Comments on: The potency of government spending and taxation. http://welkerswikinomics.com/blog/2009/04/17/the-potency-of-government-spending-and-taxation/ for students and teachers of Economics Wed, 23 May 2012 04:39:58 +0000 hourly 1 http://wordpress.org/?v=3.3.2 By: Samantha Kim http://welkerswikinomics.com/blog/2009/04/17/the-potency-of-government-spending-and-taxation/comment-page-1/#comment-22786 Samantha Kim Sun, 01 Apr 2012 16:56:06 +0000 http://welkerswikinomics.com/blog/?p=926#comment-22786 @elijah.echl.f09 One instance of leakage is most certainly the savings. However, this is not the only example of leakage. If there is excess product or imports are being sold on a larger scale that is actually taking away from the domestic economy, these could be leakages as well. @elijah.echl.f09
One instance of leakage is most certainly the savings. However, this is not the only example of leakage. If there is excess product or imports are being sold on a larger scale that is actually taking away from the domestic economy, these could be leakages as well.

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]]> By: Samantha Kim http://welkerswikinomics.com/blog/2009/04/17/the-potency-of-government-spending-and-taxation/comment-page-2/#comment-22785 Samantha Kim Sun, 01 Apr 2012 16:54:30 +0000 http://welkerswikinomics.com/blog/?p=926#comment-22785 @ctoantran2 Don't you think that perhaps fiscal stimulus could have negative effects for they may not always work and would have to be changed often as well. I personally think that there would be more of a risk with fiscal stimulus because the monetary policy would have to be adjusted to fit the economic situation just right and each situation is often unique and cannot accurately be determined until it is too late. @ctoantran2
Don't you think that perhaps fiscal stimulus could have negative effects for they may not always work and would have to be changed often as well. I personally think that there would be more of a risk with fiscal stimulus because the monetary policy would have to be adjusted to fit the economic situation just right and each situation is often unique and cannot accurately be determined until it is too late.

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]]> By: skalra2 http://welkerswikinomics.com/blog/2009/04/17/the-potency-of-government-spending-and-taxation/comment-page-2/#comment-22605 skalra2 Fri, 23 Mar 2012 07:17:41 +0000 http://welkerswikinomics.com/blog/?p=926#comment-22605 @Won_Woo_Choi I thought your response to why government spending would be less effective as an injection was interesting. Government spending does have to come from a source, often the source being taxation. Also, the government goes in to debt (something prevalent in news). Your reasoning as to why exports were 'true' injections as opposed to government spending was good. @Won_Woo_Choi

I thought your response to why government spending would be less effective as an injection was interesting. Government spending does have to come from a source, often the source being taxation. Also, the government goes in to debt (something prevalent in news). Your reasoning as to why exports were 'true' injections as opposed to government spending was good.

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]]> By: skalra2 http://welkerswikinomics.com/blog/2009/04/17/the-potency-of-government-spending-and-taxation/comment-page-2/#comment-22604 skalra2 Fri, 23 Mar 2012 07:07:45 +0000 http://welkerswikinomics.com/blog/?p=926#comment-22604 1.How do economists calculate the multiplier? The multiplier shows the ratio between the estimated GDP (Gross Domestic Product) and injections (investment, government spending) of a country. Dividing the injections by the gross domestic product gives us the multiplier which shows us the estimated GDP in dollars (or currency of that nation) for every dollar spent through injections. 2.What are leakages from the circular flow that reduce the multiplier effect? Leakages are flows of income tat leave the circular flow of income. Examples of leakages are savings, imports and taxation. They reduce the multiplier effect as they cause the estimated GDP to go down. Savings mean that money is being saved instead of spent on products, therefore less is demanded and less is produced. Imports mean that money is going out of the country to pay for goods produced by that country, also reducing GDP in host country. Taxation also reduces demand as it reduces the real income of consumers. 3.Explain the link between the accelerator model and the multiplier. The accelerator effect shows the growth in demand for a business’s product brought on by increased investment. This is linked to the multiplier effect as investment is an injection while the growth in demand leads to increase in GDP. 4.What would multipliers for other injections such as export receipts or investment look like? Would they be higher or lower than multipliers for taxation or government spending? I think this would differ from nation to nation and that additional quantitative data would be required to measure the effects. However, I think that injections such as investment or export receipts would be less effective than taxation or government spending. This is because taxation and government spending affects the entire nation where as export receipts and investment only affect some. 5.Evaluate the effectiveness of fiscal stimulus to increase the level of economic activity. Fiscal stimulus would mean to increase government spending and lower taxation for its citizens in order to promote increased demand and GDP. In theory this would promote increased consumer expenditure and lead to an increase in GDP for the nation. However, there are complications such as the government going into debt, money being saved by consumers and increased inflation. 1.How do economists calculate the multiplier?
The multiplier shows the ratio between the estimated GDP (Gross Domestic Product) and injections (investment, government spending) of a country. Dividing the injections by the gross domestic product gives us the multiplier which shows us the estimated GDP in dollars (or currency of that nation) for every dollar spent through injections.

2.What are leakages from the circular flow that reduce the multiplier effect?
Leakages are flows of income tat leave the circular flow of income. Examples of leakages are savings, imports and taxation. They reduce the multiplier effect as they cause the estimated GDP to go down. Savings mean that money is being saved instead of spent on products, therefore less is demanded and less is produced. Imports mean that money is going out of the country to pay for goods produced by that country, also reducing GDP in host country. Taxation also reduces demand as it reduces the real income of consumers.

3.Explain the link between the accelerator model and the multiplier.
The accelerator effect shows the growth in demand for a business’s product brought on by increased investment. This is linked to the multiplier effect as investment is an injection while the growth in demand leads to increase in GDP.

4.What would multipliers for other injections such as export receipts or investment look like? Would they be higher or lower than multipliers for taxation or government spending?
I think this would differ from nation to nation and that additional quantitative data would be required to measure the effects. However, I think that injections such as investment or export receipts would be less effective than taxation or government spending. This is because taxation and government spending affects the entire nation where as export receipts and investment only affect some.

5.Evaluate the effectiveness of fiscal stimulus to increase the level of economic activity.
Fiscal stimulus would mean to increase government spending and lower taxation for its citizens in order to promote increased demand and GDP. In theory this would promote increased consumer expenditure and lead to an increase in GDP for the nation. However, there are complications such as the government going into debt, money being saved by consumers and increased inflation.

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]]> By: aaxler2 http://welkerswikinomics.com/blog/2009/04/17/the-potency-of-government-spending-and-taxation/comment-page-2/#comment-22468 aaxler2 Thu, 15 Mar 2012 07:04:59 +0000 http://welkerswikinomics.com/blog/?p=926#comment-22468 Your comments on fiscal stimulus are particularly interesting. I think many of us consider fiscal stimulus just to mean increased government spending without necessarily lowering taxation. I'm not sure I agree though that it can negatively impact the economy. I think it can be nearly pointless like the bridge to nowhere, but still at least in a small way stimulates growth. Your comments on fiscal stimulus are particularly interesting. I think many of us consider fiscal stimulus just to mean increased government spending without necessarily lowering taxation. I'm not sure I agree though that it can negatively impact the economy. I think it can be nearly pointless like the bridge to nowhere, but still at least in a small way stimulates growth.

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]]> By: aaxler2 http://welkerswikinomics.com/blog/2009/04/17/the-potency-of-government-spending-and-taxation/comment-page-2/#comment-22467 aaxler2 Thu, 15 Mar 2012 07:02:34 +0000 http://welkerswikinomics.com/blog/?p=926#comment-22467 1.How do economists calculate the multiplier? 1.Economists calculate the multiplier by looking at how much the GDP has increased relative to the injection. Whether the injection be stimulus or tax cuts. This is done by dividing the change in GDP by the amount of new money introduced, the quotient gives the multiplier 2.What are leakages from the circular flow that reduce the multiplier effect? 1.Potentially leakages are people saving money or people just not spending money. Also government spending that is unnecessary like the bridge to no where. 3.Explain the link between the accelerator model and the multiplier. 1.The accelerator model states that speed at which an asset is moving towards its full value is exponential. That is to say that as time passes the rate at which it is moving increases. This can be used to show what looks like economic momentum where as only part of the economy is failing it can cause other parts to fail. Similarly the multiplier model shows how one investment and spur the growth of another. 4.What would multipliers for other injections such as export receipts or investment look like? Would they be higher or lower than multipliers for taxation or government spending? 1.The multipliers for injections like exports or investments would be substantial. These things carry great weight within our economy. However, the weigh carried by taxation or government spending is the highest multiplier of all. 5.Evaluate the effectiveness of fiscal stimulus to increase the level of economic activity. 1.This question really depends on whether one subscribes to neo-classical or Keynesian theory. From the article it appears that fiscal stimulus is not very effect in that it’s multiplied is only 1.4 where tax cuts have a multiplier of 3. 1.How do economists calculate the multiplier?
1.Economists calculate the multiplier by looking at how much the GDP has increased relative to the injection. Whether the injection be stimulus or tax cuts. This is done by dividing the change in GDP by the amount of new money introduced, the quotient gives the multiplier
2.What are leakages from the circular flow that reduce the multiplier effect?
1.Potentially leakages are people saving money or people just not spending money. Also government spending that is unnecessary like the bridge to no where.
3.Explain the link between the accelerator model and the multiplier.
1.The accelerator model states that speed at which an asset is moving towards its full value is exponential. That is to say that as time passes the rate at which it is moving increases. This can be used to show what looks like economic momentum where as only part of the economy is failing it can cause other parts to fail. Similarly the multiplier model shows how one investment and spur the growth of another.
4.What would multipliers for other injections such as export receipts or investment look like? Would they be higher or lower than multipliers for taxation or government spending?
1.The multipliers for injections like exports or investments would be substantial. These things carry great weight within our economy. However, the weigh carried by taxation or government spending is the highest multiplier of all.
5.Evaluate the effectiveness of fiscal stimulus to increase the level of economic activity.
1.This question really depends on whether one subscribes to neo-classical or Keynesian theory. From the article it appears that fiscal stimulus is not very effect in that it’s multiplied is only 1.4 where tax cuts have a multiplier of 3.

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]]> By: Konstantin Frank http://welkerswikinomics.com/blog/2009/04/17/the-potency-of-government-spending-and-taxation/comment-page-1/#comment-22449 Konstantin Frank Wed, 14 Mar 2012 10:23:43 +0000 http://welkerswikinomics.com/blog/?p=926#comment-22449 I think it is important to state that cuts in taxes can also effect the supply - side, as companies might be able to produce more at the same price. Therefore it would shift the whole equilibrium to the right. I think it is important to state that cuts in taxes can also effect the supply – side, as companies might be able to produce more at the same price. Therefore it would shift the whole equilibrium to the right.

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]]> By: Konstantin Frank http://welkerswikinomics.com/blog/2009/04/17/the-potency-of-government-spending-and-taxation/comment-page-2/#comment-22448 Konstantin Frank Wed, 14 Mar 2012 10:22:13 +0000 http://welkerswikinomics.com/blog/?p=926#comment-22448 1. How do economists calculate the multiplier? They divide the estimated change of the GDP by the amount of the injection (government spending, tax cut etc.) 2. What are leakages from the circular flow that reduce the multiplier effect? Leakages in the circular flow model are Savings (S) and money that is spend on imports (M). 3. Explain the link between the accelerator model and the multiplier. The accelerator model explains why a certain value will reach its aim faster with the time passing by. The model is also showing that people will spend more money on goods once the government started spending money. It is like a spiral. Increased demand will increase supply, the increased supply will lead to higher wages, which leaves people with more money. This money again increased the aggregate demand, and so on. 4. What would multipliers for other injections such as export receipts or investment look like? Would they be higher or lower than multipliers for taxation or government spending? I think they would look similar and would have about the same uncertain effect, as they, as the tax cuts and government spendings, depend on the consumer confidence. 5. Evaluate the effectiveness of fiscal stimulus to increase the level of economic activity. Apparently, the effectiveness of fiscal stimulus to increase the level of economic activity depends on the consumers. If the government cuts back on taxes, people might just save the money or invest it in imports. On the other hand they can be really effective as it can be seen with tax cuts, that are more than double as effective as government spendings. There is no obvious reason for this. 1. How do economists calculate the multiplier?
They divide the estimated change of the GDP by the amount of the injection (government spending, tax cut etc.)

2. What are leakages from the circular flow that reduce the multiplier effect?
Leakages in the circular flow model are Savings (S) and money that is spend on imports (M).

3. Explain the link between the accelerator model and the multiplier.
The accelerator model explains why a certain value will reach its aim faster with the time passing by. The model is also showing that people will spend more money on goods once the government started spending money. It is like a spiral. Increased demand will increase supply, the increased supply will lead to higher wages, which leaves people with more money. This money again increased the aggregate demand, and so on.

4. What would multipliers for other injections such as export receipts or investment look like? Would they be higher or lower than multipliers for taxation or government spending?
I think they would look similar and would have about the same uncertain effect, as they, as the tax cuts and government spendings, depend on the consumer confidence.

5. Evaluate the effectiveness of fiscal stimulus to increase the level of economic activity.
Apparently, the effectiveness of fiscal stimulus to increase the level of economic activity depends on the consumers. If the government cuts back on taxes, people might just save the money or invest it in imports. On the other hand they can be really effective as it can be seen with tax cuts, that are more than double as effective as government spendings. There is no obvious reason for this.

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]]> By: rthornton2 http://welkerswikinomics.com/blog/2009/04/17/the-potency-of-government-spending-and-taxation/comment-page-2/#comment-22443 rthornton2 Wed, 14 Mar 2012 02:22:04 +0000 http://welkerswikinomics.com/blog/?p=926#comment-22443 Clatters! I completely agree with your response to #5. With a fiscal stimulus, government expenditure would increase - this would increase aggregate demand. Supply always follows demand, right? So then the overall level of economic activity would increase... Clatters!
I completely agree with your response to #5. With a fiscal stimulus, government expenditure would increase – this would increase aggregate demand. Supply always follows demand, right? So then the overall level of economic activity would increase…

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]]> By: rthornton2 http://welkerswikinomics.com/blog/2009/04/17/the-potency-of-government-spending-and-taxation/comment-page-2/#comment-22442 rthornton2 Wed, 14 Mar 2012 02:08:22 +0000 http://welkerswikinomics.com/blog/?p=926#comment-22442 1.How do economists calculate the multiplier? Economics calculate the multiplier by calculating the change in GDP of an economy divided by the value of the injection into the economy. 2.What are leakages from the circular flow that reduce the multiplier effect? The leakages from the circular flow that reduce the multiplier effect include: savings, taxes, and money spent on imported goods. 3.Explain the link between the accelerator model and the multiplier. The accelerator model, depending on the specific circumstances, can influence the multiplier. An increase in government spending would act as an incentive for firms to invest more into the economy. 4.What would multipliers for other injections such as export receipts or investment look like? Would they be higher or lower than multipliers for taxation or government spending? I believe that the multipliers for injections such as export receipts or investments would be lower than multipliers for taxation or government spending. 5.Evaluate the effectiveness of fiscal stimulus to increase the level of economic activity. Fiscal stimulus can be quite effective to increase the level of economic activity. Fiscal stimulus can increase aggregate demand by increasing government spending and consumer spending. Aggregate supply always follows the trend of the aggregate demand curve, so the general level of economic activity would increase. 1.How do economists calculate the multiplier?

Economics calculate the multiplier by calculating the change in GDP of an economy divided by the value of the injection into the economy.

2.What are leakages from the circular flow that reduce the multiplier effect?

The leakages from the circular flow that reduce the multiplier effect include: savings, taxes, and money spent on imported goods.

3.Explain the link between the accelerator model and the multiplier.

The accelerator model, depending on the specific circumstances, can influence the multiplier. An increase in government spending would act as an incentive for firms to invest more into the economy.

4.What would multipliers for other injections such as export receipts or investment look like? Would they be higher or lower than multipliers for taxation or government spending?

I believe that the multipliers for injections such as export receipts or investments would be lower than multipliers for taxation or government spending.

5.Evaluate the effectiveness of fiscal stimulus to increase the level of economic activity.

Fiscal stimulus can be quite effective to increase the level of economic activity. Fiscal stimulus can increase aggregate demand by increasing government spending and consumer spending. Aggregate supply always follows the trend of the aggregate demand curve, so the general level of economic activity would increase.

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]]> By: kfletcher2 http://welkerswikinomics.com/blog/2009/04/17/the-potency-of-government-spending-and-taxation/comment-page-2/#comment-22439 kfletcher2 Wed, 14 Mar 2012 00:35:32 +0000 http://welkerswikinomics.com/blog/?p=926#comment-22439 Hello, I agree with your response, although I have a question about whether the taxes should be considered a leakage in this case as they will be reused for fiscal policies in the future. Hello, I agree with your response, although I have a question about whether the taxes should be considered a leakage in this case as they will be reused for fiscal policies in the future.

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]]> By: kfletcher2 http://welkerswikinomics.com/blog/2009/04/17/the-potency-of-government-spending-and-taxation/comment-page-2/#comment-22438 kfletcher2 Wed, 14 Mar 2012 00:24:08 +0000 http://welkerswikinomics.com/blog/?p=926#comment-22438 1.How do economists calculate the multiplier? Economists would calculate the multiplier by taking the ration between the increase in the GDP and the amount of money spent or lost in the fiscal policy. 2.What are leakages from the circular flow that reduce the multiplier effect? The main leakage would be savings, as people who do not have faith that the economy will become more stable or wants to save in case of emergency will save money for the future. 3.Explain the link between the accelerator model and the multiplier. Both the accelerator model and the multiplier measure the increase in GDP. However the accelerator model is more focused on firms while the multiplier on households. The accelerator model states that a rise in GDP is gained through investment, while the multiplier model is based on that an increase in spending will raise the GDP. 4.What would multipliers for other injections such as export receipts or investment look like? Would they be higher or lower than multipliers for taxation or government spending? I believe that the multiplier for government spending or taxation would be greater than those of investment and exports, because government intervention is spent to directly change the GDP and effects the entire country, and while investment would have a high GDP because it would lead to an increase in income in the long term, but only for those that invested. 5.Evaluate the effectiveness of fiscal stimulus to increase the level of economic activity. Fiscal stimulus increases the level of economic activity by cutting taxes or creating businesses. This raises the demand as people now have more money to spend on buying goods, which in turn stimulates the economy and raises GDP. Overall fiscal stimulus are effective, although some methods are generally better than others. 1.How do economists calculate the multiplier?
Economists would calculate the multiplier by taking the ration between the increase in the GDP and the amount of money spent or lost in the fiscal policy.

2.What are leakages from the circular flow that reduce the multiplier effect?
The main leakage would be savings, as people who do not have faith that the economy will become more stable or wants to save in case of emergency will save money for the future.

3.Explain the link between the accelerator model and the multiplier.
Both the accelerator model and the multiplier measure the increase in GDP. However the accelerator model is more focused on firms while the multiplier on households. The accelerator model states that a rise in GDP is gained through investment, while the multiplier model is based on that an increase in spending will raise the GDP.

4.What would multipliers for other injections such as export receipts or investment look like? Would they be higher or lower than multipliers for taxation or government spending?
I believe that the multiplier for government spending or taxation would be greater than those of investment and exports, because government intervention is spent to directly change the GDP and effects the entire country, and while investment would have a high GDP because it would lead to an increase in income in the long term, but only for those that invested.

5.Evaluate the effectiveness of fiscal stimulus to increase the level of economic activity.
Fiscal stimulus increases the level of economic activity by cutting taxes or creating businesses. This raises the demand as people now have more money to spend on buying goods, which in turn stimulates the economy and raises GDP. Overall fiscal stimulus are effective, although some methods are generally better than others.

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]]> By: ssewell http://welkerswikinomics.com/blog/2009/04/17/the-potency-of-government-spending-and-taxation/comment-page-1/#comment-22430 ssewell Tue, 13 Mar 2012 22:31:45 +0000 http://welkerswikinomics.com/blog/?p=926#comment-22430 I think you've explained the article very clearly and concisely, and it was well pointed out that spending on imports is a leakage. I also really like how you have applied the idea of leakages to your evaluation at the end. I think you've explained the article very clearly and concisely, and it was well pointed out that spending on imports is a leakage. I also really like how you have applied the idea of leakages to your evaluation at the end.

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]]> By: ssewell http://welkerswikinomics.com/blog/2009/04/17/the-potency-of-government-spending-and-taxation/comment-page-2/#comment-22428 ssewell Tue, 13 Mar 2012 22:22:31 +0000 http://welkerswikinomics.com/blog/?p=926#comment-22428 1. Economists calculate the multiplier by measuring the increase in GDP triggered by one dollar of government spending. 2. The multiplier effect is reduced by the leakage of saving, because consumers do not instantly spend after a tax decrease. If there is low confidence they will save the money which is no longer taken up by taxes. 3. Both the accelerator model and the multiplier effect demonstrate that a small decrease of taxation or increase in government expenditure can lead to greater overall spending in the economy. 4. Multipliers for other injections would probably not be as significant, because they would not affect all consumers. For example, profits from exports would only impact sellers, whereas a decrease in taxation would have an impact on most of the country. 5. From the article, this sort of fiscal policy does not seem very effective, as spending of one dollar only leads to an increase in GDP of $1.4. The multiplier effect of decreases in taxation has a larger effect (an increase of $3 for each dollar of tax reduced), but this still seems quite low without further statistics to compare it with. 1. Economists calculate the multiplier by measuring the increase in GDP triggered by one dollar of government spending.

2. The multiplier effect is reduced by the leakage of saving, because consumers do not instantly spend after a tax decrease. If there is low confidence they will save the money which is no longer taken up by taxes.

3. Both the accelerator model and the multiplier effect demonstrate that a small decrease of taxation or increase in government expenditure can lead to greater overall spending in the economy.

4. Multipliers for other injections would probably not be as significant, because they would not affect all consumers. For example, profits from exports would only impact sellers, whereas a decrease in taxation would have an impact on most of the country.

5. From the article, this sort of fiscal policy does not seem very effective, as spending of one dollar only leads to an increase in GDP of $1.4. The multiplier effect of decreases in taxation has a larger effect (an increase of $3 for each dollar of tax reduced), but this still seems quite low without further statistics to compare it with.

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]]> By: smarttikalevi2 http://welkerswikinomics.com/blog/2009/04/17/the-potency-of-government-spending-and-taxation/comment-page-2/#comment-22427 smarttikalevi2 Tue, 13 Mar 2012 22:15:02 +0000 http://welkerswikinomics.com/blog/?p=926#comment-22427 @Allan Gramacho It looks like I would agree with you on almost everything, although we don't have the same answers. You have given a more thorough explanation on the first question, which in a way is very effective. You say in the question number 5 that fiscal stimulus "seems to have worked in the US to recover from the recession". Would this be possible in every country? If not, why? @Allan Gramacho
It looks like I would agree with you on almost everything, although we don't have the same answers. You have given a more thorough explanation on the first question, which in a way is very effective. You say in the question number 5 that fiscal stimulus "seems to have worked in the US to recover from the recession". Would this be possible in every country? If not, why?

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