31. Explain the Laffer curve and supply-side economics.

Laffer curve is used to illustrate the idea thatincreases in the rate of taxation may sometimes decrease tax revenue. Since a 100 percent income tax willgenerate no revenue (as citizens will have no incentive to work), Arthur Laffer argued that tax revenue can be increased by reducing the tax rate. He illustrated this with what has been called the Laffer curve, which shows the tax revenue generated as the tax rate increases from 0 to 100%

He argued that tax revenue generated from labor increases at first, and then, at a certain point, it starts to decline until it reaches zero. In the 1980s, the Republicans presented this argument as a way to incease tax revenue by actually lowering tax rates. Of course, this argument only makes sense if anyone knew that the economy was actually past the point of maximum tax revenue. Nonetheless, this view was adopted by Ronald Reagan when he was President of the US. He argued that if taxes were lower, then people would work harder, yielding more tax revenue. This came to be known as supply-side economics , because lower taxes increases the supply of everything, but especially labor.

While the above argument makes sense to some extent, the supply of labor is relatively inelastic, since most everyone except for the wealthy have to work in order to survive. Hence, the tax burden on labor falls on labor. This is best evidenced by the fact that when Bill Clinton increased the tax rate, particularly on the wealthy, tax revenue increased proportionately. So the economy must have been before the maximum tax revenue point.

32. Explain what determines whether a country imports or exports a good.

There are many journal article about the topics and difference school of economics thoughts provide different argument but basically export and import are determined by GDP and exchange rate. If GDP is high, import is high. If exchange rate depreciate, export increase and import decrease, ceteris paribus.

33. Explain who wins and who losses from international trade.

As we have just seen, if trade is free, countries will export those goods that require the factor of production that are relatively abundant and import those that require the factors of production that are relatively scarce. For example, for the US, this means exporting goods that use large amount of arable land, capital, and highly skilled labor. It also means importing goods that require large amounts of unskilled labor. Suppose, as is likely to be case, that the US has a comparative advantage in production of computer software. The ability to trade, and therefore to sell in foreign countries, increase the demand for American computer software. This increase in prices. Both the increased quantity sold and the increased prices will increase the short-run profits of owners of computer software companies. They will also increase the demand for labor, increasing the number of people employed in the computer software industry as well their wages. Therefore, the owners of computer software companies and their workers are both “winners”. On the other hand, assume as is likely to be the case , that the US has a comparative disadvantage in textiles. With free trade, the US will import textile products. The imports increase the supply of textile products in the US, decreasing their prices. The decrease in prices will reduce the profits of the owners of American textile companies in the short-run. The decrease in textile prices will also decrease the demand for American textile workers, causing both the number of jobs for American textile workers and their wages to decrease. Therefore, owners of American textile companies and their workers are “losers”.