Strengths and weaknesses of using per capital national income
At the national level, public debate has centered on the performance of the main monetary measure i.e. GDP. Each year we must meliorate over the last lest we are in recession. While GDP growth is important for raising living standards, it is not synonymous with happiness.
a) Critically discuss the strengths and weaknesses of using per capita national income (even once adjusted for purchasing power parity) in the form of a measure of welfare.
Per capita national income is the standard mean income of an individual belonging to a country. It is the measure of total GDP divided by the total number of inhabitants of the country. This evaluation estimates the standard of living in the country. It is usually articulated in terms of a frequently used international currency such as dollars. It is helpful because it is a broadly accepted calculation method, which can be easily calculated from GDP i.e. Gross Domestic Product of a country with the total population. It offers a really functional statistical data for evaluation of wealth between nations. This also aids the country to know about their growth position.
Many Economists aver that per capita income has a lot of weaknesses when considered as a precise measurement of the country’s economic growth:
• Comparisons between per capita income and growth status over the years require taking into consideration the component of price changes. Because adjusting the measure of income with inflation caused, will tend to amplify the effects of growth.
• Global comparisons can be unclear due to the costs of living differences among foreign countries. These changes will not be reflected in stock exchange rates. The main scope of the comparison is to gaze at marked differences in wealth and standard of living among various countries. This is achieved by calculating per capita income attuned to the differences in purchasing power parity. This more precisely provides differences in purchasing power among various inhabitants (Osberg and Sharpe, 2005).
• Being an Average value, it fails to explain about the income distribution. If the income distribution of the people within a country is biased at a position, a group of rich class can boost per capita income far above the majority of the population. In this regard, average income is a more practical measure of the wealthiest than per capita income calculations, since it is less prejudiced due to variations and biases (Osberg and Sharpe, 2005).
• Income utilized for the family and trade are only minor economic activities that do not contribute to financial income and are also not calculated. This value may vary accordingly between families.
• Net combined buildup of stocks from productive resources are net amount of the real capital, customer goods and services and stocks of household, total alterations in the price of natural assets, stocks such as expenditures towards environmental issues, also total alteration in stage of foreign debts; preferably also total number of manpower, public capital and investment in research and development.
• Undesirable incomes from consumer goods do not contribute to economic growth, but constitute suspicious spending, for production and consumption. The expenditure towards household payments are likely to get carried over to work and are also measured in the GDP to be part of the household consumption, but the expenditure made by companies towards transporting raw materials to the work site are viewed as a transitional input in production. Since transitional inputs in the business segment are totaled out in the calculation of value added tax, it can be subjected to argument that similar expenses by households must be subtracted from marketed consumption to garner a good estimate of true consumption flows (Dolls, 2012).
b) Discuss at least two alternative measures of national welfare that have been put forward? What are the primary strengths and weaknesses of these alternatives?
Based on the literary review, there are four types of alternative such as ISEW and GPI based on corrections of GDP, sustainable or green(ed) GDP also involving corrections of GDP, genuine savings/investments, and composite indexes. In this paper, we will discuss about ISEW and GPI, Sustainable or green(ed) GDP.
ISEW and GPI
Index of Sustainable Economic Welfare (ISEW) and resultant pointers like the Genuine Progress Indicator (GPI). These indicators stand for a rectification of the regular GDP by correcting the significant deficiencies by subtracting or adding miniscule amounts of partly calculated amounts to the GDP. The ISEW is intended at calculating the consumption linked activities that unswervingly pressure for welfare. This is consummate by adding to GDP services, while subtracting GDP features not directly providing activities to consumers. The ISEW index can thus be portrayed as a computation of the benefits of economic activity of a country. Also totalling up, the ISEW includes rectifications to counterbalance income disparity and the unsustainability of consumption and production of goods. Meticulously, this index moves toward adapting the GDP for non-market services and goods like housework, defensive costs involved in environmental and social protection and its repair like health expenses, costs incurred in road accidents and expenses of urbanization. The fall in future welfare due to current consumption like lack of natural areas, greenhouse effect, depletion of non-renewable resources, soil erosion, water and air pollution, and production. The costs involved in efforts to acquire the current welfare level such as advertising, commuting, duration and intensity of work and the division of labour such as those between employed and unemployed, inequality among workers, between males and females and income. The GPI is biased to an extent from the ISEW with respect to the specific groups of corrections included. The GPI corrects for other important types namely divorce, voluntary work, loss in leisure time, criminality, unemployment and damage to the ozone layer.
The ISEW is being measured using slightly different methodologies for various countries and regions including Chile, Australia, Austria, Scotland, Denmark, the Netherlands, the UK, Germany, Italy and Sweden (Lawn, 2003; and Kubiszewski et al., 2013). The various applications indicate that GDP accommodates an increasing trend, there was a declining or steady pattern shown by the ISEW after a certain period of time. Vital causes of this inappropriate association between ISEW and GDP have been replacing of casual household production by goods offered in the market like child care, increasing injustice, natural resource depletion, and the emerging global environmental problems like biodiversity loss, acid rain and global warming. Both the GPI and ISEW propose that the expenditure of current growth in economy outweigh the benefits, moving towards the state of uneconomic growth.
Sustainable or green(ed) GDP
Another pointer also originates from GDP but sheds light completely on environmental issues and natural resources depletion. Corrections in here lead to ‘green(ed)’ or ‘sustainable’ type of GDP indicator. Sustainable income is a level of income that can be maintained or one based on reproducible environmental and economic base. The concepts of sustainable and green GDP are well entrenched in welfare economics. Vital factors are air and water pollution, resource exhaustion, noise, soil erosion, loss of biodiversity, desiccation, radioactivity, fragmentation, and spreading of different health-affecting toxins. GDP recalculations with these external factors that are ‘internalized’ is not a matter that is entirely trouble free as it signifies a totally different range of prices in the economy. Thus, it is not surprising that there existed hardly any empirical moves aimed at manipulating a sustainable or green income (Kubiszewski, 2013).
On 3 February 2009, the Australian Government, in response to the global financial crisis and fears of its impact on the Australian economy, announced the Household Stimulus Package to provide widespread assistance to low and middle-income households, as well as substantially increased expenditure on infrastructure. The total size of the Stimulus Package is estimated at $42 billion.
a) Briefly discuss the case both for and against governments engaging in active economic stabilisation.
In response to the financial crises, the Australian government announced Household Stimulus package to stimulate the economy. This includes:
• Clean Energy Supplement.
• Tax Cuts
• Extra Assistance
• Additional Resources
Moreover, the Australian Government decides on legislation to abolish the carbon tax and will shortly initiate discussion on the development of the Emissions reduction Fund.
It was a good measure to rule out the financial crisis that prevailed in Australia during 2008-2009. Many families, job seekers and pension holders benefited. The greatest disadvantage was based on the survey studies which clearly depicted that only 18.5 % of families in the lower income segment benefited from the household stimulus package. This group had an average gain of around $29 per week. This group most likely included retirees who were ineligible for any of the above mentioned payments. Majority of beneficiaries of this package were from the middle income groups. These groups gained on an average around $32 per week. The gain on an average for the highest income group stood at about $24 per week. The package thus benefited the rich lesser compared to the middle and poor income groups.
b) What are automatic stabilizers, and how do they work?
Automatic stabilizers are components of the transfer and tax systems that are typically designed to counterbalance fluctuations among economic activity minus direct interference by the policymaker. When incomes are much higher above normal, tax liabilities go up and the eligibility for government reimbursement comes down, without any modification to the tax code or similair rules. On the contrary, when incomes reduce, tax liabilities also come down and an increased number of families fall under the eligibility criteria for government transfer programs like unemployment insurance and food stamps that help fortify their income.
• Automatic stabilizers are important quantitatively at the national level. A study conducted in 2000 anticipated that payroll tax collection and abridged income offsets approximately eight percent of any turn down in the GDP. Supplementary stabilization accruing from unemployment insurance, though less compared to that from the tax system, is foreseen to be eight times as victorious per dollar in vanished revenue as more of the money is depleted rather than being saved (Dolls, 2012).
• Automatic stabilizers also exist in the transfer and tax systems of local and state governments. Though state constitutions normally require balanced budgets, that can bring about countervailing alterations among tax rules. Such supplies don’t enforce a total balance on an annual basis. They are usually centered on budget projections than on realizations, so gaps are likely to still occur when economic conditions are unforeseeably weak. Also; many governments provide what can be termed ‘rainy day’ finances that they can show as marked down during budget constraints. Still, many local and state governments react to an economic backing down by legislating higher taxes or lesser expenditure. These measures are contradictory being operational cross-purposefully with the automatic stabilizers (Dolls, 2012).
c) Evaluate the following statement: ‘Fiscal policy is a very precise tool for controlling aggregate demand. If the government wants to increase aggregate demand by $5 billion, all it has to do is to carry out exactly $5 billion worth of government spending.’
Fiscal policy is an imprecise tool for calculating aggregate demand. The statement suggests a one-to-one correlation between a dollar incurred in government spending and an appropriate raise in aggregate demand. Yet, a dollar of government expenditure could give out above or below a dollar’s increase in aggregate demand. It may invariably fail to have any upsurge in aggregate demand. The final effect of government spending on aggregate demand depends on the relation among a few input variables such as whether an economy is closed or open type and whether the economy’s exchange rate is flexible or fixed.
Under a closed economy, a $5 billion addition to the expenses of the government will originally boost average demand by $5 billion. This multiplier results in the extra fluctuations in demand that happen when expansionary fiscal policy boosts consumer expenditure and income thus producing an extra shift in aggregate demand. To cite an example, assume that the MPC or marginal tendency to consume is .85 in a closed economy; which means for every dollar that each household in the economy earns, the particular household saves $.15 and spends $.85. The multiplier is denoted by the formula 1/ (1-.85) that yields 6.666. In a closed economy, going by the similair calculation, $5 billion worth of government spending would bring about $33.3 billion in aggregate demand. Although, the income rise would also increase the demand for currency in the economy, families seeking to consume extra services and goods would favor having their wealth more in liquid form. Since the supply of currency is fixed in this economy, the interest rates would rise to accomodate the demand for currency and the supply of currency back into the system. The interest rate increases would bring about a relative fall in the demand for goods that are investment related. The rise in government expenses would diversify investment, which would make the aggregate demand curve to fall back from the $33.3 billion of complementary aggregate demand. In this type of economy that possesses a high MPC, a spend of $5 billion would almost surely bring about in excess of $5 billion rise in aggregate demand. The rise in demand would overshadow the effect of crowding-out. However in a closed economy with low MPC, it is equally possible that this effect would balance out the multiplier effect and generate a shift in the aggregate demand by lesser than $5 billion (Weber, 2012).
A comparable scenario would become successful under an open economy possessing a flexible exchange rate albeit with a few extra issues. First, provided optimum capital transfer, and ignoring tax default dangers, the initial interest rate in the open economy prior to the $5 billion of extra government expenses would come equal to that of the global interest rate denoted by R(w). As prior to the rise in family income formed by the multiplier effect and the related burgeoned demand for liquid wealth would make the interest rate to rise until the domestic interest rate, R(loc) > R(w). This interest rate rise would have two effects. First effect as prior to it would diversify out the investment expenditure and bring down the aggregate demand. The increased local interest rate would also bring about extra foreign demand for the local assets. Such a demand would generate extra demand for dollars among the foreign currency exchange market, that would increase the dollar value and cause net exports to come down. The decrease in total exports would create a fall in consumer spending, a corresponding decrease in demand for money, and a fall in interest rates till R(loc) once again = R(w).Due to this, the government expenses amplifying may have no permanent impact on aggregate demand (Weber, 2012).
Australia’s east coast gas market that has processed comparatively economical gas to domestic consumers and the industry isolated from the other parts of the world; is poised for a humongous shake-up that could witness tripling of prices. This means after decades of isolation, the gas market in the east coast will now be linked to the world gas markets that means raised prices in this part of the world.
a) Employing the conceptual framework used to explain world trade, clearly illustrate and explain why opening the Australian gas industry to the export market will result in higher prices to domestic consumers. Be sure to clearly indicate any changes in producer and consumer surplus.
Due to the gas exports, there exists a notable increase in demand for gas globally; leading to intense competition in procuring gas by those countries reeling from acute gas shortages. Such countries tend to buy at higher rates than the local costs. Domestic customers will get affected by this as they cannot provide the same commodity at different prices, which will decrease their reputation globally.
b) Although economists generally argue that increasing trade is good for economic welfare, there are a number of arguments put forward for why it might be a good idea to protect domestic industries from global competition. Clearly explain one of these arguments.
Among the economic arguments in the country for protection the most powerful one is that of the protection of domestic industry against world trade. Protection is defensible as an impermanent measure while a budding industry develops and comes to the greater stage where it will be prepared to face international competition. Various reasons may subsist to protect an industry during its infant phase. Those more commonly announced are economies of balance, administrative and technological learning processes, initial costs (e.g. breaching marketing channels followed by bringing in and adapting technology), and economies outside to the companies but interior to the industry that may time conscious and may require help to expand but once urbanized will permit the industry to situate on its own (Weber, 2012).
The case for a worldwide agreement in limiting carbon-dioxide emissions has been boosted in the wake of the world’s best climate scientists increasing their level of confidence on positive climate change being brought about. Christine Milne, the Greens leader said the report corroborated immediate and intense emission cuts worldwide were required. In her words, the government had no choice but to leave out its direct action approach and resort to immediate and intense measures at the earliest.
a) Employing a supply and demand framework, clearly illustrate and explain why the free market may produce too many carbon-dioxide emissions.
Markets severely polluted by carbon is where governments provide companies the permission for polluting and allow them to purchase and sell such rights under a cap and trade system are being generally taken into account as one among the largest issues restricting global climate change.
If a firm pollutes lesser than its allotment, then it can hive off extra credits to other firms. But, if a firm pollutes exceeding its number of allowances, then it must purchase extra allowances from other firms that decreased their pollution. Firms that don’t comply could face hefty fines.
Conceptual evaluation of demand and supply curves points out that carbon pollution markets will show the way to a low-cost decrease in carbon pollution as the market traders do not always opt for ethical choices.
Potential problems can be faced in Cap-and-trade systems. Such systems offer a small incentive to bring down carbon more rapidly than on the way out of caps as that effects extra allowances and reducing carbon prices. Also, traders may face random prices that will have reliance on decisions by the government, the climate and the economy. (Raymond and Shively, 2008).
Several major criticisms have been leveled against the move towards the basic “cap and trade”:
• It allows several firms to purchase their means out of decreasing emissions;
• It provides an incentive to adhere to the limit of total pollution till the cap, but don’t allow for an enhanced method than this.
• Lack of payments for government programs that strives to bring down carbon emissions;
• It breaks the ethical code of conduct that means polluter can pay according to how much they pollute.
Government and markets both have decisive roles in protecting the global climate; the dispute arises to incorporate them into effective solutions in right time to the major catastrophe (Raymond and Shively, 2008).
b) The alternative to using ‘direct-action’ to reduce carbon-dioxide emissions is to take a market-based approach. Building upon the framework developed for the answer to part a above, clearly illustrate and explain how a market-based approach could be used to ensure carbon-dioxide emissions are reduced to their socially optimal level.
According to a new study, the best way to reduce carbon emissions through the market forces; is EU-ETS. The study has showed the usefulness of the European Climate Exchange (ECX) which is the largest carbon trading platform in the world and identified as competent as Europe’s two biggest exchanges, the London Stock Exchange and the Euronext Paris. Through ECX to fight against the global climate change will give a foundation for the preface of a compulsory emissions cap and trade scheme undertake globally (Raymond and Shively, 2008).
The report found that the worth of the trades on the ECX were superior. Researchers proposed the indications of development based on amplified liquidity which is the instant accessibility of a company to trade with and price effectiveness, which means all available information, is included into prices so they are traded in a comparatively crystal clear manner. The ECX was shaped by the EU Emissions Trading Scheme (EU-ETS) in 2005 to assist the European Union (EU) attain the issues under the Kyoto Protocol to diminish carbon pollutions (Raymond and Shively, 2008).
The EU set restrictions and issued permit limits for amount of carbon companies could release into the environment. If companies surpass their emission limit, they acquire penalties. The EU-ETS allows companies with increase emissions to obtain the permits of other carbon companies on the ECX to avoid this. By developing a market, it offers companies a financial motivation to diminish their carbon emissions. Researchers propose that further modifications are desirable to make certain the EU-ETS survival in Europe’s economic recession. Since the study portrays to confirm the ECX’s success, economists declare the EU-ETS should be permitted to self-adjust emission caps in response to modifications in the Eurozone’s profits and industrial manufacture. This study reveals that free market startegies such as the EU-ETS are valuable (Raymond and Shively, 2008).
c) The framework employed in parts a and b assumes that individuals are perfectly rational. Briefly discuss some of the insights from behavioral economics that might lead us to question this assumption.
While EU-ETS is considered as best when compared with cap and trade system to reduce carbon di oxide pollution and emissions, our country continues to use the same cap and trade system. This is because the Government supports best carbon pollution schemes. The chief theme behind this division of the scheme is that a solid that can commence abatement more inexpensively than the permit price and that a company will recompense for permits if the cost to it of decreasing its CO2 emissions exceeds the cost of the permits. By trading among them, companies’ gets hold of the system cap at the cheapest price to the economy (Raymond and Shively, 2008).
Economists are deeply puzzled by our desire to have children. First, kids are really expensive - the biggest financial decision most couples will make. Forget the cost of buying the family home; the kids you choose to populate it with will end up costing just as much, or more, over a lifetime. A survey released last week by AMP and the National Centre for Social and Economic Modelling found the typical Australian family spent $812,000 raising two kids. This is an increase of nearly 50 per cent in just six years. …Economists like to assume we are rational individuals who make decisions based on anticipated costs and benefits.
a) Working within a supply and demand microeconomic framework, illustrate the conceptual equilibrium number of children in a household.
A survey demonstrated by AMP and the National Centre for Social and Economic Modeling identified that a typical Australian family quiet spends $812,000 to bring up their two kids. Based on the above data, the demand supply curve is as follows
Note that there is a decrease in the demand with respect to the increase in the marginal cost of children i.e. supply. If the number of kids per family is equalized, the curve achieves equilibrium.
b) One of the key ingredients for higher productivity is to lower population growth. Continuing to work within a supply and demand framework, discuss ways of lowering the equilibrium number of children in a household. Be sure to consider both the supply and demand side of the ‘market’ for children.
Lesser the population of a country, there is a marked fall in the demands for essential products. This is because, the total number of consumers decrease at a rapid rate. Moreover, many resources can be utilized minimally, when the population is low. The rate of demand for the specific goods and its services increases with the rate of consumers who prefer the same good. The increase in the demand for a product leads to the price increase. To achieve market equilibrium, the Government should implement few rules to control the birth rate of the country. Since, many Australians prefer a high standard of living, they bring up kids in elite way.
OLG model provides preliminary round, continuous macroeconomic concepts of population increase for the Australian economy. Totally, it focuses that population ageing decreases with per capita labour supplies and raise property accumulation by households, while per capita age pension government expenses and the consumption tax rate are subjected to increase considerably. Permitting for modifications in the household interest rates, population increase leads to capital increase and higher wages to labors.
Hint – the supply curve can be thought of as the marginal cost of children, the demand curve can be thought of as the marginal benefit of children.
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