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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
Taxes-Example Problem
• 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
Taxes-Example Problem
• What is the average tax rate of a person who
makes $37,000 per year?
• 𝐴𝑇𝑅 =𝑇𝑂𝑡𝑎𝑙 𝑇𝑎𝑥𝑒𝑠 𝑃𝑎𝑖𝑑
𝑇𝑂𝑡𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒
• Total Tax Paid=$952.5 + $3,297 = $4,249.50
• 𝐴𝑇𝑅 =$4,249.50
$37,000= 11.49%
Taxes-Example Problem
2
• What is the Marginal Tax Rate the
person pays?
Taxes-Example Problem
• What is the Marginal Tax Rate the
person pays?
• 12%
Taxes-Example Problem
3
• What is the Average Tax Rate for a
couple earning $74,000 (total)
Taxes-Example Problem
• 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
Taxes-Example Problem
• 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
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
International Exchange
• 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
International Exchange
• 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
• Which country should produce Wine? And which should produce textiles?
• 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
International Exchange
• Which country should produce Wine? And which should produce textiles?
• 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 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
International Exchange
• Which country should produce Wine? And which should produce textiles?
• So every time France produces one Wine they must give up 3 textile rolls
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
International Exchange
• Which country should produce Wine? And which should produce textiles?
• 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
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
International Exchange
• Which country should produce Wine? And which should produce textiles?
• So France should produce Wine because it has a comparative advantage (lower
opportunity cost)
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
International Exchange
• Which country should produce Wine? And which should produce textiles?
• 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
International Exchange
• Which country should produce Wine? And which should produce textiles?
• 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
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
International Exchange
• Which country should produce Wine? And which should produce textiles?
• 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
International Exchange
• 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”
International Exchange Rate
• Table Team Question 5
• What if we wanted to find the exchange rate:
• _____ Pounds per Euro?
International Exchange Rate
• 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