3.6 Demand management - fiscal policy Questionbank

Nepal is a landlocked country in South Asia with an estimated population of 29 million. Agriculture remains central to the economy, accounting for about 27% of gross domestic product (GDP) and employing a sizeable proportion of the workforce. However, the country also relies heavily on tourism and remittances from migrant workers abroad, which make up more than 25% of Nepal’s total GDP. Nepal has been seeking to diversify its economy through foreign direct investment (FDI) in energy, infrastructure, and services.

In 2020, Nepal’s GDP stood at US$29.3 billion. By 2021, it had increased to US$30.5 billion, partly due to post-pandemic economic recovery and continued growth in the tourism sector. Official unemployment figures in Nepal are relatively low, but underemployment remains a major issue, especially in rural areas. The country’s Gini coefficient is estimated at 0.32, indicating moderate income inequality, though rural–urban disparities still persist. Nepal’s tax system includes both direct and indirect taxes; the highest marginal rate for personal income tax is approximately 30%.

The tourism sector is vital. Trekking permits, especially for the Annapurna, Everest, and Langtang regions, represent a key source of government revenue. Due to recent changes in permit fees and fluctuations in tourism numbers, local businesses have experienced varying levels of income from trekking-related services.

Table 1: Labour market data in Nepal (2021)

Table 2: Trekking permit data for Nepal

Albania is a country in Southeastern Europe with an estimated population of about 2.8 million in 2022. The Albanian economy has been transitioning from a centrally planned system to a market-based system and has experienced positive real GDP growth in recent years. Tourism is a significant contributor to Albania’s GDP, and the government has intensified efforts to promote the country’s attractions along its Adriatic and Ionian coasts.

In 2022, Albania’s unemployment rate was around 12%, partly due to structural challenges in the economy. The government operates a progressive personal income tax system, with rates ranging from 0% up to 23%. Corporate income tax is set at 15%. Value-added tax (VAT) on most goods and services stands at 20%.

Albania’s trade balance remains negative, as the country’s main exports (textiles, footwear, and mineral fuels) have not kept pace with imports (machinery, food, and manufactured goods). The government has embarked on several infrastructural projects to attract foreign investment and reduce transport costs, including a newly announced US$200 million investment in highways. Economists estimate the marginal propensity to consume (MPC) in Albania to be about 0.8.

Table 1: Selected Macroeconomic Indicators for Albania

Table 2: Tourism Data in Albania (2022)

Guatemala is a Central American country with an estimated population of 17.9 million (2022). According to World Bank data, real GDP was approximately US$85 billion in 2022. Agriculture, particularly coffee, sugar, and bananas, makes up a significant portion of Guatemala’s exports (around 28% of total exports). While the tourism sector has been expanding, recent global events caused slowdowns. The country experiences persistent inequality, with a Gini coefficient estimated at about 0.48 in 2021. Poverty remains a major concern, especially in rural areas.

Guatemala’s tax system includes both direct and indirect taxes, although collection remains challenging. Personal income tax rates are progressive, with a top rate of 31%, while the corporate income tax rate is 25%. A value-added tax (VAT) of 12% applies to most goods. Government spending has focused on infrastructure and social programs to reduce poverty and increase potential long-term growth.

Table 1: Macroeconomic Indicators of Guatemala (2019–2022)

Table 2: Income Distribution in Guatemala (2021)

Table 3: Market for Guatemalan Coffee in the US (price per 50 kg bag)

Table 4: Tax Rates in Guatemala

Figure 1 (not drawn here) shows that, when government spending in Guatemala increases by US$1 billion, real GDP rises by an estimated US$2.5 billion. This suggests a government spending multiplier of 2.5.

Italy is the third-largest economy in the Eurozone, with one of the highest levels of public debt in the world (approximately 150 % of GDP in 2021). Despite having a diversified manufacturing sector and being one of the world’s largest wine exporters, Italy has faced persistent challenges, including relatively low growth, high structural unemployment, and regional disparities between the more industrialized North and the agricultural South.

According to the World Bank, Italy’s real GDP grew by 3.9 % in 2022, following a rebound in economic activity after significant pandemic-related contractions. Tourism accounts for about 13 % of GDP, while wine exports, led by regions such as Veneto and Tuscany, play a significant role in the country’s trade balance. However, youth unemployment remains high, and income inequality, measured by the Gini coefficient, remains a concern for policymakers.

Tble 1: Selected Macroeconomic Indicators of Italy (2019–2022)

Table 2: Distribution of Income in Italy by Quintile (estimates for 2022)

Italy’s fiscal policy is characterized by a progressive income tax system, where the tax rate increases with higher incomes. Meanwhile, corporations face an average of 24 % corporate tax. The government has struggled to foster high-growth rates due to constrained public finances and the need to manage its large debt burden.

Table 3: Market for Italian Wine Exports (2022)

Producers of Italian wine benefit from strong demand in foreign markets. However, increasing global concerns about inflation and supply chain disruptions have impacted production costs, especially for small wineries. The table above shows data for two different price points in the export market for Italian wine.

Estonia is a small Baltic nation of approximately 1.3 million people and a member of the European Union (EU). Its economy is characterized by a highly developed digital infrastructure, a strong commitment to innovation, and comparatively low public debt. The country has seen notable growth in service sectors such as tourism and information technology (IT). Estonia is also known for its relatively low level of corruption and ease of doing business.

In recent years, Estonia’s GDP growth has fluctuated. Between 2018 and 2019, real GDP grew steadily due to robust exports of IT services and growth in inbound tourism. However, the global economic slowdown in 2020 led to lower tourism revenues, affecting the country’s overall economic performance. Income inequality has been an area of focus for policymakers, given Estonia’s Gini coefficient has been moderate but slowly increasing. The government maintains several forms of taxation (including VAT, personal income tax, and corporate taxation), each contributing differently to government revenue.

Tourism is an important source of income, especially from visitors from Finland, Russia, and other EU countries. Average spending per tourist has tended to rise, but so have accommodation and transportation costs. The price elasticity of demand for inbound tourism is not negligible, as changes in travel costs and exchange rates influence tourist flows.

Estonia’s taxation system includes a flat personal income tax rate of 20%, although there are discussions about introducing progressive elements. VAT rates vary depending on the product category. Meanwhile, the government has contemplated expansionary fiscal measures to offset slower growth periods. Policymakers also debate the efficacy of supply-side policies (such as reducing labor taxes and encouraging business start-ups) to maintain Estonia’s competitiveness in the global digital economy.

Table 1: Selected Macroeconomic Indicators for Estonia (2018–2021)

Table 2: Estimated Demand for Inbound Tourism (annual)

Table 3: Government Tax Data (2021)

Table 4: Consumption and Multiplier Data (2021)

Denmark is a highly developed economy in Northern Europe with a population of about 5.9 million. It boasts one of the highest standards of living in the world, supported by a broad-based welfare system and progressive taxation. The service sector, advanced manufacturing, and renewable-energy technology form key parts of its economy. Denmark’s central bank has maintained low interest rates, helping to foster economic stability. However, challenges such as ensuring long-term sustainability of the welfare system and addressing potential future energy shortfalls remain.

Exports are crucial for Denmark’s economic success, with wind turbines, pharmaceuticals, and meat products contributing significantly to export revenues. Wind turbine manufacturers in Denmark have become global leaders, but recent shifts in global demand and competition from Asian producers have tested the capacity of local firms. Meanwhile, a high rate of personal and corporate income tax has provided funds for extensive public expenditure, including education, healthcare, and infrastructure.

Table 1: Selected Macroeconomic Indicators for Denmark (2022–2023)

Table 2: Market for Wind Turbines Produced in Denmark

Table 3: Income Distribution in Denmark (2022)

Table 4: Overview of Tax Rates in Denmark

In 2023, an energy-infrastructure firm in Denmark is planning a major investment worth 1.2 billion DKK, and claims it could significantly boost the economy by generating additional consumption expenditures.

Wind Turbine Exports
Denmark exported 70 units of wind turbines at an average price of 11,000,000 DKK per unit to other European countries in 2022. Owing to rising demand for renewable energy worldwide, the price of wind turbines exported from Denmark is expected to rise from 11,000,000 DKK to 12,000,000 DKK per unit in 2023. However, global competition from producers in Asia might cause changes in the quantity demanded.

Fiji is an archipelago located in the South Pacific, known for its thriving tourism industry and longstanding sugar sector. Tourism directly and indirectly accounts for nearly 38% of Fiji’s gross domestic product (GDP), making it one of the country’s main sources of foreign exchange. The island nation receives over 800 000 international visitors in a normal (non-pandemic) year, with most tourists arriving from Australia and New Zealand. However, dependence on tourism also makes Fiji vulnerable to external shocks such as global economic downturns or natural disasters.

The sugar industry is the second-largest contributor to Fiji’s export earnings, employing workers in growing, harvesting, and processing sugarcane. Due to changing weather patterns and competition from other sugar-producing nations, sugar production in Fiji faces challenges in expanding supply. In an effort to diversify government revenue, Fiji applies a 9% value added tax (VAT) on domestic sugar sales.

In 2022, the Fijian government announced a 200 million FJD infrastructure investment program aimed at improving rural roads, upgrading port facilities, and modernizing sugar processing plants. Economists estimate Fiji’s marginal propensity to consume (MPC) at 0.75, suggesting a potentially significant boost to aggregate demand if the infrastructure spending is effectively implemented.

Table 1: Key Macroeconomic Indicators for Fiji (2019–2020)

Table 2: Sugar Market Data in Fiji

Additional Information

• Fiji’s VAT on sugar is 9%.
• The government’s total planned infrastructure investment in 2022 is 200 million FJD.
• Economists estimate Fiji’s MPC = 0.75.
• Corporate tax rate is 20%.
• Personal income tax is a progressive system up to 20%.

Estonia is a small, high-income European country with a population of around 1.33 million. The Estonian economy is highly open, with exports accounting for a large share of its GDP. In 2021, Estonia’s real GDP was approximately €34.5 billion, growing by 8.0%, while the 2022 figure rose to €36.4 billion, with real GDP growth of 3.5%. Over the same period, the unemployment rate declined from 6.2% to 5.6%.

Estonia is known for its advanced digital infrastructure, which has attracted investment in technology and services. However, inflation surged in 2022 due to global supply pressures and increased energy prices. Estonia has a relatively low level of income inequality compared to many countries, as measured by its Gini coefficient, which improved slightly from 0.31 in 2021 to around 0.30 in 2022.

Estonia’s tax system is characterized by a flat personal income tax rate of 20% and a 20% corporate tax on distributed profits. The government also raises revenue through value-added tax (VAT) at 20%, excise duties, and social security contributions of 33%. The timber industry plays a significant role in Estonian exports; higher prices for timber have contributed to fluctuations in export earnings.

Below are three tables presenting selected data for the Estonian economy:

Table 1: Selected Macroeconomic Indicators for Estonia (2021–2022)

Table 2: Timber Market Data in Estonia

Table 3: Tax Revenue in Estonia (2022)

Serbia is a country located in Southeastern Europe with a population of approximately 6.9 million. Its official currency is the Serbian dinar (RSD). According to official estimates, Serbia’s nominal GDP in 2022 reached US$65.2 billion, growing from US$63.5 billion in 2021. The unemployment rate stands at 9.8%, although it can be higher in rural areas. Inflation in 2022 averaged about 11.5%, driven partly by increasing energy prices.

Serbia is well-known for its agricultural output—especially raspberries, where it ranks among the top producers in the world. Domestically, the government charges a 20% value added tax (VAT) on many goods and services. The personal income tax system has a base rate of 10%, rising gradually for higher income brackets, while corporate income is taxed at 15%. The Gini coefficient stands at 0.35, suggesting moderate income inequality.

Trade is a constant focus of Serbian economic policy. Serbia has strong trade links with the European Union (EU), which accounts for roughly 63% of its exports. Policymakers have debated using expansionary fiscal policy to support economic growth, focusing on infrastructure development and public investment.

Table 1: Selected Macroeconomic Indicators for Serbia (2022)

Table 2: Labour Market Data for Serbia (2022)

Table 3: Domestic Market for Raspberries in Serbia

Figure 1 (not shown) illustrates the domestic demand (Dd) and supply (Sd) for raspberries in Serbia, where the equilibrium price in 2022 was 300 RSD per kg. By early 2023, the price reached 350 RSD per kg as global demand picked up.

India’s economy is one of the fastest-growing in the world, yet it continues to face various challenges such as income inequality, infrastructure bottlenecks, and volatile agricultural markets. Onions, for instance, are a staple food item in India and play a significant role in the Consumer Price Index (CPI). Fluctuations in onion prices, caused by unpredictable supply shocks and strong consumer demand, can lead to rapid changes in household expenditures.

Macro Performance and Government Revenues
India’s real GDP growth slowed down in 2019; however, the economy was still thriving compared to many other emerging markets. Due to the impact of the COVID-19 pandemic in 2020, real GDP growth declined sharply, but bounced back in 2021 and remained relatively strong in 2022. The country’s population continues to grow, contributing to both challenges and opportunities for economic development. Despite a rebound in total government tax revenues (direct and indirect taxes), issues of income inequality remain significant.

Table 1 below shows selected macroeconomic indicators:

Table 1: Selected Macroeconomic Indicators for India (2019–2022)

Income Distribution
India has made strides in reducing poverty; however, income inequality remains an obstacle to equitable growth. Table 2 presents approximate data on the distribution of income by quintile in 2022:

Table 2: Income Distribution in India (2022)

Market for Onions
Onions are a basic necessity in the Indian diet, but supply constraints (such as monsoon variability and storage issues) often drive significant price volatility. Table 3 shows onion prices and daily quantities demanded in four major Indian cities:

Table 3: Onion Prices and Daily Quantities Demanded

Recently, policymakers have been studying the price elasticity of demand and supply (PED/PES) for onions in order to design more effective price stabilization policies. In Mumbai, if prices were reduced from INR 30/kg to INR 25/kg, it is estimated that daily onion consumption would rise from 900 tonnes per day to 1,000 tonnes per day.

Government Investment and the Multiplier
India’s government regularly invests in infrastructure (roads, railways, digital connectivity) to stimulate growth. Economic models suggest that such investments may have a significant multiplier effect on real GDP if the marginal propensity to consume (MPC) is high. On average, the MPC in India is estimated to be around 0.8, though regional differences exist.

Figure 1 below shows the country’s real GDP growth trend from 2019 to 2022, illustrating the sharp slowdown in 2020 and the rebound in 2021.

Figure 1: India’s Real GDP Growth from 2019–2022

• 2019: +4.0%
• 2020: –6.6%
• 2021: +8.9%
• 2022: +7.0%