Macroeconomics

[blackrose420]

“This is an indisputable fact that all governments spend money. Some of this spending is to buy goods and services (such as roads and police), and some is to provide transfer payments (for the poor and elderly, for example). The revenue raised through the printing of money is called seigniorage. The term comes from seigneur, the French word for “feudal lord”. In the Middle Ages, the lord had the exclusive right on his manor to coin money. Today this right belongs to the central government, and it is one source of revenue.”
<b><font color="blue">Refer to the above scenario; one method of government to finance its spending is seigniorage, mention two other ways through which government can finance its spending</font id="blue">.</b>

[Mahtab]

1.Tax
2.Loan

[maqszaman]

Although Mahtab has mentioned two more sources of govt financing but I am eager to highlight some important facts here. The govt finances it spending by two sources viz Revenues & Deficit Planning. Revenue encompasses Direct Taxes such as Income Tax or Wealth Tax (Abolished in Pakistan now) and Indirect Taxes such as Customs' Duty, GST, Excise, Surcharges etc. Another major source of govt. revenue is fiscal levies such as Transfer fees, property taxes, fines, penalties, etc. These taxes are collected at different Govt. levels.

If the expenditures are higher than the revenues, it finances the deficits by taking loan from Internal banking systems in the form of Treasury Bills or borrows money from international banking systems such as World Bank, MIF, ADB or from govt USA, Japan, UK Canada, Sweden etc. The other source is to print currency notes.

Deficit planning always results in inflation and weak currency units. It is also a major reason of making poor more poor and rich more rich. If people don't mind, unfortunately, there is no legal protection of deficit planning in Pakistan. In other countries, there are constitutional bindings on the govt not to exceed from a certain limit, such as in India.

[Toronto_Boy]

Dear Maqsood

You have raised a very good issue of deficit financing, though I see it a little differently specially in Pakistan's perspective. In essence, I am supportive of deficit financing for development projects and not for non-development expenditures like salaries of bureaucracy.

I would discuss it further if time permits.

Regards

[maqszaman]

Hi Toronto Boy,

Deficit planning is only good if it is managed in certain parameters. Generally it is 2% to 3% of GDP. No doubt deficit planning help economies grow and ignite economic activities. However, in Pakistani prospective, Govt over runs the limited which has caused inflation to grow more than 20% as per CIA Report of Facts, WB & IMF. Food inflation is even higher. I don't think that deficit planning is the only reason for such high inflation. In fact corruption is also a major factor.

[awaisaftab]

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by maqszaman</i>
<br />Hi Toronto Boy,

Deficit planning is only good if it is managed in certain parameters. Generally it is 2% to 3% of GDP. No doubt deficit planning help economies grow and ignite economic activities. However, in Pakistani prospective, Govt over runs the limited which has caused inflation to grow more than 20% as per CIA Report of Facts, WB & IMF. Food inflation is even higher. I don't think that deficit planning is the only reason for such high inflation. In fact corruption is also a major factor.
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

In my opinion the volume of any economic activity or perameter should be described in relation to per centage with N.I rather comparing on GDP basis.

[Toronto_Boy]

Not necessary. GDP approach used for deficit financing is more conservative approach to control domestic inflation that would be caused by deficit financing.

NI would include income generated from resources external to country (e.g. remittances, profits from outside country etc.). Deficit financing based on income generated outside of country would cause inflationary pressures on goods and services produced inside of country, because deficit financing would be more than required level to be supported by goods/services available inside the country. Its like credit creation in Pakistan based on incomes of Pakistanis living outside of Pakistan. This would cause more inflation in country, because it is not backed-up by income generated WITHIN country.

So, using GDP is more restrictive and conservative approach in this case of deficit financing.

[maqszaman]

As far as I have studied economics, all percentages are based on GDP which is a yard stick in economics. GDP is the basic economic indicator. However, HDI factors are not entirely based on GDP, which is quite a different aspect of developmental economics. Deficit planning/financing is also compared as percentage of GDP.

Now come to the point, deficit planning/financing is also a tool of economic growth, if used rationally otherwise it causes devastating effects on the economy. In our country, deficit planning is used to meet running expenditure of the govt. I remember that in the current year budget, deficit planning/financing was much higher than the developmental budget that means the govt. is meeting its running expenditures through deficit planning/financing. Even in the developmental budgets, ERR is calculated first which is a key factor in developmental economics.

[awaisaftab]

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by maqszaman</i>
<br />As far as I have studied economics, all percentages are based on GDP which is a yard stick in economics. GDP is the basic economic indicator. However, HDI factors are not entirely based on GDP, which is quite a different aspect of developmental economics. Deficit planning/financing is also compared as percentage of GDP.

Now come to the point, deficit planning/financing is also a tool of economic growth, if used rationally otherwise it causes devastating effects on the economy. In our country, deficit planning is used to meet running expenditure of the govt. I remember that in the current year budget, deficit planning/financing was much higher than the developmental budget that means the govt. is meeting its running expenditures through deficit planning/financing. Even in the developmental budgets, ERR is calculated first which is a key factor in developmental economics.

<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

I am agreed and know very well that GDP is used as yardstic. But I gave only a suggestion. Therefore also a trend of using NI as comparsion, but in rare cases.

[Toronto_Boy]

Yes Awais, I forgot to say that your suggestion or question was quite unique and intelligent to see things differently. An out of box approach that caused me to think in different way.

Thanks for it.

Regards

[maqszaman]

@ Awais,

I am sure that you are very well aware of the economic concept and I am really impressed with your subterranean understanding of economic principles. I knew that you were referring to Economic Rate of Return (ERR) when you were mentioning NI as a yard stick. You just missed the term so I mentioned it too. Comparing other indicators with NI will require thorough research to develop relationship and interpretation. It will also require decades becasue of its applications.