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    Chapter 10 - GOVERNMENT IN: The Macroeconomy

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    Quinnee Vallejos
    This document discusses government budgets and fiscal policy. It provides data on government revenues and expenditures in the Philippines from 2002-2007. It shows that expenditures exceeded revenues in most years, resulting in budget deficits. The key points are: 1) Fiscal policy uses taxation and government spending to influence the level of income in the macroeconomy. 2) Expansionary fiscal policy, like increasing government spending or cutting taxes, aims to increase income by shifting aggregate expenditure upward. 3) Contractionary fiscal policy, like cutting spending or raising taxes, aims to decrease income by shifting aggregate expenditure downward. 4) A deflationary gap occurs when aggregate expenditure is below full employment income, resulting in unemployment

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    Chapter 10 - GOVERNMENT IN: The Macroeconomy

    Uploaded by

    Quinnee Vallejos
    37 views26 pages
    This document discusses government budgets and fiscal policy. It provides data on government revenues and expenditures in the Philippines from 2002-2007. It shows that expenditures exceeded revenues in most years, resulting in budget deficits. The key points are: 1) Fiscal policy uses taxation and government spending to influence the level of income in the macroeconomy. 2) Expansionary fiscal policy, like increasing government spending or cutting taxes, aims to increase income by shifting aggregate expenditure upward. 3) Contractionary fiscal policy, like cutting spending or raising taxes, aims to decrease income by shifting aggregate expenditure downward. 4) A deflationary gap occurs when aggregate expenditure is below full employment income, resulting in unemployment

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    Ch10

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    Ch10 - Government in the Macroeconomy

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    This document discusses government budgets and fiscal policy. It provides data on government revenues and expenditures in the Philippines from 2002-2007. It shows that expenditures exceeded revenues in most years, resulting in budget deficits. The key points are: 1) Fiscal policy uses taxation and government spending to influence the level of income in the macroeconomy. 2) Expansionary fiscal policy, like increasing government spending or cutting taxes, aims to increase income by shifting aggregate expenditure upward. 3) Contractionary fiscal policy, like cutting spending or raising taxes, aims to decrease income by shifting aggregate expenditure downward. 4) A deflationary gap occurs when aggregate expenditure is below full employment income, resulting in unemployment

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    37 views26 pages

    Chapter 10 - GOVERNMENT IN: The Macroeconomy

    Uploaded by

    Quinnee Vallejos
    This document discusses government budgets and fiscal policy. It provides data on government revenues and expenditures in the Philippines from 2002-2007. It shows that expenditures exceeded revenues in most years, resulting in budget deficits. The key points are: 1) Fiscal policy uses taxation and government spending to influence the level of income in the macroeconomy. 2) Expansionary fiscal policy, like increasing government spending or cutting taxes, aims to increase income by shifting aggregate expenditure upward. 3) Contractionary fiscal policy, like cutting spending or raising taxes, aims to decrease income by shifting aggregate expenditure downward. 4) A deflationary gap occurs when aggregate expenditure is below full employment income, resulting in unemployment

    Copyright:

    © All Rights Reserved
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    Download as ppt, pdf, or txt
    of 26

    Chapter 10 - GOVERNMENT IN

    THE MACROECONOMY

    Economics 11 UPLB
    Prepared by Tirso B. Paris, Jr.
    September 2007
    The Government Budget
    Government budget
    indicates the public sectors expenditures and sources of
    finance
    Net budgetary position

    revenues > expenditures budget surplus

    revenues < expenditures budget deficit

    revenues = expenditures balanced budget


    Revenues & Expenditures
    (in billion PhP)
    Item 2002 2003 2004 2005 2006

    Revenues 578 640 707 816 980

    Expenditures 789 840 894 963 1,044

    Surplus/ -211 -200 -187 -147 -64


    Deficit
    Ratio of Deficit 5.00 4.32 3.57 2.50 0.99
    to GNP
    2007 National Budget and Projected
    Revenues
    Budget: PhP 1.126 Trillion
    RA 9401
    social payback to the people for the fiscal
    turnaround of their government

    Proj. Revenues: PhP 1.118 Trillion

    Budget Deficit: PhP 63 Billion


    The 2007 budget will enable us to:
    provide free meals to 1.5 million youngsters as
    incentive for attending class
    recruit 3,000 new policemen

    send about 700,000 scholars to schools and colleges

    immunize two million children

    establish 2,400 outlets of Botika ng Barangay (Village


    Pharmacy)
    provide medical insurance to 4.4 million poor
    persons, among others
    - Secretary Rolando Andaya Jr.
    How NG spends the 2007 Budget?
    Economic services (including agriculture, trade
    and natural resource) - 21.8 %
    Social services (consisting of health and
    education spending) - 28.1%
    General public services account for 16.2 %
    Defense, 4.8 %
    Debt service, 28.3 %
    Top Ten Departments
    Education, 128.6 billion
    Public works, 71.2-billion
    Defense, 54.3 billion
    Interior and local government, 51.3 billion
    State universities and colleges, 17.3 billion
    Agriculture, including the AFMA (Agriculture and Fisheries
    Modernization Fund), 17.3 billion
    Transportation, 16.9 billion
    Health, 11.5 billion
    Judiciary, 9.3 billion
    Comelec, 9.17 billion
    Government Revenues 2004
    ITEM % share

    Tax Revenues 85.5

    Taxes on net income and profits 39.8

    Taxes on property 0.1

    Taxes on goods and services 24.0

    Taxes on intl trade and transactions 17.5

    Other taxes 4.1

    Non-Tax Revenues 14.5

    TOTAL 100.0
    GOVERNMENT AND NATIONAL
    INCOME:

    THE THREE-SECTOR MODEL


    Revisions to the Income Determination
    Model
    Disposable income (YD) - income that
    households are free to spend and save.
    YD = Y T
    Where Y- income
    T- taxes
    Aside: for convenience, net transfers to
    households = 0
    Consumption now depends on disposable
    income
    Revision to the Consumption
    Function
    C c mpc YD
    or
    C c mpc (Y T )
    The above implies that:
    when T C
    Y = C + S is now replaced by YD = C+S
    In a three-sector model,
    AE = C + I + G
    Thus, in equilibrium:
    Y=C+I+G
    Derivation of Equilibrium Income:
    Three-Sector economy
    Assume:
    Lump sum taxes (T T 100)
    G is autonomous
    (G G 200)
    Income and Aggregate Expenditure

    Y T YD C I G AE
    1,100 100 1,000 950 100 200 1,250
    1,300 100 1,200 1,100 100 200 1,400
    1,500 100 1,400 1,250 100 200 1,550
    1,700 100 1,600 1,400 100 200 1,700
    1900 100 1,800 1,550 100 200 1,850
    2,100 100 2,000 1,700 100 200 2,000
    Alternative Equilibrium Condition:
    3-Sector Model
    Equilibrium condition: Y = AE
    Equilibrium income is at Y = 1,700
    Alternative equilibrium condition:
    S+T = I+G
    To illustrate, above values suggest that:
    I = 100, T = 100, G = 200
    In equilibrium,
    S = YD C = 1600 1400 = 200.
    I + G = 300 = S + T
    C c mpc (Y T ), I I , G G

    Algebraic Treatment
    We know that: C c mpc (Y T ), I I , G G
    Y AE C I G leads to Y c mpc (Y T ) I G
    Solving for Y, we now have: Y * c I G mpc T )
    1
    where
    1 mpc
    In our example:
    C = 200 + 0.75 (Y- T)
    I = 100
    T = 100
    G = 200
    1
    Y * (200 100 200 0.75(100) 1700
    1 0.75
    F10.1

    Aggregate expenditure (in pesos) AE

    AE
    E0
    1,700

    45
    Y
    0 1,700 2,300
    Y*
    Income (in pesos)
    Government spending and equilibrium
    income
    Main point: G AE Y*
    How large is the change in income?
    1
    Y G
    *
    4 G = 200 Y* = (4).(200) = 800
    1 0.75
    F10.2
    Aggregate expenditure (in pesos) Govt Spending and Y*
    AE

    E1 AE1
    AE0

    E0
    G

    45

    0 Y0 * Y1* Y

    Income (in pesos)


    Income taxes and
    equilibrium income
    Main point: T C AE Y*
    How large is the change in income
    Y* mpc T mpc 0.75 4 T 100

    Y* (0.75) (4) (100) 300

    Tax multiplier, = -mpc = -0.75 = -3


    1-mpc 0.25
    F10.3

    AE

    E0 AE0
    AE1

    E1
    -mpc*T

    45
    0 Y1* Y0* Y
    Fiscal Policy
    Fiscal policy - a collective term that refers to the
    use of taxation and government spending to
    influence the level of income
    Expansionary fiscal policy - spending and taxation
    aimed at increasing income;
    e.g. , G or T
    Contractionary fiscal policy - spending and
    taxation aimed at decreasing income;
    e.g., G or T
    Deflationary Gap
    Full employment level of income or output (Yf)
    level of income wherein the economys
    resources are fully utilized.
    Note: Y* not always equal to Yf

    Deflationary gap when AE < Y at Yf


    Note: With deflationary gap, Y* < Yf
    unemployment
    To close gap, AE must such that Y* = Yf

    Expansionary fiscal policy is required to make


    the AE shift up
    F10.2
    AE Deflationary Gap

    a AE1
    AE0
    b
    c Deflationary
    gap

    45
    Y
    0 Y* Yf
    Numerical Example:
    Deflationary Gap
    If Yf = 2,000 a deflationary gap
    exists since Y* < Yf.
    In our example:
    C = 200 + 0.75 (Y- T) To close gap, use expansionary
    I = 100 fiscal policy, e.g., G
    T = 100
    By how much should G ?
    G = 200
    Y*= 1,700 GapG = (Yf -Y*)/G
    G = 4
    = (2,000 1,700)/4
    T = -3
    = 75
    Thus, G should increase by 75 so that Y* = Yf
    Check: Y*1 = [(200 + 100 + 275 - ).75(100)] . 4 = 2,000
    Inflationary Gap

    Inflationary gap when AE >Y at Yf


    There is pressure for an increase in the general
    price level (inflation) because it is not possible
    to produce beyond Yf.
    To close gap, can use contractionary fiscal
    policy to shift the AE schedule down
    F10.3
    Inflationary Gap
    AE

    AE0
    Inflationary c
    gap b AE1

    45
    Y
    0 Yf Y*
    Numerical Example:
    Inflationary Gap
    If Yf = 1,500 an inflationary gap
    In our example: exists since Y* > Yf.
    C = 200 + 0.75 (Y- T)
    I = 100 To close gap, use contractionary
    T = 100 fiscal policy, e.g., T
    G = 200 By how much should T ?
    Y*= 1,700
    G = 4 GapT = (Yf-Y*)/T
    T = -3 = (1,500 1,700)/-3
    = 66.67
    Thus, T should increase by 66.67 so that Y* = Yf
    Check: Y*1 = [(200 + 100 + 200) - .75(166.67)] . 4 = 1,500

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