Economics IA Portfolio - Final PDF

Preview

Summary

Final Economic IA portfolio; grade received: 7...

Description

Table of Contents 1. Microeconomic Article: “Research Backs Kerela's Fat Tax for India”………… 2 - 3 Microeconomic Commentary…………………………………………………….. 4 - 6 2. Macroeconomic Article: “Catalonia unemployment jumps as political crisis drags on”…………………………………………………………………………………… 7 Macroeconomic Commentary…………………………………………………….. 8 - 11 3. International Trade Article: “President Trump's trade team is getting tougher on Canada”……………………………………………………………………………. 12 - 13 International Trade Commentary……………………………………………… 14 - 16

1

Research Backs Kerela's Fat Tax for India LUCKNOW: Months after Kerala government proposed a 14.5% fat tax on burgers, pizzas and other junk food served in branded restaurants, a battery of researchers have backed taxation on unhealthy food to cut down the risk of diabetes, cardiovascular disease and chronic kidney disease in South Asia. The team of researchers, whose work has made it to the British Medical Journal's April 11 edition, included Prof Anoop Mishra of National Diabetes, Obesity and Cholesterol Foundation India, Prof Nikhil Tandon, department of endocrinology, All India Institute of Medical Sciences besides others. The key message given in the article called Diabetes, Cardiovascular disease and chronic kidney disease in south Asia:: current status and future direction read: "South Asians are more likely than other ethnicity to develop diabetes, cardiovascular diseases and chronic kidney disease. Also, they have an earlier onset and poor outcomes. Thus, strategies for early diagnosis and treatment including awareness generation, opportunistic screening, availability of low cost drugs and task shifting to health workers mist be prioritised. Countries must consider taxation on unhealthy foods, restrictions on advertising, and appropriate food labelling." Noting that cardiovascular disease, diabetes, and chronic kidney disease now account for 27%, 4.0%, and 3.0% of deaths respectively, in South Asia, the article said, "a tax of 20% on sugar sweetened drinks in India is projected to reduce the prevalence of overweight and obesity by 3.0% and the incidence of type 2 diabetes by 1.6% over the period 2014-23, assuming that consumption increases in line with current trends." Citing the example of Mexico, they noted that an excise tax of 10% on sugar sweetened drinks decreased consumption by an average of 6% over one year. They clearly batted for Kerela's fat tax strategy stating, "The Indian state of Kerala recently announced a "fat tax" on pizzas, burgers, sandwiches, and tacos sold through branded food outlets. Such strategies must be adopted in cities of South Asia that experience widespread marketing and consumption of unhealthy fast foods. Furthermore, a 20% tax on palm oil purchases in India is projected to avert approximately 363 000 deaths from myocardial infarctions and strokes over the period 2014-23 (1.3% reduction in cardiovascular deaths). Palm oil is consumed widely in low and middle income countries. It is high in saturated fat and causes a large increase in cholesterol concentrations. Diabetes burden has doubled in the last 10 years from 3.2 crores to 6.3 crores and is projected to grow to 10.12 crores in the next 15 years. Similarly, prevalence of obesity is also as high as 22% among adults as well as children in India. Hypertension is also fast growing in India with a prevalence rate of 25.4% among adults. "With this

2

background, the work offers insight and hope of significantly reducing India's diabetes burden and number of deaths due to cardiovascular diseases in less than a decade. The idea of taxation is worth a thought," said Prof Nirmal Gupta, head of cardiovascular and thoracic surgery department, Sanjay Gandhi Post Graduate Institute of Medical Sciences.

3

The article published by the Times of India, explains the recently implemented tax on junk food in India. India currently has implemented a 14.5% tax on junk food served in branded restaurants in order to reduce the risk of diabetes and cardiovascular diseases. The implementation of this ad-valorem specific tax, a percentage tax on goods and services, will reduce the demand Figure 1

for these unhealthy options due to

the price increase as it will reduce the incentive for consumers to buy these options. The shift in the supply curve creates a new equilibrium price that is higher than the original equilibrium, however the quantity is reduced and thus the goal of reducing consumption is achieved. The issue in India is especially prevalent because, according to the article, “South Asians are more likely than other ethnicities to develop diabetes, cardiovascular diseases and chronic kidney disease.” Furthermore, the obesity level in India has “doubled in the last 10 years from 3.2 crores [100 million] to 6.3 crores, and is projected to grow to 10.12 crores in the next 15 years,” therefore making this an issue that is in need of some level of government intervention. Governments often implement ad-valorem taxes in order to control the consumption of goods such as junk food, which cause negative externalities of consumption, as they are demerit goods. Demerit goods are goods that are

4

considered unhealthy or negative, and Figure 2 consumption as a form of market failure. In this case, the consumption of junk food can lead to diabetes, or cardiovascular diseases. Therefore, since more people need healthcare, there is an increase in the marginal social cost, which then causes the marginal private benefit to exceed the marginal social benefit as society is forced to spend more on health care as a result of the consumption of the junk food. Therefore the consumption of unhealthy food options causes market failure. As seen in Figure 2, when the marginal private benefit exceeds the marginal social benefit, the amount of the good that is produced at equilibrium is greater than the socially optimal level of the good. Therefore there is an over allocation of resources in the market for junk food. In a situation such as this one, governments have a responsibility to intervene in order to reduce the size of the negative externality, as it has a negative impact on society. Government intervention, in this case is positive as it allows for a stronger society both economically and in regards to health. The implementation of this tax will hopefully reduce the risk of disease amongst the Indian population along with the other strategies the government is putting in place. Professor Nikhil Tandon stated, “countries must consider taxation on unhealthy foods, restrictions on advertising, and appropriate food labelling.” These strategies are beneficial to both consumers and the government, however it places a burden on fast food producers as it will reduce their sales and prevent them from having as high of revenue. Although this is a genuine concern for producers, the implementation of the tax is in the best

5

interest of the consumers as diabetes and heart disease have become prominent threats in South Asian societies. The taxation is also beneficial to society as it reduces the negative externality as well as generating government revenue. In addition to the tax on junk food, the Indian government has enacted a 20% tax on sugary drinks, which is said to “reduce the prevalence of overweight and obesity by 3.0% and the incidence of type 2 diabetes by 1.6% over the period 2014-23.” If the tax on junk food served in branded restaurants is as successful as the tax on sugary drinks, it would be beneficial to society as it would further decrease the level of obesity, as well as decreasing the level of the externality caused in this situation of market failure. The effects of the tax may not have many short-term effects, however, in the long run there are significant benefits to reducing the consumption of these unhealthy food items by means of government intervention. Lastly, this solution may not provide a full solution for the situation described in the article, though it does significantly reduce the implications of the health issues involved in the consumption of these foods.

6

Catalonia unemployment jumps as political crisis drags on Paul Day MADRID (Reuters) - Registered unemployment rose sharply in Catalonia in October, data showed on Friday, with more people signing on as jobless in the region than anywhere else in Spain as companies fled in the midst of the country’s worst political crisis in decades. Almost 2,000 companies based in Catalonia moved their legal headquarters out of the region in October after an independence vote banned by Madrid that led to the central government sacking regional authorities and taking control. The number of people in Spain registering as jobless rose for the third straight month by 1.67 percent in October from a month earlier, or by 56,844 people, leaving 3.47 million people out of work, data from the Labour Ministry showed. Of that, Catalonia saw unemployment rise by 3.67 percent, or 14,698 people, the largest loss of jobs amongst all the regions and compared to a just 0.08 percent rise in jobless in the region of Madrid. The Bank of Spain warned on Thursday that uncertainty due to the independence drive, if it persists, could lead to slower economic growth and lower job creation in the next few months. October often sees a continuation of rising unemployment after the summer tourist sector lays off temporary workers in hotels and restaurants. Registered jobless rose strongest in the service sector, with a 2.2 percent monthly rise, or by 50,885 people, followed by agriculture, marking the end of summer harvests, up 5.83 percent, or 9,194 people. In Spain, the number of people paying in to the social security system as workers in Spain rose by 94,368 people, to 18.43 million people, the ministry said. In seasonally adjusted terms, Spain’s registered unemployed fell by 23,690 people in October from a month earlier. Spain’s unemployment rate, taken from a wide survey of the workforce a considered a more accurate representation of the country’s unemployed than the monthly figure, fell to its lowest since 2008 in the third quarter at 16.38 percent.

7

The article published by Reuters, explains the recent rise in registered unemployment in Catalonia due to the region’s “worst political crisis in decades.” Catalonia is a region in Spain that has recently voted for the independence referendum. Due to this, companies in Catalonia have left the country due to its political instability, causing an increase in structural unemployment. Structural unemployment occurs when an industry relocates and causes a dramatic decrease in the demand for a certain set of skills within an economy. “The number of people in Spain registering as jobless rose for the third straight month by 1.67%,” due to the vote that declared Catalonia independent from Spain. This was most likely due to the 2,000 companies who moved their legal headquarters away from Catalonia in the weeks following the independence vote as caused by a loss of producer confidence following the referendum. As a result of the companies relocating in order to remain within the European Union, there is a shift of the labor demand curve to the left, as shown by Figure 1. The Figure 1

decrease in labor demand causes

disequilibrium in the labor market where the unemployment exists in the space between Q1 and Q2. The rise in unemployment is significant as Catalonia saw “unemployment rise by 3.67%.” Consequently, Catalonia is currently experiencing the largest

8

increase in unemployment of all the Spanish regions. Structural unemployment is considered one of the most serious forms of unemployment as it is of a long-term nature and is difficult to combat. This specific type of unemployment also has many negative effects on an economy. The negative effects of structural unemployment within an economy include: higher rates of poverty, less government revenue due to a reduction in the number of people paying direct taxes, and lower standards of living. Additionally, higher unemployment means an economy is less likely to be operating at a point on its production possibility curve. This causes a slower rate of economic growth due to the increased unemployment levels. Economic growth occurs when there is an increase in the real GDP of an economy over time and can occur when an economy moves towards their full employment of all available resources. Spain’s unemployment rate “fell to its lowest rate since 2008 in the third quarter at 16.38 percent” showing that the Spanish economy has moved away from full employment of resources. In the short run, this would be shown as a shift in the economy’s actual output as less

Figure 2

will be produced as caused by the relocation of the companies/ In Figure 2 this is shown as a shift in A1 away from the curve to A2. This demonstrates a decrease in Spain’s actual output.

9

In the long run, however, sustained rates of structural unemployment could cause a shift in the potential output of the Catalan economy. Due to the relocation of the many firms who were previously producing goods that kept the real GDP high, there will be a decrease in the real GDP over time. Furthermore, the region will now be unable to create jobs and employ the unemployed labor force, causing a decrease in the output the region could be producing. This is shown in Figure 3 as a shift to the left of the production possibility curve, caused by a loss of skills and hence a lower level of labor productivity. Therefore in the long run there will be an overall decrease in the level of output as well as a decrease in the economy’s real GDP. The extent to which this is likely to happen depends on how the Catalonian government chooses to combat these high rates of unemployment. Structural unemployment is caused by instability, and therefore Catalonia needs to provide stability and create incentive for the companies to return to the region. For example, Catalonia could offer tax Figure 3

abatement to large companies willing

to return, where companies are offered reduced taxes for a number of years in order to encourage Catalonia’s economic development and increase incentive for companies to return. However, through implementing this policy, the tax burden becomes heavier on local residents and businesses. This is often rectified by

10

implementing a general tax-reduction in the region that benefits all businesses and still creates incentive for producers to return to Catalonia. A general taxreduction may be the best way to create incentive and thus reduce structural unemployment in Catalonia while the region restores its political stability.

11

President Trump's trade team is getting tougher on Canada. In a decision opposed by some Republicans, the Commerce Department late Tuesday applied tariffs as high as 10% to Canadian paper. This follows American tariffs of up to 18% on Canadian lumber, imposed last year. Commerce Secretary Wilbur Ross says Canadian paper companies get subsidies from their national government and it's unfair to American competitors. In 2016, imports of Canadian paper totaled $1.3 billion. The timing of the move is sensitive. Leaders from the United States, Canada and Mexico start the next round of talks on NAFTA, the three-nation trade pact, on January 23 in Montreal. Five rounds of talks have yielded no progress on divisive issues such as car manufacturing. Trump made NAFTA a punching bag during his 2016 campaign. He promised to renegotiate it and bring jobs back from Mexico or withdraw from the 24-year-old agreement. Canadian Foreign Affairs Minister Chrystia Freeland called the U.S. action "unfair and unwarranted," and said the paper tariffs will cost American jobs. U.S. congressional leaders had voiced strong opposition to any duties against Canadian paper, which they argue helps support 600,000 American jobs in newspaper publishing and commercial printing. Eight senators, including Republicans Lindsey Graham and Susan Collins, urged Ross and U.S. Trade Representative Robert Lighthizer to look closely at how the tariffs could affect "hundreds of thousands of Americans jobs." Seven Republicans signed the letter along with Senator Angus King, an independent from Maine.

12

What's unusual about the paper tariff is that one small company in Washington state, Northern Pacific Paper, pushed for it. It employs 260 workers at its mill and is owned by the New York hedge fund One Rock Capital, which did not respond to CNNMoney's request for comment. Resolute, a Canadian company that employs 2,500 Americans and will be hit by both the lumber and paper tariffs, called the Trump administration's decision "outrageous." "This is an effort to perversely manipulate trade laws," Seth Kursman, Resolute's spokesman told CNNMoney on Wednesday. Resolute has headquarters in Montreal and also employs 5,500 Canadians. Kursman would not speculate whether the tariffs would cost the company jobs. Catalyst, another Canadian paper firm, called the tariffs an "unwarranted trade action." It has 1,200 Canadian employees and 1,400 U.S. employees. Other Canadian companies did not immediately respond to requests for comment.

13

The article from CNN Money, discusses the effect of the newly imposed American tariffs on Canadian paper. A tariff is a type of trade barrier where a tax is placed on imports, and is used as a form of protectionism in order to help domestic producers of the same good. When a tariff is implemented, the quantity of a good or service imported is reduced, therefore, allowing domestic producers to produce and sell more of their good or service. United States President, Donald Trump, has decided to apply “tariffs as high as 10% to Canadian paper.” As seen in Figure 1, when a tariff is imposed in the market for paper, the quantity of paper imported from Canada is Figure 1

reduced from Q4 – Q1 to Q3 – Q2. Additionally, the price of

paper exceeds the world price, meaning that domestic producers are able to produce more paper, as caused by the law of supply where supply increases in response to a subsequent increase in price. Due to the increase in price of the Canadian paper, consumers are less likely to buy these goods, and are more likely to buy paper produced by domestic producers, as caused by the law of demand where as prices rise, demand falls. The tariff aims to reduce the quantity of Canadian paper imports, as “in 2016, imports of Canadian paper totaled to $1.3 billion.” By imposing a tariff on

14

Canadian paper, the United Stat surplus in the market for paper, a Figure 2

shown by Figure 2. Despite a gain in government revenue and producer surplus, the United States will also experience a loss in consumer surplus, and a loss to society as caused by the tariff. The implementation of the tariff on Canadian paper, hurts Canadian producers as they will see a significant fall in the quantity of paper exported to America, and hence a loss in export revenue. Ideally, the United States should benefit from imposing a tariff, although, they will also experience societal loss and could potentially slow down economic growth and risk an increase in inflation rates and unemployment rates. A tariff on Canadian paper will also be at the expense of the consumer, as despite the tariff aiding domestic producers, the overall price of paper will increase as a result of this trade restriction. Although President Trump believes the tariff will support and employ more American workers, many believe that this decision will increase the unemployment rate in the United States. For example, as stated in the article, U.S. congressional leaders were against the 10% tariff on Canadian paper as it “helps support 600,000 American jobs in newspaper publishing and commercial printing.” Furthermore a Canadian company called Resolute “that employs 2,500 Americans” will be greatly impacted by both the tariffs on Canadian lumber and Canadian paper, thus putting those 2,500 American...