CONSUMPTION,
TAXATION, SAVING
(MACROECONOMICS)
Lecturer :
Irvan Yoga
Pardistya, SE., MM., Ak
AHNAF TAQIY ROBBANI
16106310300015
ACCOUNTING – A8
ECONOMIC & BUSINESS FACULTY
UNIVERSITY OF SINGAPERBANGSA KARAWANG
October 2016
PREFACE
Al-hamdulillahi rabbil'alamin,
thanks to Allah s.w.t., which has given grace to the author, so it can
complete the task this macroeconomics. Thanks to Mr. Irvan Yoga Pardistya, SE.,
MM., Ak who has provided a valuable lesson to the author of Macroeconomics.
Thanks to my parents who have given strong support to the author.
Hopefully we as a student at the
"State University Singaperbangsa Karawang" can work more
professionally by using English as a second language whatever we do. thanks.
AHNAF
TAQIY R.
1610631030015
The
Keynesian Model Of Income Determination In A Three Sector Economy
Introduction
The action of government relating to its expenditures, transfers and taxes is
called the fiscal policy. Here we focus on three fiscal policy models which are
in increasing order of complexity, with the emphasis being on the government
expenditure, taxation and the income level.
Government Expenditure
This includes goods purchased by the central, state and the
local government and also the payments made to the government employees.
Transfers
These are those government payments which do not involve any
direct services by the recipient for instance welfare payments, unemployment
insurance and others.
Taxes
These include taxes on property, income
and goods. Taxes can be classified into two categories, direct taxes and
indirect taxes. Direct taxes are levied directly and include personal income
and corporate income tax. They are paid as a part of the price of the goods.
1.
We
simplify our analysis by making a few postulations, which are as follows.
2.
The
government purchases factor services from the household sector and goods and
services from the firms.
Definition
of Consumption
Consumption, in
economics, the use of goods and services by households. Consumption is distinct
from consumption expenditure, which is the purchase of goods and services for
use by households. Consumption differs from consumption expenditure primarily
because durable goods, such as automobiles, generate an expenditure mainly in
the period when they are purchased, but they generate “consumption services”
(for example, an automobile provides transportation services) until they are
replaced or scrapped.
Factors
Affecting the Level of Consumption
Many
factors affecting the bigness household consumption expenditure. These factors
can be classified into three major :
1. Factors
of Economic
2. Factors
of Demografi
3. Factors
of Non Economic
Keynesian Consumption
Model :
Ø Relation
of Disposable Income and Consumption
If
dispossable income increased,
then consumption will increased too.
Records concerning the keynes consumption function :
1. Riil
variable that
is Keynes consumption function shows the relation between income with
consumption expenditure both expressed with using a constant price level, not
the relation between nominal income with a nominal consumption expenditure.
2. Current
income, not income earned previously , and not income that estimated to
happened in the future
3. Absolute
Income, not the relative income or permanent income, as stated by other
economis
Relation
of Disposable Income and Consumption
Note
: ∆ = Alteration
At
the moment of disposable income level is zero, the consumption level is
200. means autonomous consumption is 200. When disposable income increased to
1.000, 2.000, 3.000, etc consumption is also become 1.000, 1.800, 2.600, etc.
The increased in consumption is due every 1,000 unit increase in disposable
income many as 800 is used for consumption additional.
Ø Marginal
Propensity to Consume
Marginal
Propensity to Consume is a concept which
gives a description of how consumption will increase if disposable income
increased by one unit.
Ø Average
Propensity to Consume
Average
Propensity to Consume is
the ratio between total consumption with disposable income total.
Relation
of Disposable Income and Consumption
MPC
and APC
Note
: MPC
= ∆ Consumption / ∆ Disposable Income
APC
= Consumption / Disposable Income
Definition of Saving
Saving is income not spent, or deferred consumption. Methods of saving
include putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing
expenditures, such as recurring costs.
In terms of personal finance, saving generally specifies low-risk preservation
of money, as in a deposit account, versus investment,
wherein risk is higher; in economics more
broadly, it refers to any income not used for immediate consumption.
Saving in Economics
In Economics, Savings are defined as income minus consumption. The rate at which people can be expected
to do this is called the Marginal propensity
to save or Average
propensity to save. The rate of savings is
directly related to both the interest rate and
investment, largely by way of the capitalmarkets. It is worth noting that some
investment is considered savings. If investment merely replaces depreciated capital stock, rather than increasing
the capital stock and workforce, it is still considered part of savings.
Saving Function
Saving function or the propensity to save expresses
the relationship between saving and the level of income. It is simply the
desire of the households to hoard a part of their total disposable income. Symbolically, the functional
relation between saving and income can be defined as S= f(Y).
The equation shows that the remaining amount after
the deduction of total expenditure from total income is saving. Thus, saving is
that part of income which is not spent on consumption.
Each additional disposable income will be allocated
to increase the consumption and savings. the bigness an additional of
disposable income which become additional savings called Marginal
Prospensity to Save.While the ratio between savings level with disposable
income called Average
Propensity to Save.
If each additional of disposable income allocated as
additional of consumption and saving
and If both sides of the equation are
divided by Yd,
then :
Relation
between MPC and MPS, APC and APS
Note
: MPC
= ∆ Saving / ∆ Disposable Income
APS
= Saving / Disposable Income
Determinants of Saving
Function
The
determining factors that contribute to the saving function include Desire to
save, Ability to save, and Facilities to save :
Desire to Save
The desire or the willingness of an individual or
household to save is the major driving factor towards saving. The factors that
affect the desire of an individual to save are :
·
Level
of income
Level of income is an important determinant of
saving in any economy or country. Higher the level of income for any household
or individual, higher the level of saving.
·
Provisions for the future
The future requirements of money is uncertain. So,
in order to have a secured future against any uncertain events, saving up at
present helps to have a pool of extra money. Savings can be taken as a
precaution for any unforeseen needs in the future.
Ability to Save
In spite of the willingness to save, one cannot save
if they do not have the capacity or the ability to save. Saving is only
possible if an individual can meet all their consumption expenditures and still
save up, then it can be said that they have the ability to save. Ability to
save depends on the level of income and consumption expenditure.
The factors that determine the ability to save
include :
a) Labor Efficiency
The
ability or power to save depends on the efficiency of labor. If an economy has
an efficient group of people, it increases production efficiency as well. This
results in increasing income and thus people can have more money that can be
saved, even after meeting the consumption expenditures.
b) Size
of National Income
Higher
the national income, greater is the ability to save. Low national income in
developing and under-developed countries is the main reason for no saving being
made.
c) Developmental
activities
The
development of various sectors like trade, industrial areas, agricultural
sector, etc. is a source of increased income level, as there will be more
inflow of money into the economy.
Facilities to Save
Saving also depends on the facilities availability.
This includes :
1) Development of
financial institutions
The development and expansion of financial
institutions like banks, co-operatives, etc. encourage people to save more with
their effective marketing strategies. They also provide attractive interest
rates on savings.
2) Rate
of interest
Attractive
interest rates encourage people to save more. When the interest rates are high
in the market, people save more, and when the rates are low, they withdraw and
spend on consumption.
3) Social
security system
The
provision of security system such as old age pensions, medical insurance,
unemployment allowance, etc. reduces the rate of saving in a country. When there
is adequate provision of social security in the society, people feel secured
about their future and they spend more of their income on consumption.
4) Taxation Policy
Progressive
taxes reduce saving as taxes increase with the increase in income. People with
higher income save less because of the taxes they need to pay. But if the taxes
on expenditure are higher then, they are encouraged to spend less and save
more.
5) Fiscal policy
The
fiscal policy of the government affects the level of saving in a country. If
taxes are imposed on necessary commodities, people cannot save more. The
reduction of taxes on basic goods leads to an increase in the level of saving.
Also, if taxes are high on luxury goods, people are enticed to save more than
to purchase luxury goods.
Consumption Tax
A consumption tax is a tax on spending on goods and services. The
tax base of such a tax is the
money spent on consumption. Consumption taxes are usually indirect, such as a
sales tax or a value added tax.
Types of Consumption Tax
Ø
Value Added Tax
A value added tax (VAT) applies to the
market value added to a product or material at each stage of its manufacture or
distribution. For example, if a retailer buys a shirt for $20 and sells it for
$30, this tax would apply to the $10 difference between the two amounts. A
simple VAT would be prpotional to
consumption but also be regressive on
income at higher income levels (as consumption falls as a percentage of
income). Savings and investment are tax deffered until they become consumption.
A VAT may exclude certain goods, to try to make it less regressive. The tax is
used in countries within the European Union.
In Australia,
Canada, New Zealand and Singapore this form of national tax is called aGoods
and Services Tax (GST). In
Canada it is also called Harmonized
Sales Tax (HST) when combined with a provincial sales
tax.
Ø
Sales Tax
A sales tax typically applies to the sale of
goods, less often to the sales of services. The tax is applied at the point of
sale. Laws may allow sellers to itemize the tax separately from the price of
the goods or services, or require it to be included in the price (tax
inclusive). The tax amount is usually calculated by applying a percentage rate
to the taxable price of a sale. When a tax on goods or services is paid to a
governing body directly by a consumer, it is usually called a use tax. Often
laws provide for the exemption of certain goods or services from sales and use
tax.
Ø
Excise Tax
An excise tax is a sales tax that applies to a
specific class of goods, typically alcohol, gasoline (petrol), or tourism. The
tax rate varies according to the type of good and quantity purchased and is
typically unaffected by the person who purchases it.
Ø
Expenditure Tax
A direct, personal
consumption tax may take the form of an expenditure tax or an income tax that deducts savings and
investments, such as the Hall–Rabushka
flat tax. A direct consumption tax may be called
an expenditure tax, a cash-flow tax, or a consumed-income tax and can be flat
or progressive. Expenditure taxes have been briefly implemented in the past in
India and Sri Lanka.
We simplify our analysis by
making a few postulations, which are as follows.
1. The government purchases
factor services from the household sector and goods and services from the
firms.
2. Transfer payment includes subsidies to the firms
and pensions to the household sector.
3. The government levels only direct taxes on
the household sector. We here introduce the notion of an income leakage and an
injection. In a two sector model, a part of the current income stream leaked
out as saving whereas injections in the form of investment were injected into
the system.
Let us see few illustrations relating to a
three sector economy.
Illustration
1
In a two sector economy, the basic equations
are as follows:
The Consumption function is C = 200 + 0.8Yd
and investment is I = 300 millions. The equilibrium
level of income is 2500 millions. Presume the government is added to this two
sector model, which then becomes a three sector economy.
The government expenditure is at 100 millions
1.
Determine the equilibrium level of income in the three sector economy
2.
What is the multiplier affect of the government expenditure? Is it of
the same magnitude as the multiplier effect of a change in the autonomous
investment?
3.
Presume that there is a balanced budget in that the entire government
expenditure is financed from a lump sum tax. Find the new equilibrium level of
income in the three sector economy.
Solution
The equilibrium condition in the three sector
economy is given as
Y = C + I + G
Thus,
Y = 200 + 0.8Y + 300 + 100
Thus,
Y = 200 + 0.8Y + 300 + 100
Y = 600
+ 0.8Y
Y
–
0.8Y = 600
0.2Y = 600
Y = 600
/ 0.2
The equilibrium level of income in the three
sector economy is 3,000 millions, which is an increase by 500 millions over the
two sector economy.
Government Expenditure Multiplier
GM = Δ
Y =
1
Δ G 1 – b
Δ G 1 – b
= 1 / 1 – 0.80
= 5
Investment Multiplier,
m
= Δ Y = 1
Δ I 1 – b
Δ I 1 – b
Where b
is the marginal propensity to consume,
Thus the magnitude of the multiplier effect
is the same as that of a change in government expenditure.
G = T = 100millions
Thus,
C = 200 + 0.8 (Y -100)
Thus,
C = 200 + 0.8 (Y -100)
C = 200
– 80 + 0.8Y
C = 120
+ 0.8Y
But, Y = C
+ I + G
Y = 120
+ 0.8Y + 300 + 100
Y
–
0.8Y = 120
+ 400
0.2Y = 520
Y = 520
/ 0.2
The new equilibrium level of income in the
three sector economy, when there exists a balanced budget is 2,600 millions.
Illustration 2
In an economy, the full employment output
occurs at 2000 millions. The marginal propensity to consume is 0.8 and the
equilibrium level of output is currently at 1600 millions. Suppose the
government aspires to achieve the full employment output, find the change in
1.
The level of government expenditures
2.
Net lump sum tax
3.
The level of government expenditures and the net lump sum tax when the
government aims at bringing the productivity the full employment while keeping
the budget balanced
Solution
We have, GM :
ΔY = 1
Δ G 1 - b
Δ G 1 - b
Where, Δ
G = Change
in government expenditure
b = Marginal
propensity to consume
Δ
Y = Change
in income
GM = Government
expenditure multiplier
For instance,
b = 0.80
Δ
Y = 2000
– 1600
Δ
Y = 400
Thus,
400 / Δ G = 1 / 1- 0.8
400 / Δ G = 1 / 1- 0.8
Δ
G = 400
(0.2)
Thus, the level of government expenditures required
to achieve the full employment output is 80 millions
Definition of Taxation
Taxation is the
transfer of a portion of the national products from the hands of individuals to
those of the government, for the purpose of meeting public consumption or expenditure.
Whatever be the denomination it bears, whether tax, contribution, duty, excise,
custom, aid, subsidy, grant, or free gift, it is virtually a burden imposed
upon individuals, either in a separate or corporate character, by the ruling
power for the time being, for the purpose of supplying the consumption it may
think proper to make at their expense; in short, an impost, in the literal
sense.
1.
Efficient - A tax system
should raise enough revenue such that government projects can be adequately
sponsored, without burdening the economy too much (not particularly the tax
payer), as not to become a disincentive for performance (internal and external
investment, work returns and savings).
2.
Understandable - The
system should not be incomprehensible to the layperson, nor should it appear
unjust or unnecessary complex. This is to minimize discontent and costs.
3.
Equitable - Taxation
should be governed by people's ability
to pay, that is, wealthier individuals or firms with greater incomes should
pay more in tax while those with lower incomes should pay comparatively less.
4.
Benefit Principle - Those
that use a publicly provided service (which is funding primarily through
taxation) should pay for it!
Direct, Indirect, and Benefit Taxation
Direct taxation are
paid by taxation on the income of the wage earner. This form of taxation is
unavoidable, and for simplicity usually collected before the worker collect
his/her wages.
Indirect taxation
Indirect taxation is
often avoidable and is not taken from wages. An example of indirect taxation is
VAT (Value Added Tax) or sales tax placed on goods and services. This is tax,
but not all people have
to pay
it, and can choose not to.
Excise duty is
a governmental tax meant for producers and manufacturers on certain goods. Manufacturers are
considered to be :
1. Entities
who manufacture goods themselves.
2. Entities
who outsource manufacturing, but manufacturing takes place from their name
To
cover these costs, manufacturer adds them to COGS (cost
of goods sold), where the buyer ends up paying for these costs. Thus, it is
considered to be an indirect tax.
Benefit of Taxation
Taxes are the main source of state revenue. Without
the tax, most of the activities of state is difficult to be implemented. The
usage of tax money includes ranging from personnel expenditure until to finance
various development projects. Development of public facilities such as roads,
bridges, schools, hospitals, police stations funded by using money from taxes.
References
http://www.investopedia.com/terms/t/taxes.asp
Rahardja, Prathama., and Manurung, Mandala, Teori
Ekonomi Makro (5th ed.).
Jakarta:
Lembaga Penerbit Fakultas Ekonomi Universitas Indonesia, 2014.
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