Question

International per capita GDP comparisons are misleading when countries involved differ greatly in the percentage of economic activity that is transacted in organized markets.  

1) Why is it?

Why do permanent tax cuts have a greater impact on consumption than temporary tax cuts?

Permanent tax cuts affect expectations of long-run income more than temporary tax cuts.

2) Tell me more details why.

Answer 1

1 It is because in many developing countries unorganised markets are there. There is no good record on the number of transactions occurring in these markets and on the value of these transactions. Quite often information is kept hidden from govt. Infact in some countries like India parallel economy proportion has even been estimated upto 50%.The more the promotion of goods traded in these unorganised markets the smaller is the per capita gdp figure reported by govt. on the other hand transactions in developed countries occur usually in organised markets. So their reported GDP per capita tends to be higher. Thus per capita gdp comparison can be misleading

2 Temporarily tax cuts increase transitory income. It does not increase income for a long time. The individual knows soon there will be no such increase in disposable income due to tax cut. He thus tries to save some part of the increased income for future consumption or future emergencies. On the other hand in case of permanent tax cut the individual knows he can meet future needs and contingencies with increased disposable income which is going to continually pour in month after month. He thus does not save much for future use. Thus his consumption increases