Question

Discuss the following:

1. Income distribution effects

2. Resource allocation effects

3. Domestic production and consumption effects

4. Government revenues effects

5. Price of the goods effects

Answer 1

(a) Income Distribution Effects : Income distribution is the key component in Macroeconomics, which says that how much income is generated through rich and poor in an economy. Unequal income distribution effects can help growing an poor economy because some of the people in an economy become business tycoons who helps in pushing the economy upwards. Whereas unequal distribution of income in middle and rich economies reduces the overall output and drag the economy down because it increases the wealth gap between rich and poor which helps in only some part of the population growing while major part is still suffering to survive, that major part creates resentment in the economy which drag the economy. Gini Coefficient which shows us the income distribution effect in an economy. The value of it ranges between 0 to 1. Higher unequal distribution shows 1 and equal distribution shows 0.

(b) Resource allocation : As we have scarce resources in our economy, we needs to allocate the resources efficiently which increases productivity. We as human wants everything but there are some restrictions with respect to income and wealth and there comes the part of trade off in the economy. We need to trade off between goods where we have to sacrifice one good over other. Resources in the economy should be allocated in such a way that the outcome must be Pareto equilibrium where one cannot get anything without hurting someone.

(c) Domestic production and consumption : Domestic production and consumption tells us about the trade pattern in the economy. If the production > consumption, then there must be exports from the economy to all over the world and the country gets benefit from the balance of payments surplus. If production < consumption, then there must be imports in the economy from rest of the world as country needs resources to feed the population, thus country faces deficit in the balance of payments. Generally a country export that good in which they have comparative advantage of that good and produces that good in excess and import that good in they wants much resources to produce.

(d) Government revenue : It is a major source of revenue of government which they collects from taxation in the economy. Government in exchange of taxation spend on their public. They provide them basic amenities like roads, dams, bridges, schools, hospitals, colleges etc., through which a poor person can take facilities. Government majorly charges progressive tax in which they collect more tax as income rises, so an rich person is liable to pay more tax.

(e) Price of the goods : It determines the customer base of that product in the market. If the price is high they attracts less customers and vice versa. There exist a negative relationship between price and quantity demanded of that product. There are cases of luxury goods (exceptions) in the market which have such a high price and high demand.