Insight into Economics-6

Insight into Economics-6

Now that we have covered monetary policy, values, price levels etc;, we will move on to Fiscal tools like Interest rates and taxes. I am not claiming that these theories are exhaustive but one gets an entry into the world of Macro Economics and daily practice and thinking can enhance upon this platform one decide to stand on.

Let us start with Interest rate as depicted by the Phillips Curve. It is a Cartesian graph with x-axis showing the Inflation level (mentioned in the last exposition) and unemployment on the y-axis. These are negatively correlated. Higher the Inflation rate lower the unemployment level. Graph with negative slope.

This forces us to define the Civilian Labor Force of an Economy which is defined as those who are above 17 years of  age and are willing to seek work for living in jobs that are accountable.

Labor Participation Rate is (General population above 17 years –  those who are unwilling to work)

Employment rate =(Civilian labor force – unemployed)

Unemployment  = (1=Employment rate)

(only rates are mentioned I expect the reader to covert to appropriate percentages from Time series data of the economy to get the percentages)

Unemployment is classified into three, 1)Structural unemployment  which is those who are unemployed due to the systemic instabilities in an economy  like Recession (general contraction of gross national product or gross domestic product for two quarters) and contraction.  2)Frictional unemployment which is those who are unemployed due to sudden change in Technology in the environment, like introduction of computers etc; and 3)Transient unemployment are those who are generally in transit from one work to another.

Grey market employment is those who are engaged in unaccountable jobs like pan wallahs, rikshaw pullers, house hold help, hawkers etc;.

Now let us talk about Laffer curve. This is a curve with Tax revenue on the y-axis and Tax rate on the x-axis. It is an inverted U shaped curve. As the tax rate increase the tax revenue increase and at some maximum point it starts diminishing. This means uncontrolled increase in Taxes won’t lead to optimal tax revenue for the nation.

As mentioned earlier tax rates cannot be very high in an economy, in which case the government resources will come down as depicted by Laffer curve and government spending in the GDP account will come down creating contraction of  the Economy.

This give the basic Fiscal tools of Interest rates and Taxes and how they can be used to expand and contract the economy for controlling the dynamics of the economy.  The basic monetary tool was explained earlier.