Mankiw: Chaper 8, 9 Taxes, International Trade

The eighth chapter features the controversial raising of revenues with taxes.  When a tax is levied, who actually pays the tax, the seller or the buyer.  A program such as welfare has an effect on the economy.  Neither the buyer nor the seller benefits from the tax, but the government does.  It effects issues such as elasticity, supply, and demand because it is a deadweight.  It effects issues such as retirement and changes taxpayers' choices.  Sometimes people circumvent the tax with an underground market.  The raising of taxes also changes from place to place, making equality rather complex.  When Reagan lowered taxes, revenues dropped, although some claimed that the lowering would actually raise taxes as a byproduct of growth.  Bill Clinton reversed the trend by raising taxes, increasing the revenues, and building government surpluses.

The chapter argues indirectly against taxes by demonstrating its adverse effect on buyers and sellers.  However, it does not address the issue of the citizen who cannot contribute to the economy because of a myriad of reasons from age to disability.  Their welfare must also be part of the argument.

Chapter 9

The principle of comparative advantage has led the business world to export many American jobs.  To win in the international trade area, a business must make a profit, by maximizing the profits with labor and products of lowest cost.  When a country exports, it loses resources, but gains money.  If an item is exported, the good increases in price at home.  The importing nation receives a good at an economical price, but loses its money.  Somewhere the welfare of the positive must overtake the negatives in order to make it useful.  (By logic, this means that the loss of jobs could be a definite negative far worse than any profit made by a company that goes international.)  In order to promote home production, a tariff could be used.  The tariff, however, and also raise prices at home because the item entering the country costs more, and domestic supplies are not adequate.  (Strange law that American flags must be made domestically.) The tariff causes deadweight, and affects the buyer and seller again, just like a tax.  Quotas can manipulate the supply entering the country.  This can also work against the buyer and seller.  International trade, if left free and open, keeps prices low and reduces deadweight.  Of course, that does not benefit the government.

Jobs are affected.  National security can be affected.  People are unemployed, and the manufacture of essential goods is now in the hands of a foreign nation.  If the country favors a domestic industry (cars) it works against the profit incentive.  Some countries can have an unfair advantage.  The country can manipulate other countries, in a way that promotes one and harms the other, leading to conflict.  So the country enters free trade agreements, equalizing a whole region.  The WTO attempts to make the trade fair for all, allowing for bargaining and other communications to reduce conflict.

These two chapters have done a great deal to explain to me why the country is undergoing some very powerful changes.  According to the principles in them, to make a profit, a business needs a great deal of flexibility to do whatever is necessary to make a profit.  These will be modified by the governments, who will manipulate the system in a number of ways including taxes, tariffs, and economic policies designed to lower unemployment, raise revenue, and build domestic economic strength.  I felt that much the discussion seems to make the disadvantaged citizen a victim to the economic interests, because the business is unwilling to share the wealth with an outside entity, be it the government or be it a social program.

Mankiw: Interdependence (Economics)

This 3rd chapter begins with the parable of the rancher with meat and the farmer with potatoes.  If each wants to eat meat and potatoes, they must agree on the value for each to make the trade equitable.  Numerous scenarios can occur in order for both to have the desired meal, even if they choose not to deal with each other.  By formulating deals that the other likes, they can come up with a profitable exchange for both.

One or the other can have an advantage in the exchange, depending on the concepts of supply and demand. With low competition, one or the other can have a prestigious position in the exchange and enhance his values.  Adam Smith makes the proposition that one should calculate the costs of home manufacture or production against the cost to simply buy from another.  If it isn't worth it, don't do it.  Another example, should Tiger Woods mow his own lawn.  The answer is no, if he can make 10,000 during the same time on the course.  The same thing can apply to having other nations produce goods for consumption here.  Comparative advantage is this principle of economic consumption.  Should a country do it.  The book says yes.

Chapter 4  Supply and Demand

Prices shift according to how much is on the market for consumption.  Competition with sellers improves the buying ability of the public.  Monopolies threaten that.  Factors affect the ability to buy--ie, employment, income, comparisons, personal tastes, etc.  Increasing prices eliminate buyers.

Prices can manipulate the number who smoke.  However, there could be trade offs--for example, drug use in its place.  So simply altering the dynamic between supply and demand can have a down side.  Shifting the prices can have huge effects--sales can work.  A seller looks for an equilibrium, beneficial both to himself and the buyer.  External changes like weather can affect the value and shift the equilibrium.


These two chapters explain why we trade and how to fix the prices.  What I have garnered is a little more understanding why the US has a perceived trade imbalance.



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