İKTİSADA GİRİŞ II

Views related to tasks which government should undertake in an economy have been varying noticeably during history. The idea of government’s intervention to economy started with Mercantilists in the 16th century. Mercantilism denies and replaces middle-age insights with more rational principles. These principles were very efficient in terms of economic configuration of governments between the 16th and 18th centuries.

Y – T = C + S + IM

Y = C + S + T + IM

This last equation demonstrates that the total income of the country is being used in four different ways. This income is partly transferred to government as taxes (T), partly used to purchase the domestically produced goods and services, in other words, consumed (C), partly spent for imported goods and services (IM) and partly used for savings (S).

Transfer expenditures can be divided into four groups.

• Economic Transfers: Transfers made by the government in order to support the investments of Public Economic Enterprises.

• Financial Transfers: Transfers to special budget institutions and local authorities (universities, provincial administrations and municipalities etc.) made by government.

• Social Transfers: Transfers made by the state with the social purposes (financial aids for retirement funds and association, student grants etc.).

• Debt Payments: The expenses not paid in related fiscal year but in following years are assumed as transfer payments. These are the interest payments the government pays for domestic and international debts, amortization of debt, expenses of previous years not paid in due date as well as debts of previous years.

For the government to shift aggregate expenditure function upward to production level YF, within the scope of what we learnt so far, there are three ways: First, the government may decrease taxes that will cause income level to raise by shifting consumption function upward. Second, by increasing public expenditures the government may ensure total aggregate expenditure function to move upward. Third, in order to make the investments to be more profitable, the government may encourage more investments by providing more tax discounts. As known, an increase in planned investments also shifts aggregate expenditure function upward. Arranging fiscal policy to increase aggregate expenditures is called as expansionary fiscal policy.

According to the concept named as automatic stability providers or automatic stabilizers, some items existing in both spending and revenue sides of government budget, automatically change to diminish cyclical fluctuations and help providing stability. Although the automatic stabilizers are not enough to provide economic stability, these may help significantly. During economic recession and high unemployment periods, the tools in question are automatically step in and diminish the descending trend of GDP. On the other hand, during excessive economic activity with increasing inflationary pressure, these tools may help to diminish pressures mentioned.

Automatic stabilizers are the revenue and expenditure items in the government budget that automatically change to provide stability in the economy.

The primary automatic stabilizer is the income tax. Of the income taxes, automatic stabilizer characteristic is more clear and also significant in progressive income tax. Taxes collected over income are in the center of a tax system. When production (i.e., income) increases in an economy, total income tax revenue of the government increases as well and vice versa. In progressive income tax system, tax rate that a person has to pay increases with the income of that person obtains.

In case of changes in public expenditures and taxes are the same, the numerical value of net multiplier being equal to 1 is called as balanced budget multiplier.

Balanced budget multiplier is the net multiplier with a value of 1 when government expenditures and taxes change in the same amount and direction.

Government should undertake to ensure economic development, growth, stability and fair income distribution in the country.

Government should use the expending and taxing force (fiscal policy) to direct the economic life in the country.

In the ıncome determination model developed in the book government expenditures are assumed as exogenous, in other words, they are autonomous.

Tax multiplier is defined as (-MPC+MPI)/(MPS+MPI)

Tax multiplier = (-0.80+0.20)/(0.20+0.20)=-0.60/0.40=-1.5

Expenditure multiplier = 1/(MPS+MPI)= 1/(0.20+0.20)=1/0.40=2.5

Tax multiplier = (-MPC+MPI)/(MPS+MPI)=(-0.80+0.20)/(0.20+0.20)=-0.60/0.40=-1.5

Change in income =Tax Multiplier x Change in Taxes

Change in income = [(-0.80+0.20)/(0.20+0.20)] x (-100) = -1.5 x (-100) = -150

Balanced budget multiplier is always equal 1

Depending on the balanced budget multiplier, total income increases equal to increase in government expenditures altough this increase is financed by the same amount increase in taxes.

Expansionary fiscal policy requires a decrease in taxes.