://www.economicshelp.org/blog/5695/alevel/unemployment-stats-and-graphs/ [Accessed 20 March 2015]. Rittenberg, L., 2008. Principles of Microeconomics. s.l.:Flat World Knowledge. Read More