Putting It All Together Part 2€¦ · Taxes-Example Problem ... •Karl Polanyi attempted to...

Putting It All Together Part 2

Module #13 & 14

Taxes

• Marginal Tax Rate

• The tax rate you pay on the last dollar earned

• Average Tax Rate

• 𝐴𝑇𝑅 =𝑇𝑜𝑡𝑎𝑙 𝑇𝑎𝑥𝑒𝑠 𝑃𝑎𝑖𝑑

𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒

Taxes

• Marginal Tax Rates

depend on how

much you make

• The Marginal Tax

Rate is the rate you

pay on the last

dollar you make

Taxes

• So if you make $30,000 in a year

• You pay 10% on the first $9,525

• And

• You pay 12% on the income from $9,526-$30,000

• So you would pay a 12% Marginal Tax Rate

• It is the rate you pay on the last dollar

Taxes-Example Problem

• BREAKUP INTO YOUR TABLE TEAMS!

• What is the average tax rate of a person who

makes $37,000 per year?

• 𝐴𝑇𝑅 =𝑇𝑂𝑡𝑎𝑙 𝑇𝑎𝑥𝑒𝑠 𝑃𝑎𝑖𝑑

𝑇𝑂𝑡𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒






• Step 1 10% ∗ $9,525 = $952.5

• Step 2 12% ∗ $37,000 − $9,525

• = .12 ∗ $27,475 = $3,297

• Total Tax Paid=$952.5 + $3,297






• Total Tax Paid=$952.5 + $3,297 = $4,249.50

• 𝐴𝑇𝑅 =$4,249.50

$37,000= 11.49%


2

• What is the Marginal Tax Rate the

person pays?


• What is the Marginal Tax Rate the

person pays?

• 12%


3

• What is the Average Tax Rate for a

couple earning $74,000 (total)


• What is the Average Tax Rate for a

couple earning $74,000 (total)

• Step 1-10% on first $19,050

• =$1,905

• Step 2-12% on $74,000-$19,051

• =$54,949 * 12% = $6,593.88


• What is the Average Tax Rate for a couple

earning $74,000 (total)

• Step 1-10% on first $19,050

• =$1,905

• Step 2-12% on $74,000-$19,051

• =$54,949 * 12% = $6,593.88

• 𝐴𝑇𝑅 =$1,905+$6,593.88

$74,000=

$8,498.88

$74,000= 11.48%

Thorstein Veblen

• Thorstein Veblen 1857-1929

• Wrote “The Theory of The Leisure Class”

• Theory based on anthropological evidence (from the early 1900s)

• Son of Norwegian immigrants

• Studied philosophy at John Hopkins University before earning his PhD at Yale University in 1884

Thorstein Veblen

• In the late 1800s factory production was becoming very common

• Previously artisan production was the norm

• Artisan production takes place when one or two craftsmen or craftswomen

create something

• So cars were made by small shops, including furniture, clothes, houses, everything

https://www.youtube.com/watch?v=0_HGqPGp9iY

Thorstein Veblen

• The American Industrial Revolution moved production from artisan work to

factory production

• Thorstein Veblen saw in this movement the birth of “Conspicuous

Consumption”

• The desire to buy nice things in order to show off one’s wealth

• Consumption as a signal of success and power

Karl Polanyi

• For Karly Polanyi social change is the result of “Counter Movements”

• These are areas where people get frustrated with a key issue and protest or

vote to change it

• For Polanyi no specific political party or ideology starts movements, they are

a result of people responding to issues

• So the anti-tax movement would be a countermovement; as would the environmental

movements

Karl Polanyi

• Karl Polanyi attempted to explain the rise of fascism in WWII

• Before WWI was “The Gold Standard”

• Every country held gold in reserves to back their currency

• Countries with more gold had stronger currencies

Karl Polanyi

• For the one hundred years before WWI (from 1817-1917) there were no

major international conflicts

• There were regional only

• Karl Polanyi pointed out that during this time international finance tied

countries together

• Even countries that had very bad relationships, avoided war because of international

trade

Karl Polanyi

• The Sterling Pound (the currency of Great Britain) was the most dominant

international currency

• Great Britain began to sell its government debt

• Instead of sending its currency globally

Karl Polanyi

• As fears that Great Britain would not be able to pay off its debt circled, this

collapsed trust in the Gold Standard

• In truth Great Britain had offered too much debt and did not have enough

gold to pay off all of its debtors

• Hence the South Sea Company scandal

Karl Polanyi

• Between WWI and WWII the US dollar became much stronger

• In part because of the recent industrialization that increased exports and domestic

growth

• The Fed was actually trying to make the dollar stronger when they chose to

shrink the money supply during the Great Depression

• Not realizing what they were doing to the domestic economy

International Exchange

• Everything we have covered up until this point is for one economy

• Kind of like if thee was only one country in the whole world

• What we have left out is the interaction between different economies

• Recall: Comparative Advantage


• Recall: Comparative Advantage

• Occurs when one person, or country, has the ability to produce goods at a lower

Opportunity Cost

• Recall: Opportunity Cost-What one must give up in order to do something

• Ex: France can produce either 40 barrels of wine or 120 rolls of textiles

(clothes)

• Great Britain can produce 200 rolls of textiles or 20 barrels of wine


• Ex: France can produce either 40 barrels of wine or 120 rolls of textiles (clothes)

• Great Britain can produce 200 rolls of textiles or 20 barrels of wine

• Which country should produce Wine? And which should produce textiles?

• What is Frances cost of producing a barrel of wine? And the cost of producing a roll of textiles?

International Exchange: Table Team Question


• To answer this we must know the relative costs of both country.

• What is Frances cost of producing a barrel of wine? And the cost of

producing a roll of textiles?

Country Wine Textiles Cost: Wine per

Textile Roll

Cost: Textile

per Wine

France 40 120

GB 20 200



• To answer this we must know the relative costs of both country.

• What is Frances cost of producing a barrel of wine? And the cost of

producing a roll of textiles?


Textile Roll

Cost: Textile

per Wine

France 40 120 40/120=1/3

wine/textile

120/40=3

textile/wine

GB 20 200 20/200=1/10

wine/textile

200/20=10

textile/wine



• So every time France produces one Wine they must give up 3 textile rolls


Textile Roll

Cost: Textile

per Wine

France 40 120 40/120=1/3

wine/textile

120/40=3

textile/wine

GB 20 200 20/200=1/10

wine/textile

200/20=10

textile/wine



• So every time France produces one Wine they must give up 3 textile rolls

• And every time GB produces one Wine they must give up 10 textile rolls


Textile Roll

Cost: Textile

per Wine

France 40 120 40/120=1/3

wine/textile

120/40=3

textile/wine

GB 20 200 20/200=1/10

wine/textile

200/20=10

textile/wine



• So France should produce Wine because it has a comparative advantage (lower

opportunity cost)


Textile Roll

Cost: Textile

per Wine

France 40 120 40/120=1/3

wine/textile

120/40=3

textile/wine

GB 20 200 20/200=1/10

wine/textile

200/20=10

textile/wine



• What about textiles?

• If France produces a single roll of textiles it must give up 1/3rd wine

•Country Wine Textiles Cost: Wine per

Textile Roll

Cost: Textile

per Wine

France 40 120 40/120=1/3

wine/textile

120/40=3

textile/wine

GB 20 200 20/200=1/10

wine/textile

200/20=10

textile/wine



• What about textiles?

• If France produces a single roll of textiles it must give up 1/3rd wine

• If GB produces a single roll of textiles it must give up 1/10th textiles


Textile Roll

Cost: Textile

per Wine

France 40 120 40/120=1/3

wine/textile

120/40=3

textile/wine

GB 20 200 20/200=1/10

wine/textile

200/20=10

textile/wine



• So France should produce Wine and GB should produce textiles

• When these countries trade they will exchange the goods in each others

country’s currency


• When these countries trade they will exchange the goods in each others

country’s currency

• So France will have to exchange their Euros (€) for British Pounds (£) and

then use those to buy textiles from British producers

• GB will have to exchange their British Pounds (£) for Euros (€) and the use

those to buy wine from French producers

International Exchange Rate

• Nominal Exchange Rates

• The rate at which two countries currencies can be traded

• So if 1 British Pounds (£) trades for 1.5 Euros (€)

• We would say the exchange rate is: 1.5 €/£

• “One and a half Euros per Pound”


• Table Team Question 5

• What if we wanted to find the exchange rate:

• _____ Pounds per Euro?


• What if we wanted to find the exchange rate:

• _____ Pounds per Euro?

• So we want to put 1 £ on top and 1.5 € on the bottom

• So the exchange rate is 1 £ per 1.5 € = 1/1.5=0.66

• .66 £ /€ You would say “0.66 Pounds per Euro”

International

Exchange Rate

• Ex. Top row is 1.631 £/$

• Table Team Question 6

• What is the $/£ rate?

International

Exchange Rate

• What is the $/£ rate?

• Hint: An “inverse” is basically any ratio flipped

• So the £/$ rate is 1.631 £ per $1

• So the inverse is: $1/1.631£=0.613 $/£

International

Exchange Rate

• With your Table Teams!,

confirm that the inverse

rates are correct

International

Exchange Rate

• With your Table Teams!,

• Give the following exchange rates:

• Peso to Yen

• Yen to Peso

• Yuan to Yen

• Euro to Yuan

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