Relationship Between Income Growth, Inflation Rate And Tariff Rates: A Report For Schmeckt Gut

Supply and Demand

So for Schmeck Gut to effectively launch its Besser energy bar within Atollia, it requires to consider different economic environment factors. Some of these factors include income growth, Tariff rates on the imports, as well as inflation (Mankiw, 2014). The company should put into consideration the relationship between these factors before setting the energy bar. There is correlation between these three variables-inflation rate, tariff rates on imports, as well as Income growth. Tariff rates or simply a tariff refers to tax imposed on imports for their consumption within a given country (Akimaya& Dahl, 2018). They are very important in protecting domestic goods from competition caused by the imported goods. Inflation on the other hand is defined as the persistent or continuous price rises for goods and services within a country. An inflation rate compares the value of currency within the country’s economy to value of purchasing a unit of a required good or service. Income growth or increase in income is defined as rise in individuals or Organizations income that is earned or received (Parenti, Ushchev, &Thisse, 2017). The relationship between inflation rate growth, income growth, and tariff can be explained using supply and demand, aggregate demand & aggregate supply, Philipp’s and Laffer curves. The relationships are described below:

The growth of income by a rate of 5% will possibly cause an increase in demand of products; it may possibly cause a shortage or reduction in supply (Akimaya& Dahl, 2018). Income growth to the company will force it to hire more employees thus enhancing production and increasing product demand as well as increasing wages. Increase in demand and decrease in the supply may lead to the rise of product prices thus increasing inflation. The 5% income increase would possibly cause an increase in the inflation rates by 2% according to the laws of supply and demand. Similarly 10% increase in the rates of tariffs would lead to a 5% decrease in the level of income of the company because of the increase in the prices of the goods imported (Coglianese, Davis, Kilian & Stock, 2017). On the same note, the increase in rates of tariff with a magnitude of 10% will lead to a less demand of domestic and imported products because of highly imposed prices. For this case, the consumers’ consumption on quantity of goods will reduce therefore causing limited supply. The domestic consumers within the country will be affected by the level and rates of tariffs as they tend to charge higher prices or charges.

According to the diagram above, increase in the tariffs will also lead to increase in the price of goods and services, this leads to reduction on the supply of imports (Cole, Giné, & Vickery, 2017).

Basing on the concepts of micro-economics, there exists two types of equilibrium. These types of equilibrium are; long term equilibrium and short term equilibrium. The long term equilibrium in micro-economics always happens when the wages and prices are very flexible regardless of the economic condition within the country. The short term equilibrium always happen when the prices of products and wages are not matching or corresponding to economic condition changes within the economy (Zhao et al, 2018). This implies that the changes within the economic climate, prices of the goods and services will not rise quickly to cause maintenance of equilibrium.

Supply and Demand curve

Aggregate demand and supply model refers to a concept that predicts or illustrates the aggregate or total demand and supply of particular commodities within the economy. The model is useful in determining the interactions between aggregate demand and total supply on the standard of macro-economics. Considering this case or scenario, it’s identified as there is an increase in the level or rate of productivity, the aggregate supply curve shifts rightwards therefore leading to reduction in the rates of inflation and an increase in the income growth (Jungherr, Mader, Schoen & Wuttke, 2018). On the other hand, the movement of the aggregate supply curve leftwards because of rises in the tariff may cause higher prices, lower imports, as well as high rates of inflation within the economy. For that reason it’s observed that the increase in the tariff rates by 10% would also lead to an increase in the rates of inflation by 2% and income level increase by 5% thus leading to redundant growth of the economy (Oladosu, Leiby,  Bowman, Uría-Martínez, & Johnson, 2018).The increase in the income of the firm is very important because it will lead to an increase in the firm’s profits. Therefore, this increase in the firms or company’s profits will force it to sell and produce more so as to be in the position of managing the resources that are drawn from the production (Jungherr, Mader, Schoen & Wuttke, 2018). Given the fact there is an increase in the income of the firm by 5% as well as the tariff rates by 10%, the desire of rising and expanding the output levels will increase causing a 2% inflation when there are price lag (Ruiz, 2012).

The increase in the rates of tariff by a percentage of 10% will cause high production within the local firms thus causing an increase in the total demand of domestic products thus causing an increase in the prices of services and goods. This is referred to as a demand-pull inflation. Increase in the rates of tariffs by 10% will lead to monopoly of domestic goods thus causing firms to increase on the prices of the goods within the market increasing on the inflation rates by 2%. If income levels increase by the percentage of 5%, Aggregate demand would rise causing price rise by 2% within the long run.

 Due to increase on rates of tariffs by 10%, there will be stagflation within the economy caused by reduction in supply of goods imported into the economy. Therefore the tariffs imposed on imported goods may cause shocks on aggregate supply of services and goods. The shocks are caused because the domestic firms within the country remain not competed leading to increase in prices of goods and services causing inflation. When the aggregate or total supply of goods imported into the country reduces, there is a reduction in the Growth Domestic Product (GDP) within the economy, prices skyrocket causing cost-push inflation.

In the above scenario, the increase in the rates of tariffs eventually cause a decrease in the total or aggregate supply of a given imported product, the aggregate supply curve shifts left. The existence of decreased supply of goods imported into the economy as well as inflation at the same time in the country may lead to stagflation (Alan & Stuart, 2011).

Aggregate supply and Aggregate demand

Referring to Laffer curve, though imposing very high taxes is useful to the economy in generation revenue, it’s a bad idea. The Laffer curve is very useful in giving graphical relationship among taxable income, tax rates, and tax revenue. Most individuals misinterpret the Laffer curve because they reject its existence. Others make assumptions that imposing tax rated should be conducted at very high levels. If the rates of tariff increase by 10%, the level of revenue from imports reduces because of limited supply of imports. Also the increases of rates of tariffs by a percentage of 10% causes and increase in domestic production of goods and services so as to compensate on the revenue lost on reduced supply of imports. Increasing on the taxes rates or tariffs causes reduction on the dollar rate but in the long run causes inflation because of low supply of services and goods (Bolshaw, 2012). Therefore, the tax rate increase within the economy has more bad than good, rather than improving the country’s financial status; it causes more financial problems compared to other countries having low rates of tariff.

Phillips curve is very useful in giving explanations about inflation theories expressed by an economist known as Keynes under different circumstances for example demand-pull and cost-push inflations. Explained by Keynes theories, demand-pull inflation is caused by an increase in demand of goods and services because of increase in the levels of employment within the economy. In this matter, increase in rates of Tariff by 10% will lead to reduction in the supply of imported commodities thus increasing aggregate demand of product and limited supply of domestic commodity because of constraints of employment. The theory makes an assumption of full employment level within the economy, the rate of aggregate demand and aggregate supply are considered to be equivalent thus causing a reduction in the rates of inflation from 2%.

 For this case where the tariff rates in the country are at 0%, the rate of inflation within the country is at 5% while the income level of the firm increases by 5%, the supply of the Schmeck Gut product and demand will increase or be high. The increase in demand and supply will cause the company to gain revenue (McConnell, 2009). The demand will be high because the supply of the commodities is high due to tax exemptions or free trade. This means that the price of goods will be low. Increase in income of the consumers will be also one of the major factors that would possibly cause increase on demand of the commodity. The increase in income causes demand increase because the products distributed by Schmeck are normal goods. Basing on demand theory, the higher the income of consumers, the higher the demand of the commodity given that the product is not an inferior good (Afonso&Kazemi, 2017). This is because consumers would be hoping to gain maximum satisfaction from the product.

At low rates of inflation of 2%, low income increase percentage at 1% would not have a very big negative impact on the demand of the commodity but high rates of tariff of 10% will cause a very big impact on the supply of the commodity. The high tariff rate will reduce on the supply of the imported good within the country thus causing increase in the prices. The increase in prices leads to decreased demand of commodity, this increases supply of domestically produced goods. The domestically produced goods would not be in position to serve the market thus limited supply of bar drinks and causing inflation rise rates in the country and low incomes (Akimaya& Dahl, 2018).There is also a positive correlation between the income of consumers and demand of commodity except the demand of inferior goods always have a negative correlation (Steffen, 2012).Therefore increase in prices and inflation within the country would affect the demand of these commodities.

Aggregate supply blows or shocks

When the economy’s tax is high, the demand of Schmeckt Gut products is affected. Given that there is high tax, the income increasing rate is at 2%, and the inflation rate within the economy is low, few of Schmeckt Gut products would be imported into the country. The demand of these commodities will very moderate because of the taxes (Mumbower, Garrow, &Higgins, 2014).The firm will be demanding high prices so as to balance the revenue and costs of production. This may fail to regulate a lot of revenue to the company because the consumers will shun away from the purchase of these commodities. Keynes noted that when the demand of services and goods within an economy is greater than the rate of production, it would increase price of these goods thus increasing money in circulation which causes inflation in turn. This type of inflation is referred to as demand-pull inflation (Roth, 2012). Therefore low supply of Schmeck Gut product in would possibly cause inflation, Inflation is very dangerous to the commodity prices. When the inflation is high in the economy, there are expectations of high prices of goods and services (Burke &Abayasekara, 2018). The Tariff rates are also useful in increasing the demand of domestically produced goods because they will reduce on the supply of imported goods. Tariffs are also used by the government in stopping the importation of cheaper commodities into the country (Lichter, Peichl, & Siegloch, 2017) Predictions on tariffs have a very big impact on demand of products of Schmeck Gut.

 When the rates of tariffs are low within the country, the demand of Schmeck Gut is expected to increase. When the percentage increase of income for the company is 3%, and the tariff rate is 0% which is a case of free trade, the demand of products produced by Schmeck would increase beyond the supply causing the fall of inflation with a rate of 3%. Increase in demand of the commodity with low supply causes demand-pull inflation while increase in demand matching the supply of the product would lead to fall in prices (Diaz, 2012). One of the advantages of low tariff rates is that they cause reduction on the prices of Schmeck Gut commodities which increases its competition with locally produced commodities(McConnell, 2009). Free trade will be favorable to the firm in the way that it facilitate increased supply of its commodities and this in turn reduces the prices of the commodities and demand. Increase in demand will cause increase in revenue of the company from sales (McConnell, 2009). The increasing tariff rates can affect the operations of Schmeck Gut by reducing the supply of its commodities thus low revenue.

When conducting the multiple regression for the demand of Schmeck product, four variables are used, one is a dependent variable while the other three are independent variables. The independent variables are “Mean income for the individual”, “Energy bar store number”, and the “tariff rate on the drinks”. The dependent variable during the analysis is the annual average demand for the energy bars for every individual. The results as expressed below were obtained through conducting multiple regressions (William, 2016).

Multiple regression analysis

The table below illustrates results which were obtained after carrying out the multiple regression analysis using excel.

Table 1: The table for regression statistics

Table 2: Illustration of the ANOVA results

Table 3: The table showing the regression coefficients

Analyzing the regression statistics table, the multiple R is used in the representation of strength of coefficient of correlation between the dependent variable and independent variable (Silverman, 2018). The resultant correlation between the independent and dependent variable in the analysis is 0.955933; this identifies a very strong correlation between the variables (Silverman, 2018). Using table of regression coefficient, all the independent variables have a very less p-value which is lower than 0.05. This shows that the variables have got a big effect on dependent variable. It is identified that when the given p-value of an independent variable is above 0.05, it means there is a very less impact on the dependent variable (Mankiw, 2014). The equation of regression after conducting regression analysis can be obtained using the different independent variable coefficients (Silverman, 2018). Therefore, to obtain the equation, the average demand for Schmeck energy bars for every person taken as Y, considering income for every individual as Earning PP, considering Tariff rates as T, and store number as storeNum. The equation of regression is expressed as:

Y = 0.004838*Earning PP -6.4568*T + 4.072444*storeNum – 12.1602.

Using the coefficients for every independent variable, the relationship between them and the dependent variable can be determined. Mean income of every individual is positively correlated to the annual average demand for the energy bars for every individual, it means that when there is increase in the income of individuals, there is also  increase in demand of energy drinks and vice versa (Free, 2010). Energy bar store number also has a positive correlation with annual average demand for the energy bars for every individual, this means increase on energy number of stores will also cause increase in the demand of the energy bar drinks and vice versa . Tariff rate on the drinks has a negative correlation with annual average demand for the energy bars for every individual (Labandeira., Labeaga., & López-Otero, 2017), this means that increase on the tariff rates will also cause reduction on demand of energy drinks while reduction on rates of tariffs will cause increase on energy drink demand (Campbell, 2009).

Scenario 1 (Inflation high):

When the inflation is assumed to be 5%, the increase rates of income 5% as well as tariff rates 0%, the company can possibly make revenue because of free trade. The only disadvantage is that the inflation may cause high costs of production and distribution costs. The board of the company should progress because there are expectations of making profits.

Scenario 2 (Inflation down):

When there is a low inflation and the income rate of increase is 1%, the tariff rate is 10%; the possibilities for the firm will be making low profits and revenue. The firm has to analyze the market before distributing its products; this would be very useful because it will help it understand the relationship between price and demand for the energy drinks within the market (Dimopoulos&Sacchetto, 2017).

Recommendations

Scenario 3(High taxes):

When the taxes are approximately 10%, expected rise in the incomes is 2%, a low inflation of 1% is caused. The company would possibly make low profits because of the high taxes which would force it charge high prices to its consumers thus decreasing the demand of the commodity.

Scenario 4 (low taxes):

Having taxes would possibly favor the country but would cause increase in inflation within the country. This possibly happens because there is increased demand which need to be covered up with similar rate of supply. If the company properly manages income rates, tariff rates, prices, and inflation rates would make revenue.

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