THEORY OF CONSUMPTION
ARIZONA STATE UNIVERSITY
ECN 211 - MACROECONOMIC PRINCIPLES
WEEK 1
CONSUMPTION BEHAVIOR SOCIETY:
Public consumption expenditure is one of the macroeconomic variables. A person's
consumption is directly proportional to their income. This means that the greater the income,
the greater the consumption expenditure. Savings behavior is also influenced by income
factors. Thus, if income increases, both consumption and savings will equally increase.
The ratio of the amount of additional consumption expenditure to income is called the
marginal propensity to consume or MPC, while the amount of additional savings to income is
called the marginal propensity to save or MPS.
The difference between developed and developing societies is not only in the relative
size of MPC or MPS, but also in the consumption pattern itself. The consumption pattern of
developing societies is dominated by the consumption of basic needs or primary needs.
Meanwhile, developed societies tend to allocate more to secondary or tertiary needs.
Y : Revenue
A : Primary Needs
B : Secondary Needs
C : Tertiary Needs
Based on Figure 3.1 above, it is clear that the difference in consumption patterns
between developing and developed countries is depicted in an inverted pyramid. In
developing countries most of the income is used to meet basic or primary needs, while a
small portion is used to meet tertiary needs. In developed countries, most of the income is
used to meet tertiary needs while a small part of the income is used to meet basic needs.
In relative terms to national income, The proportion of public consumption expenditure has
been declining over time. In 1970, almost 80% of GDP was allocated to public consumption
expenditure. 10 years later, the proportion was reduced to only about 60%. And in the early
90s the proportion of public consumption expenditure in GDP use was only around 50%. The
decline in the relative proportion of public consumption expenditure suggests that the
allocation of GDP is now increasingly directed towards more productive uses. This condition
is indeed very necessary to support the implementation of development. Table 3.1 below
presents data on the development process of the percentage allocation of Indonesian public
consumption to GDP.
Based on the data in table 3.1 above, the change in allocation for public consumption
in 1970 was 79.64% of GDP and in 1993 was 52.43%. While for 1970 is 14.05% of GDP for
1993 to 35.28%. Changes in the allocation of use from the consumptive sector and towards
the productive sector are very positive, because this will be able to further move the wheels
of the economy that occur in society.
CONSUMPTION PATTERNS SOCIETY:
Consumption patterns can be recognized based on the allocation of its use. For
analytical purposes, the allocation of community consumption expenditure is broadly
classified into two groups, namely expenditure on food and expenditure on foodstuffs. An
overview of community consumption patterns based on the type of expenditure is shown in
table 3.2 below.
Table 3.2 Average Expenditure per Month/Capita in 1984-1993 (by Type of
Expenditure in rupiah)
Type
Spending
1984
1987
1990
1993
A. Food
Expenditure
9.146
(68,55%)
12.247
(67,21%)
16.379
(67,41%)
21.228
(63,59%)
B. Non-food
Expenditure
4.197
(31,45%)
5.926
(32,79%)
7.917
(32,59%)
12.517
(36,41%)
Total
100%
100%
100%
100%
The type of consumption expenditure of the community is in line with the process of
economic growth that occurs in society. The shifting pattern also reflects an increase in the
level of welfare in society. A better level of community welfare will tend to fulfill non-food
needs.
What are the consumption patterns of Indonesians when compared to other societies?
The World Bank's 1993 publication explained that 48% of Indonesian household
consumption expenditure is spent on food. This percentage is much higher than that of
neighboring Malaysia, which is only 23%. Meanwhile, households in Japan spend only 17%
of their expenditure on food. Those in the United States are even better off, spending only
10.5% on food. The household consumption structure of some countries is shown in table 3.3
below.
Table 3.3 Household Consumption Structure of Some Countries (In Percentage)
Expenditure
Allocation
Food
Clothing
Types of rent
and energy
Education
Health Care
Transport and
Transportation
Indonesi
a
India
Malaysia
USA
Japan
48
52
23
10
17
7
11
4
6
6
13
10
9
18
17
2
3
9
14
10
4
4
5
14
10
4
4
19
14
9
Other
Consumption
22
13
33
30
34
An overview of the structural pattern of household consumption as shown in table 3.3
above can be used as a strategy for development policies carried out in a country. In
relatively developed countries, non-food needs such as education, health, transportation and
transportation are the main priorities. Therefore, the government's policy strategy will follow
this pattern. Conditions will be different in developing countries where the main priority of
the expenditure structure pattern is the consumption of food needs.
People's consumption patterns differ across expenditure layers. There is a general
trend that the lower the expenditure class, the more food expenditure is allocated. On the
other hand, the higher the expenditure class, t h e greater the proportion of expenditure on
non-food consumption. All these consumption patterns can also be taken into consideration in
a company's marketing strategy. For Indonesia, the distribution of the population according to
consumption expenditure varies greatly from province to province.
VARIOUS THEORIES OF CONSUMPTION:
The consumption theory that we have known before is the consumption theory
proposed by Keynes. In this theory, it is argued that the size of consumption expenditure is
only based on the size of the level of community income. Keynes stated that There is a
minimum consumption expenditure to be made by the society (Autonomous Consumption)
and consumption expenditure will increase as income increases.
In subsequent developments, the question arises how is the actual relationship
between consumption expenditure and income and income factors? The relationship
involving these other factors will be discussed by various other theories of consumption.
Consumption Theory with Life Cycle Hypothesis:
The consumption theory with this hypothesis was proposed by Ando, Brimberg, and
Modigliani 3 great economists who lived in the 18th century. According to this theory, a
person's socio-economic factors greatly affect that person's consumption patterns.
This theory divides consumption patterns into 3 parts based on a person's age, namely:
1. From the age of 0 to the age where a person can generate their own income, they experience
Disaving (consuming but not generating income).
2. Where the age of someone who can work and then generate their own income and is greater
than their consumption expenditure, they experience savings.
3. Where a person is at an age when he can no longer work he experiences disavowal.
When viewed in a graph, consumption patterns based on theory consumption with the life
cycle hypothesis.
In Figure 3.2 above, the vertical axis shows the consumption level of a person and the
horizontal axis shows time. Part I is age 0 to t0 a person experiences dissaving where the
person does not yet have income but he needs consumption. Age t0 to t1 this person is still
dissaving because consumption is greater than income. Part II is age t1 to t2 where a person
1 1
t
t t
t t
t t
experiences saving where income is greater than income than consumption. For part III is age
t2 where people return to dissaving. He no longer generates enough income to cover expenses.
AMB uses the following consumption function form:
C = Aw
In contrast to Keynes who stated that MPC is a static number, AMB stated that a is not a static
number, but its value depends on age, appetite and interest rate.
W is the present value of wealth consisting of 3 factors, namely :
•
Present value of income from wealth such as interest, rent and so on.
•
Present value of income in exchange for labor, e.g. wages, salaries
•
Present value of wages expected to be received over a lifetime.
Specifically, the form of the consumption equation proposed by AMB is as follows:
C = a At + a YL + a(T-1) Y LE
Description:
C : Consumption Expenditure a : MPC
A : Wealth
Y L: Earnings from work
Y LE: Lifetime expected income from this year T : Remaining life of a person calculated at
the present time
The problem that often arises in trying to calculate the above equation is estimating
the expected income in the future. One way used by AMB is to make the assumption that :
YLE = b yL and 0>b<1
This assumption states that the expected income increases by b, thus the consumption
equation can be substituted into :
C = a A + a[Y tL + b(T-1) YLE ] C = a A + a[1 + b(T-1)] Y L
In short-term consumption a At becomes an intersip which empirically the
consumption function according to AMB is as follows
The following: Ct = 0.06 At + 0.07 Y L
Consumption Theory with Relative Income Hypothesis:
The theory using the relative income hypothesis was put forward by James
Duesenberry, in his theory Duesenberry made 2 assumptions, namely:
1. The tastes of all households for consumption goods are independent i.e. they are
influenced by the spending done by their neighbors.
2. Consumption expenditure is irreversible, meaning that the pattern of expenditure when
income increases is different from the pattern of expenditure when income decreases.
Duesenberry states that the theory of consumption based on absolute income as proposed by
Keynes does not consider the ecological aspects of consumers. Duesenberry states that the
consumption expenditure of a household is highly dependent on the household's position in
the surrounding community. If consumers constantly see the consumption patterns of their
richer neighbors, then there is a demonstration effect. However, the imitation of neighbors'
consumption patterns must be analyzed by looking at the relative position of the household in
the surrounding community.
For example, a household that earns Rp. 3 million every month and lives in an area where
the average income is Rp. 500,000. It will tend to save more and consume less, because its
income is relatively higher than the surrounding community. Conversely, if the household
lives in an area where the average income of the community is Rp. 5 million, then households
with an income of Rp. 3 million tend to have greater consumption expenditures from less
savings, because their income is relatively lower than the income of the surrounding
community.
If from year to year there is an increase in income for the entire community, then the
income distribution of the entire community does not change, the increase in absolute income
causes consumption expenditure to rise, and the amount of savings will also increase in the
same proportion. This means that APC + C/Y does not change and this also means that APC
= MPC which is the long-run consumption function as shown in Figure 3.3.
From the long-term consumption function, Duesenberry derived the short-term
consumption function based on the second assumption. The amount of consumption
expenditure is influenced by the amount of the highest income ever achieved. If there is an
increase in income, consumption expenditure will tend to increase by a certain proportion.
Meanwhile, if income decreases, consumption expenditure will also decrease but the
proportion is smaller than the decrease in income. This is because a consumption pattern that
occurs in a certain amount (the highest income ever achieved) will be difficult to reduce
when income falls, let alone a very drastic decline.
The basic concept of consumption theory with the relative income hypothesis is the
basis for the difficulty of efforts to eradicate corruption among our bureaucratic apparatus in
this reform era. Corrupt bureaucratic officials who earn 10 times their official salary, is it
possible for them to reduce consumption by only receiving their official salary (1/10), while
their consumption patterns are already very high (income from corrupt proceeds).
CL in Figure 3.3 above shows the long-run consumption function. If the income is
Oy0 then the amount of consumption expenditure that occurs is By0 . If the household income
decreases from Oy0 to Oy2 , the amount of consumption expenditure will not fall to point E
along the long-term consumption curve CL, but will fall to point A on the curve short-term
consumption expenditure C1. This is because when there is a decline in income, household
consumption patterns do not fall dramatically. The decline in income will cause consumption
expenditure to fall slowly and households will tend to reduce savings to support the old
consumption pattern. If income then rises again from Oy2 to Oy0 household consumption
expenditure will also not rise dramatically, but will increase slowly. This is because the
household is trying to restore its savings that were reduced when income fell. After income
OY0 is reached and savings have reached their original level, so that if there is an increase in
income from Oy0 to Oy1 , then household consumption expenditure will increase drastically
from point B to point D. Furthermore, if income falls back to OY0 , consumption expenditure
does not fall at point B but falls to point F, namely the consumption function that is on the
short-term consumption expenditure curve C2 which is higher than the short-term
consumption curve C1. This is the so-called Ratchet effect t h e r e f or e an economic
downturn will cause consumption expenditure to fall along the short-run consumption curve,
and not on the long-run consumption function curve.
Consumption Theory With Permanent Income Hypothesis
The theory of consumption with permanent income hypothesis was proposed by M
Friedman based on this theory the income received by the community can be divided into 2
parts viz: (1) permanent income and (2) permanent income. (2) transitory income.
What is meant by permanent income is:
•
Income that is always received at everycertain period and can be estimated in
advance, for example income from wages, salaries.
•
The result of all the factors that determine a person's wealth (which creates wealth).The
wealth of a household consists of two categories, namely non-human wealth and
human wealth on-human wealth includes physical wealth (durable consumer
goods,buildings, etc.) and financial wealth (stocks, valuable donations), while human
wealth is the wealth inherent in the human being. That itself, such as expertise, skills,
education.
With Thus wealth(W) can be formulated as follows:
W = Yp/i W so that Yp = i W
Where:
W : one's wealth
Yp : the person's permanent income i : interest rate
What is meant by transitory income is that good income can be generated in advance
and its value can be positive if the luck is good or negative if the luck is bad. A person who
earns positive transitory income, while a farmer who fails to harvest due to bad
climate/weather is said to earn negative transitory income.
So a person's measured income is affected by permanent income and transitory
income with the following equation:
Y = Yp + Yt
Y = measured income Yp = permanent income Yt = temporary income
Furthermore, Friedman's theory makes two assumptions regarding the relationship
between permanent income and temporary income, namely:
•
There is no correlation Yp Yt or in other words, the transitory income received is merely a
factor of chance.
•
Transitory income does not affect consumption expenditure significantly if it is saved.
Conversely, if one's income experiences negative transitory income, the reaction is to reduce
savings and does not affect consumption expenditure.
According to Friedman's income, consumption expenditure is also divided into two
categories: permanent consumption (Cp) and temporary/transitory consumption (Ct).
Permanent consumption expenditure is planned consumption, while temporary/transitory
consumption is consumption expenditure that is not planned. The relationship between
measured income (Y) and measured consumption (C) will be the relationship between
permanent income and permanent consumption.
INVESTMENT THEORY:
This chapter aims to explain:
•
Theories of investment.
•
Investment and production capacity.
•
Investment executors.
INVESTMENT THEORIES:
Investment is one of the most important indicators in relation to national income. The
relationship between investment and national income is so important that it is understandable
why in all macroeconomic theories investment is discussed in a separate section.
Various shocks in investment (through the multiplier process) national out-put. The
multiplier is a number that shows how much national income changes as a result of changes
in investment. Changes in investment are often the cause of why the level of national income
falls below potential production capacity, and are often the cause of why national income at
one time increased far above potential capacity in society, thus leaving the symptoms of
investment.
Investment is an issue that is directly related to the expectation of income (prospect of
yield) from future capital goods. The expectation of future income is an important factor for
determining the amount of investment. Regarding the issue of when or under what
circumstances an entrepreneur will invest, there are two theories that discuss it, (I) the
conventional (classical) theory and (II) the theory of Keynes.
Conventional (Classical) Theory:
The conventional (classical) theory of investment is essentially based on the theory of
marginal productivity of the capital factor of production. Based on this theory, the amount of
capital to be invested in the production process is determined by its marginal productivity
compared to the interest rate, so that the investment will continue to be made if the
productivity limit of the investment is still higher than the interest rate that will be received.
The fact shows that various forms of wealth provide different results, and also contain
unequal risks, so it must be chosen which method is better, which is profitable and provides
maximum satisfaction for a person who has wealth. The owner of wealth must choose and
decide which is more profitable between buying stocks, long-term bonds, short-term bonds,
or investing in companies.
Based on the theory of the productivity frontier, the investment problem was broken
down by classical economists into the profit maximization principles of individual firms. This
is because a firm will maximize its profits in a perfectly competitive situation, if it uses its
capital to the extent that the marginal product of capital is equal to the cost of capital, i.e. the
interest rate.
The outline of the classical theory of investment is as follows:
•
Investments will be made when the prospected yield is greater than the interest rate. If
you want to compare the income from investment with interest rates, it should not be
forgotten that capital goods generally have a long use and are not just disposable, so that
the income from investment (which will be compared with interest) consists of the
amount of income that will be received at the end of each year, during the use of capital
goods in production (economic life), the amount of income each year is then compared
with the current interest rate.
•
Investment in a capital item is profitable when the cost (cost) plus interest is less than the
expected income from the investment. Thus the elements that are taken into account in
determining investment are: (1) the level of costs (fees) on capital; (2) the interest rate;
and (3) the high yield of income received. Changing one of the three factors above will
result in a change in the calculation of profitability.
Theory of J.M.Keynes:
According to the view of JM. Keynes, the problem of investment, both the
determination of the amount and the opportunity to invest is based on the concept of
Marginal Effeciency of Investment (MEI). Based on this concept, investment will be carried
out if MEI is still higher than the interest rate.
Graphically depicted as a declining schedule, the MEI depicts the amount of
investment that will be realized at each interest rate. The decreasing level of the MEI schedule
is caused by two things, namely:
•
That the more the amount of investment that is realized in society, the lower the MEI will be.
•
The more investment is made, the higher the costs and capital goods (assets) become.
According to Keynes' theory of investment, the main consideration for the
implementation of investment is the marginal efficiency factor of the investment itself. The
marginal efficiency of this investment is highly dependent on the entrepreneur's estimates and
calculations of the development of the future economic situation. Therefore, the level of MEI
cannot be determined with certainty.
The foresight of entrepreneurs with the possibilities that will occur is strongly
influenced by various factors, both economic factors and psychological factors. In order to
connect entrepreneurs with investment possibilities, it is necessary to know what an
entrepreneur is. Entrepreneur, is a type of businessman who has special behavior and talents
that are not found in other entrepreneurs. This group of entrepreneurs has played a very
important role in the history of economic development in the western world.
An entrepreneur is an innovator, one who seeks combinations in the production
process to create new advances and increases in production output. It is these entrepreneurs
who are able to capitalize on potential investment opportunities so that the likelihood of
success is very high.
INVESTMENT AND NATIONAL PRODUCTION CAPACITY:
(COR and ICOR issues)
The issue of Capital Output Ratio (COR) and incremental Capital Output Ratio (ICR)
is a widely used tool in the theory of economic development. The main objective of economic
development is to increase the prosperity and living standards of the people. To what extent,
the high level of prosperity and living conditions is reflected by the national income achieved
by the economic activities of the community itself.
Investment is economic activity in the form of both the addition of production factors
and the improvement of the quality of production factors. This investment will then increase
public expenditure which is then strengthened by the multiplier effect which will ultimately
increase national income.
In order for national production not to decrease, the depreciation of productivity must
be offset by investment, which will occur when new investment is greater than depreciation.
In the multiplier concept, national income will change whenever the amount of
investment changes. In connection with this, the question arises as to how m u c h
investment must be invested in society, so that income can be increased by a certain amount.
This is done and depends on COR, which is a number that states the ratio between the amount
of investment and the amount of national production.
INVESTMENT EXECUTORS:
When viewed from the side of who will carry out the investment, it can be divided
into: (1) government investment (2) private investment and (3) government and private
investment. The three elements of investment implementation can be broadly described as
follows:
Public Investment:
These government investments are generally not made with the intention of making a
profit, but the main purpose is to meet the needs of society such as the construction of roads,
bridges, dams and others. These investments are often called Social Overhead Capital (SOC).
The benefits of these investments are realized only when there is an increase in
demand in society. The increase in effective demand also increases income. Public
investment isoften alsoreferred to as autonomous investment, i.e. investment that arises not
because of additional income. This investment is not attractive to the private sector, because
this investment requires a very large cost, and this investment does not provide immediate
benefits, but gradually in the future several years.
Based on Figure 3.5, the size of investment is not influenced by the level of income
but can change due to changes in factors outside of income even though this investment is not
influenced by the level of income but the effect of the level of income in society.
Private Investment:
Private investment is a type of investment made by the private sector and is shown to
obtain income and is diring due to an increase in income. Therefore, if income increases,
consumption increases and effective demand also increases. This private investment is also
called induced i n ve s tm e nt , Induced investment is a type of private investment. The
investment caused by the increase in demand whose source lies in the increase in income.
Based on Figure 3.6 above, investment is placed on the upright axis, while the flat
axis represents income. The investment function is I (Y), which states that the high level of
investment is affected by various levels of income.
This investment function rises from the bottom left to the top right, and starts from a
certain level of income. The investment function I (Y), is also plotted in such a way that it
intersects the Y-axis from below, which is meant to imply that there is negative investment.
At a low level of income. In other words, a low level of national income (less than or equal to
OY2) would be will bring disaster to their lives in the future.
Public and Private Investment
The type of investment made by the public and private sector is foreign investment.
Foreign Investment occurs from the difference between exports over imports. Induced
investment in this case is caused by economic development abroad. So the nature of induced
investment is an investment due to an increase in income.
This type of investment is very possible to develop in an era of economic
globalization where the boundaries of a country's economic territory are becoming unclear.
The problem now is how each country can stimulate foreign investment.
ANALYZE NATIONAL INCOME IN A SIMPLE CLOSED ECONOMY:
This chapter aims to explain :
•
The nature of a simple closed economy
•
Consumption function, APC and MPC
•
Saving function, APS and MPS
•
Relationship between MPC, MPS, APC, and APS
•
Equilibrium National Income
•
The meaning and operation of multipliers
•
Inflationary Gap (IG) and Deflatinary Gap (DG)
THE ESSENCE OF SIMPLE CLOSED DEVELOPMENT:
A closed economy is an economy that does not recognize economic relations with
other countries.
In this kind of economy we will not encounter problems arising from foreign
economic transactions, such as exports and imports.
Meanwhile, we use the term simple here just to show that the economy that is given
the simple title does not recognize the existence of economic transactions carried out by the
government. Thus, the form of
The perokoniman we will discuss is an economy without economic relations with other
countries and without economic transactions by the government.
In this simple closed economy, the expenditure of the society in each year, or in each
unit of time, will consist of expenditure on household consumption and expenditure on
investment. The total expenditure of the society is also its income. In a shorter way, the
statement can be written:
Y=C+I
Where:
Y : Shows the amount of national income per year C : Shows the amount of household
consumption per year I: The amount of investment per year
In this simple analysis of national income, we view investment as an exogenous
variable. What is meant by variables that are not described by the model we use, but are
variables that are determined by forces originating from outside the capital used. So in other
words, we consider all values and exogenous variables as a datum, or as a variable whose
value we do not look for its origin.
APC AND MPC CONSUMPTION FUNCTIONS:
In its general form, a consumption function that is a straight line (liner) has the
following equation:
C=a+Cy
Where:
a : Indicates the amount of consumption at zero national income
c : Indicates the amount of Marginal Propensity to Consume.
Meanwhile, MPC is the ratio between the amount of change in consumption and the
amount of change in national income. The MPC can be formulated as follows:
The MPC number is generally smaller than one, but greater than half. And what is
more certain is that the MPC number has a positive sign. The positive MPC means that the
increase in income will result in increased consumption. The MPC number is smaller than
one, indicating that the additional income
The MPC that a person receives is not entirely used for consumption, but is partly set aside
C= (APCn-MPC)Yn+MPC.Y
for savings. An MPC figure that is greater than half indicates that the use of additional
income is largely used to increase the size of consumption, while the rest, which is a smaller
amount, will be additional as follows:
FISCAL POLICY ANALYSIS IN A CLOSED ECONOMY:
This chapter aims to explain :
•
Fiscal policy issues
•
Analyze fiscal policy in a simple tax system
•
Equilibrium national income
•
Various multipliers
FISCAL POLICY ISSUES:
Fiscal or political policy is any government policy aimed at influencing the course or
process of people's economic lives through the State budget.
The State budget is a budget prepared by the government regarding State revenues or
revenues and State expenditures prepared during a certain period, usually one year.
In relation to the State budget policy, there are three main functions, namely:
•
Allocation Function
Based on this function, budgetary policy is directed at allocating factors of production that are
available in the community in such a way that the community needs what is called public
goods. Without government initiatives in this regard, it is unlikely that people will be able to
adequately meet their needs for security, justice, education and so on.
•
Distribution Function
This distribution function has the aim of organizing a relatively fairer distribution of national
income. The reality shows that inequality in income distribution often causes turmoil in
society.
•
Stabilization function
This stabilization function aims, among other things, to maintain a high level of employment
opportunities, a stable price level and an adequate level of economic growth.
This fact shows that the volume of transactions conducted by the government in most
countries continues to increase over the years. This means that the role of government fiscal
action in determining the level of national income is great.
For mature economies, the increasing role of government fiscal measures in the
mechanism of national income formation is mainly intended so that the government can be
more able to influence the course of the economy. Thus, it is expected that with its fiscal
policy, the government can endeavor to The avoidance of the economy from undesirable
circumstances, such as a lot of unemployment, inflation, and so on.
For developing countries, the government is generally aware of the low investment that
arises from the initiative of the community. This is because the income level of the people is
still very low, so the effort to raise funds for investment is also limited. Therefore, without
government intervention, it is unlikely that an economy that is still underdeveloped will be
able to carry out a large enough net investment to increase the national production capacity
for the prosperity of its people. From the entire description above, we can understand how big
the role of government fiscal policy is for people who want to advance their economy.
Basically, there are two major components of the budget, namely the revenue
component and the expenditure component.
State Budget Components
The components of the expenditure budget consist of revenue and expenditure
components. While in more detail is as follows:
•
Revenue, which in this book we assume consists only of tax revenue.
•
Expenditures, which are made by the government consist of :
⮚
Government consumption expenditure is commonly referred to as government
expenditure.
⮚
Government spending in the form of government transfer.
Taxes are intended as money or purchasing power submitted by the community to the
government where there is a submission of money or purchasing power the government does
not provide direct services in return. The reason why we say there is no direct return received
by the taxpayer is because no matter what form of tax paid by the community to the
government, the community will certainly obtain services as well, it's just that the service
received by the taxpayer is indirect.
A taxpayer (tax payment) income, for example from the payment of taxes the
taxpayer does not get anything from the government. However, given that the results of tax
collection by the government will be used to finance government expenditures that benefit
the community which includes taxpayers.
In order for tax revenue to function optimally, it requires taxpayer awareness as a
good citizen. On the other hand, tax officials who are free from collusion and corruption are
needed.
If these two things can be implemented properly, the community will be able to enjoy
all the needs of life well, especially with regard to various life infrastructure.
Government consumption expenditure refers to all government expenditures where
the government directly receive a return on their services. For example, the government pays
the salary of the civil servant concerned. A hope of the community is that all kinds of
government expenditure, directly or indirectly, will later obtain great benefits for the
community as a whole per unit of time marked with the symbol G.
In addition, there are expenditures that we call government transfers, namely
government spending without direct reciprocity. Some examples of government transfers are:
•
Government contributions made to citizens who suffer as a result of natural disasters.
•
Contributions made by the government to the unemployed.
•
The pension received by retired civil servants.
•
Subsidies given by the government to companies.
•
Student fees given by the government to students and so on.
ANALYSIS POLICY FISCAL IN SIMPLE TAXATION SYSTEM:
Consumption and Saving Function in the Presence of Government Fiscal Action.
After the government's fiscal action, public expenditure on consumption is no longer
directly determined by the level of national income as earnings, but by the level of disposable
income.
National income as earnings is the amount of income received by members of society
for a certain period of time, as a reward for the factors of production they contribute in
forming the national product.
YD=Y+Tr+Tx
If YD indicates the amount of disposable income, Tr indicates the amount of
government transfers and Tx indicates the amount of taxes levied by the government, then
mathematically as follows:
On the basis that the size of a society's consumption in the current analysis no longer
depends on the size of national income as earnings, but depends on the size of disposable
income, the consumption function that applies to the economy without government action can
no longer be used.
ANALYZING NATIONAL INCOME IN AN OPEN ECONOMY:
This chapter aims to explain :
•
International economic relations
•
Analysis national income in the economy
INTERNATIONAL ECONOMIC RELATIONS:
Economic relations between a country and other countries include various forms,
namely:
•
Exchange or trade of goods and services produced
•
Exchange of economic resources or factors of production and
•
Relationship about debt and credit
The three types of economic relations mentioned above are closely related to each
other. For example, debt and credit relations between countries and other countries may arise
due to trade in goods and services.
Although the three types of relationships are interrelated, they still need to be
distinguished, because sometimes the development of the three types of relationships is not
always in line.
Benefits of International Relations:
Economic relations that take place between countries will provide benefits and
advantages for each country that conducts economic relations. Some of the benefits or
advantages that can be enjoyed from international economic relations include:
•
Through economic and trade relations between countries, the countries concerned can
obtain goods and services that cannot be produced domestically.
•
It allows each country to specialize in producing goods or services whose efficiency is
higher than other countries, or because they can be produced at a relatively lower price
than other countries. With specialization, the factors of production can be used more
efficiently, so that goods can be produced more cheaply, and the population can enjoy
more goods.
•
Allows for the expansion of the market for domestically produced goods, but sales can
no longer be increased. The need for certain types of goods or industrial products
produced domestically may have been met, but the capacity to use machinery has not
reached its optimum. By exporting abroad, production capacity can be increased and the
means of production used are more efficient and production costs can be reduced.
•
Through international economic relations, it is possible for a country to learn better
production techniques and more modern ways of managing companies. This will enable
the country concerned to raise its productivity levels and accelerate the increase in its
national production.
Factors Affecting Export and Import:
The size of exports and imports is determined by place, i.e. :
•
Domestic prices. The higher domestic prices are, the harder it is for domestic producers to
compete with foreign producers. As domestic prices rise, exports decrease. The opposite
condition will affect imports.
•
If prices abroad are higher, then domestic producers will have difficulty competing with
domestic producers. So higher prices abroad will encourage exports. Exports from
Indonesia to the United States or to Japan will be boosted if the increase in prices in
Indonesia is lower than the increase in prices in the United States or Japan, otherwise it
also affects imports.
•
Changes in foreign exchange rates also affect exports. If the rupiah depreciates or
devalues against the U.S. dollar, then exports will increase Indonesia-United States has
also increased. Likewise, if the rupiah currency appreciates, the opposite will happen
(affecting imports).
•
The higher the income of the foreign population, the greater the demand for exported
goods. The opposite is true for imports.
Export is one of the components of aggregate expenditure, because the greater the
value of exports, the higher the national income. On the other hand, the amount of national
income does not affect the amount of exports. Although national income increases, exports
may not necessarily increase. The amount of imports of a country will affect the amount of
foreign exchange reserves of a country.
