In recent years, Russia has benefited from high world prices for the large amoun

Question

In recent years, Russia has benefited from high world prices for the large amount of oil it produces for export. As a result, Russia has had positive net exports. Because oil is partly state owned and heavily taxed where privately owned, government tax revenues have increased so that the Russian government budget is in surplus. How would these differences between the Russian and U.S. economies affect the direction of the arrows in the circular flow diagram? Explain any changes that would need to be made.

Explanation / Answer

A central feature of the U.S. economy is the economic freedom afforded to the private sector by allowing the private sector to make the majority of economic decisions in determining the direction and scale of what the U.S. economy produces.This is enhanced by relatively low levels of regulation and government involvement,as well as a court system that generally protectsproperty rightsand enforces contracts. But this is not a case for the Russian economy. In Russia, the private are heavily taxed when it comes to oil production and export.

The net result is that Russia would have to go for of export oil at a higher price to compensate for their taxes, so their demand would decrease. On the other hand, USA's oil would have a higher demand as it would be less costly. As the demand would increase, there would be a rise in price.

Counter-cyclical policies isrecommended.An example of a counter-cyclical policy is raising taxes to cool the economy and to prevent inflation when there is abundant demand-side growth, and engaging in deficit spending on labour-intensive infrastructure projects to stimulate employment and stabilize wages during economic downturns. Classical economics, on the other hand, argues that one shouldcuttaxes when there are budget surpluses, and cut spending

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