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ECO 2121 Study Guide - Midterm Guide: Portfolio Investment

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ivoryscorpion387
25 Feb 2016
School
University of Ottawa
Department
Economics
Course
ECO 2121
Professor
Ram Acharya

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Document Summary

The country"s foreign wealth is high because it is earning more than it is spending which means that it has more assets than liabiliies: the higher the negaive fa, the larger the increase in foreign wealth. Canada"s fa has been negaively increasing throughout the past decades and therefore its wealth has been increasing. The other diference is that gdp conines itself to domesic producion, and gndi includes income lows with the rest of the world. Gndi provides a much beter indicator than the gdp of the living standard of the people of a country as it includes all incomes transferred (i. e. remitances).

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Related Questions

WRITE a one-sentence summary of each paragraph!

The False Income-Inequality Narrative

BY JASON L. RILEY

Published in the Wall Street Journal on Sept. 29, 2015

An enduring theme of the Democratic presidential race has been income inequality, coupled with an enduring belief that America's affluent reached their status at the expense of the poor and the middle class.

Bernie Sanders speaks of little else on the stump. And when not busy dissembling on her handling of email correspondence at the State Department, Hillary Clinton will tell you that the deck is still stacked in favor of those at the top. If Joe Biden gets in, expect more of the same. The vice president is said to be contemplating a 2016 bid in large part because struggling middle-income families may have trouble relating to Mrs. Clinton on inequality given her high living since leaving the White House.

This theme, in any case, seems to resonate with voters, which is no huge shock in the sixth year of an economic recovery. Envy and resentment fuel class warfare and lackluster economic growth throughout the Obama presidency have made people less optimistic and more inclined to fault others for their circumstances. A Wall Street Journal/NBC News poll this week reports that four-in-five Americans “were either angry because our political system seems to only be working for the insiders with money and power or anxious and uncertain. After all, the economy still feels rocky and unpredictable or both.

Liberals want to address income disparities through wealth redistribution by taking money from more productive people and giving it to the less productive in the name of fairness as the left defines it. They want to raise income taxes, expand the welfare state, lift minimum wages, and strengthen the bargaining power of unions. Mr. Sanders has been the most explicit about this, even going so far as to propose a wealth tax. Our economic goals have to be redistributing a significant amount of [wealth] back from the top 1%, the senator said in July.

In reality, the left has overstated the problem. And all the focus on divvying up existing wealth instead of creating more risks making matters far worse for the people they are trying to help and the country in general. To the extent that the expanding welfare state allows more people to live without working and therefore without earning income or developing their own human capital—supporters of the welfare state are contributing to the very income disparities they so much decry, writes economist Thomas Sowell in his new book, “Wealth, Poverty and Politics.

Mr. Sowell is the author of more than 30 books over the past four decades, many having to do with what drives different social and economic outcomes among different groups in the U.S. and elsewhere. In his latest tome, he draws from this well of research to do what he has done so well for so long: question basic assumptions behind public policy and follow the facts where they lead him.

One common assumption is that proportionate or random outcomes are the natural order of things and that gaps or disparities are evidence of something wrong. In fact, huge disparities are the norm, not the exception, because the demographic, cultural, and political factors that influence the development of the human capital that makes people productive also tend to be unequal.

In 2013, only 9% of U.S. women with college degrees who gave birth were unmarried, versus 61% of women who were high-school dropouts and unmarried. Harvard's Robert Putnam reports that children from professional families will hear 19 million more words than their working-class peers before the first day of kindergarten.

These children don't have the same prospects. Equal opportunity, in the sense of being judged and rewarded by the same standards as others, cannot possibly mean equal life chances for children born and raised in these very different settings,writes Mr. Sowell. The fact that life is unfair is not the same as saying that a particular institution, or a particular society, is unfair.

The argument that social mobility is a thing of the past in the U.S. also is disputable. Longitudinal studies by the IRS and others that measure the progress of individuals over time show that the American dream is alive and well. One such paper, published by the Pew Charitable Trusts in 2012, measured whether a person has more or less income, earnings, or wealth than his or her parents did at the same age and concluded that the vast majority of Americans had higher incomes, while 50% had greater wealth.

In other studies, Pew has found generational stagnation but the authors have noted that it didn't apply to immigrants. If low-income immigrants can rise even when the native-born don't, writes Mr. Sowell, that strongly suggests that American society continues to offer opportunities to move up economically, but that not all groups make the same use of these opportunities.

Mr. Riley, a Manhattan Institute senior fellow and Journal contributor is the author of Please Stop Helping Us: How Liberals Make It Harder for Blacks to Succeed (Encounter Books, 2014).

Question 3

According to Joseph Schumpeter, the theory of creative destruction describes a process by which

A

some new products unleash a gale of destruction that drive other new products out of the market.
B

new products unleash a gale of destruction that drives old products out of the market.
C

new products are created by the destruction of capital.
D

the creation of new products never involves the destruction of old products.

Question 4

Which of the following countries had the highest GDP per capita in 2012?

A Qatar
B

United States
C

Japan
D

Norway

Question 5

________ save a ________ of their income. This ________ capital in their economy and raises economic growth.

A

Developing countries; large proportion; decreases
B

Developing countries; small proportion; increases
C

High-income countries; large proportion; increases
D

High-income countries; small proportion; increases

Question 6

The demand for loanable funds is determined by the willingness of ________ to borrow money to engage in new investment projects.

A

A

government
B

households
C

banks
D

firms

Question 7

The U.S. economy has been more stable since 1950.

True

False

Question 8

When the economy reaches a trough in a business cycle, which of the following will occur?

A

Income, production, and employment will continue to fall.
B

Income, production, and employment will begin to rise.
C

Income and production will rise, but employment will continue to fall.
D

Employment rises, but income and production will continue to fall.

Question 9

In a closed economy, what is the relationship between saving and investment?

A

Saving is greater than investment.
B

Investment is greater than saving.
C

Investment is equal to saving.
D

Investment may be greater or smaller than saving.

Question 10

The per-worker production function shows the relationship between ________ per hour worked and ________ per hour worked, holding ________ constant.

A

labor; real GDP; technology
B

capital; real GDP; technology
C

labor; capital; real GDP
D

capital; labor; real GDP

Question 11

New growth theory states that increases in ________ capital will result in ________ at the ________ level.

A

knowledge; increasing returns to scale; firm
B

physical; decreasing returns to scale; firm
C

knowledge; decreasing returns to scale; economy
D

knowledge; increasing returns to scale; economy

Question 12

Which of the following is not a reason why the Industrial Revolution occurred when and where it did?

A

The British government was committed to upholding private property rights.
B

The British government was able to eliminate arbitrary increases in taxes.
C

The British government was able to more easily seize wealth.
D

Institutional changes by the British government helped protect wealth.

Question 13

Growth in real GDP per capita for the world economy was greatest during

A

the seventeenth century.
B

the eighteenth century.
C

the nineteenth century.
D

the twentieth century.

Question 14

Which of the following is a normative statement about economic growth?

A

Economic growth is associated with higher labor productivity growth.
B

Economic growth increases GDP per capita.
C

Economic growth hurts developing countries.
D

Foreign direct investment stimulates economic growth.

Question 15

The effect of a recession on a company like Whirlpool Corporation is such that

A

sales decline more sharply for Whirlpool as compared to firms that do not produce durable goods.
B

profits fall less sharply as compared to firms that do not produce durable goods.
C

the decline in sales is more short-lived as compared to firms that do not produce durable goods.
D

there is no difference in the impact of the recession on its profits as compared to firms that do not produce durable goods.

Question 16

For the recessions in the United States since the 1950s,

A

cyclical unemployment has been non-existent.
B

unemployment rises on average by about 1.2 percentage points 12 months after a recession begins.
C

unemployment falls on average by 2 percentage points 12 months after a recession begins.
D

unemployment rises on average about 5 percentage points 12 months after a recession begins.

Question 17

You are an economic advisor to the president. You are asked to recommend a policy to promote long-term economic growth in the economy. Which of the following policies would you choose?

A

a reduction in sales taxes
B

an investment tax credit
C

a reduction in taxes on luxury yachts
D

All of these

Question 18

In comparison to a government that runs a balanced budget, when the government runs a budget deficit,

A

the equilibrium interest rate will fall.
B

business investment will fall.
C

household savings will fall.
D

None of these

Question 19

If labor productivity growth slows down in a country, this means that the growth rate in ________ has declined.

A

labor force participation
B

the quantity of goods or services that can be produced by one hour of work
C

the working-age population
D

nominal GDP

Question 20

Policies to promote growth by increasing saving and investment work through

A

decreasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital.
B

increasing the supply of loanable funds, increasing the interest rate, raising the level of investment in physical capital.
C

increasing the supply of loanable funds, lowering the interest rate, lowering the level of investment in physical capital.
D

increasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital.

 
After reading the article, post substantive comments on the economic impact of the Tax Cuts and Jobs Act of 2017.
 
THE ECONOMIC IMPACT OF THE TRUMP TAX CUTS
April 25, 2018
The Economic Impact of the Trump Tax Cuts
By Hilary Schmidt, International Banker
 
On December 22, US President Donald Trump signed into law the Tax Cuts and Jobs Act of 2017. The legislation is one of the most radical changes to fiscal policy the United States has undertaken in decades, with sweeping amendments implemented across the entire breadth of the tax code. Indeed, in his State of the Union Address, Trump called it the biggest tax cuts and reforms in American history. As such, its impact is likely to be felt throughout the economy for quite some time to come.
 
It is arguably the cut in a corporate tax that forms the centrepiece of this new legislation, with the rate being cut from 35 to 21 per cent. That puts the new rate broadly in line with the worldwide average, which as measured by the Tax Foundation across 202 jurisdictions currently stands at 22.96 per cent or 29.41 per cent when weighted by gross domestic product (GDP). Corporations will also stop having to pay corporate tax on any income earned from foreign operations, while such money that is brought back home will be taxed between 8 and 15.5 per cent, significantly lower than the 35-per cent tax they are currently paying.
 
Republicans believe such substantial cuts will spur a massive influx of business investment that will eventually lead to higher average wages for Americans. For example, Texas Congressman Mike Conaway stated, It's in all of our best interest to have these tax cuts for corporations so that they will have more money to invest in their business and pay their workers. But much of the research conducted thus far suggests otherwise; the Center on Budget and Policy Priorities, for instance, recently concluded that workers would receive a maximum of only a quarter of the benefits from tax cuts; and even then, it is most likely to be the higher earners that would be the biggest beneficiaries.
 
Another piece of evidence to which analysts are pointing is data from S&P Dow Jones Indices, which shows that non-financial companies in the S&P 500 are already flush with cash at the moment, having between them an estimated $1.63 trillion. And despite this vast sum of cash, an investment boom has not transpired. Indeed, some top companies have made it explicitly clear that any tax relief they receive from the reforms will be primarily used to increase dividends and buy back stock to boost share prices. Amgen CEO Robert Bradway, for example, said We've been actively returning capital in the form of growing dividend and buyback, and expect us to continue that. And in terms of what businesses planned to do with any profit returned from abroad, a Bank of America Merrill Lynch survey of more than 300 CEOs found that paying down debt and stock buybacks were by far and away from the biggest priorities for businesses.
 
The other major pillar of the reform is the cuts that have been enacted for individual income earners, with middle-class taxpayers earning between $19,050 and $77,400 per year receiving a cut in tax from 15 to 12 per cent. Higher-bracket earners, meanwhile, will see their tax rates go from 25 to 22 percent (for incomes between $77,400 and $165,000); 33 to 24 percent ($165,000 to $315,000); and 39.6 to 35 percent ($400,000 to $600,000). And as far as analysis from the Tax Center is concerned, after-tax income will increase by an average of 2.2 per cent across all groups. However, all of this changes after a few years, due to official budget rules that limit the cost of the bill to $1.5 trillion in total which therefore means that to make the corporate tax cuts permanent, the individual tax relief will expire by 2025. As such, a tax increase will likely result by 2027, which, according to projections by the Tax Policy Center, will impact 53 per cent of Americans.
 
Whether the overall impact will be a net positive or negative for the US economy remains to be seen at this stage, therefore. While most analysis produced to date agrees that economic growth will receive a boost in the short-term, the predictions that have so far come in have been decidedly more mixed and less sure for longer time horizons. The non-partisan Joint Committee on Taxation of the US Congress expects the gross domestic product to be 0.8 per cent higher on average each year during the next 10 years than baseline forecasts, thanks mainly to an expected increase in labour supply and business investment. According to the independent non-profit research organisation the Tax Foundation, meanwhile, the plan will primarily reduce marginal tax rates and the cost of capital. In turn, this will lead to a 1.7-per cent rise in GDP over the long-term, a 1.5-per cent increase in wages and a further 339,000 full-time equivalent jobs. This year, moreover, will see GDP growth being posted at 2.45 per cent, compared to baseline growth of 2.01 per cent.
 
But most analysts see the economic benefits tapering off much sooner than the 10 years asserted by the Joint Committee on Taxation. Goldman Sachs, for example, believes the tax cuts will only slightly boost growth in the short-term before fading quickly. Alec Phillips and Blake Taylor, analysts on Goldman's US economic-analysis team, stated in December that the bank's estimate of the growth effects of the legislation in 2018 and 2019 would be 0.3 per cent per year, before dropping off. Indeed, Phillips and Taylor warn that the legislation may end up damaging the economy in the long run: We note that the effect in 2020 and beyond looks minimal and could be slightly negative.
 
Some also point to the fact that the cuts will drastically deepen the national debt, with Maya MacGuineas of the Committee for a Responsible Federal Budget estimating an additional $1.5 trillion will be added to the $10 trillion already forecast for the next decade. As she explained, Instead of trickling down economic growth, the House plan will unleash a tidal wave of debt that will ultimately slow wage growth and hurt the economy. She seems to have a point the debt today is 77 per cent of GDP, much higher than the 31 per cent in place when the 2001 Bush tax cuts were passed, and the highest it has ever been save for the period just after World War II. What's more, given that interest rates could well rise faster than expected as a result of the likely ballooning of the debt, it may well dampen the expected boost to business-capital expenditure, consumer spending and wage growth.
 
Indeed, the arbiter of monetary policy itself, the Federal Reserve, has indicated that it remains somewhat unsure of the overall impact of the tax cuts. According to the released minutes of the central bank's December meeting, growth will only modestly be boosted, with members of the Fed's board and presidents of its member regional banks saying they expect real GDP growth of just 2.2-2.6 per cent and a median expectation of 2.5 per cent growth for this year. The comparatively tempered projections are reflective of the debate within the Fed over just how much of a boost business investment and consumer spending will receive from the tax cuts.
 
According to the minutes, Many participants judged that the proposed changes in business taxes, if enacted, would likely provide a modest boost to capital spending, although the magnitude of the effects was uncertain. While they are highly likely to have a positive effect on economic growth, the Fed also warned that much of the extra cash that is generated is more likely to be utilised for mergers and acquisitions or debt reduction and stock buybacks. Moreover, the boost to consumer spending may have already occurred in part on the back of realised future tax-cut expectations.
 
Ultimately, it may be too soon to make any firm conclusions about how impactful the tax cuts will eventually be; but given that the US economy is already experiencing strong economic growth, and given that virtually all the signs point to an economy operating at full employment and therefore, at full capacity such sweeping reforms that have been at least partly designed as an economic stimulus could well be dangerous. The impact on inflation and debt may well force the Fed to hike rates more than the three times that back in December it had projected for 2018. Time will tell.