Understanding Taxation and Trade

Tax is to raise revenue (cover a range of government expenditure) (e.g. Build school, hospital, improve road)

To discourage certain activities that will cause damage to people’s health or pollution. (e.g. cigarette, cars, fuel)

To discourage the import of goods, import tax is referred to as tariff

To redistribute income from the rich to poor

Direct tax: paid directly to the government from your wages

Indirect tax: tax that is added on goods and services. Consumers pay tax by paying more for the goods or services.

Progressive tax: rich people pay more than poor people

Regressive tax: poor people pay more than rich people. This happens when the government imposes a tax at a set rate.

Proportional tax: Everyone has to pay the same percentage of income. So no matter what station of income you are, you pay the same.

Export is bigger than import = happy

Import bigger than export = sad

Because export earns money from other countries, import loses money

Calculation of progressive tax: final income-total=percentage

Disposable income=income-tax

VAT=disposable income x income spent

Dumping: dumping goods are the goods that sell in other countries at a price less than it costs to make them due to the local government subsidies.

+: Industries in other countries cannot compete and fail, reduce competition and put up the price

Being able to sell at this unfairly competitive lower price

Consumer can save money

Company might improve

Tariff: they are the taxes that the government adds on imports and exports; they are used to restrain trades. Tariff gives further revenue for the government and biggest producers.

f and g: government tariff, which makes the government earn more money.

e and h: consumers could buy at the world price but not tariff added. Deadweight loss of consumers’ surplus.

b and c: quantity of imports (with tariff), which is expensive. It is what consumers actually buy.

a and d: quantity of imports (without tariff), which is cheap. It is what people wanted to buy.

Lorenz Curve: Line of absolute equality. (y=cumulative share of income. x=cumulative share of population) A=bowl. When A is big, people don't get the same income, the incomes have less equality. When A is small, people get the same income, which is good. Incomes have more equality.

Gini coefficient = A/A+B x 100

Price of a country up (inflation): SRAS shift to the Left, P up Y down

Unemployment in a country up: SRAD shift right, P down Y down

The government increases indirect taxes (purchase tax, VAT): SRAS shift Left, P up Y down

The government increases direct taxes (income): SRAD shift Right, P down, Y down