Assignment 1

Md. Rabib Al Rafayed

2023-1-88-005

Task # 1: Provide an illustration of welfare costs of inflation in the

context of Bangladesh.
The annual inflation rate in Bangladesh was 9.63% in September 2023, which is a slight decrease
from the previous month’s rate of 9.92%. The most significant categories in the consumer price
index are food, non-alcoholic beverages, and tobacco (59% of the total weight) and gross rent,
fuel, and lighting (17%). The inflation rate has been a concern for the country’s economy as it
can lead to a decrease in purchasing power and an increase in the cost of living. In the context of
Bangladesh, some possible welfare costs of inflation are:

 Reduced purchasing power: Inflation erodes the real value of money and reduces the
purchasing power of households, especially the poor who spend a large share of their
income on food and other necessities. This can lower their living standards and increase
poverty.
 Distorted relative prices: Inflation can distort the relative prices of goods and services,
leading to inefficient allocation of resources and misinformed decisions by consumers
and producers. For example, inflation can make some goods appear more expensive than
others, even if their real prices have not changed.
 Increased uncertainty: Inflation can increase uncertainty and risk in the economy,
making it harder for people to plan and invest in productive activities. For example,
inflation can reduce the real returns on savings and financial assets, discouraging saving
and investment. Inflation can also affect the credibility and stability of the monetary
policy and exchange rate regime, creating macroeconomic instability.

Task # 2: Pick any industry or sector in Bangladesh and explain price

setting behavior in practice.

In the face of a soaring cost of living, many low and middle-income people in Bangladesh have
either ditched branded products or switched to smaller packs, causing consumer goods producers
and marketers to record a slowdown in sales in 2022.
Senior executives of several fast-moving consumer goods (FMCG) companies told The Daily
Star that the sales volume of non-essential products either fell or posted a very minimal growth
last year compared to 2021.
FMCGs, also known as consumer-packaged goods, are products that sell quickly at relatively
lower costs. And the top officials say people have become more sensitive to the prices while
sensitivity to the brands fell, meaning they are giving up their preferred brands in order to access
low-priced alternatives.
This is because their purchasing power has eroded as inflation has persistently remained at an
elevated level since March while incomes have stagnated. We can see, even though demand has
Assignment 1
Md. Rabib Al Rafayed
2023-1-88-005
decreased, prices might go down slowly because companies don't want to be the first to make big
pricing changes.

Task # 3: Can efficiency wage improve quality and effort among

public/private sectors workers in Bangladesh?
Efficiency wage theory suggests that increasing wages can lead to increased labor productivity
because workers feel more motivated to work with higher pay. Therefore, if firms increase
wages, some or all of the higher wage costs will be recouped through increased staff retention
and higher labor productivity. However, according to a World Bank study, public sector workers
in developing countries are generally paid a wage premium compared to all private sector
salaried employees, but the size of the premium is sensitive to the choice of the private sector
comparator and varies considerably by worker characteristics. For most countries, the average
premium disappears when the public sector is compared to only formal sector private employees,
especially when controlling for occupation. The public sector wage premium is higher for
women and low-skilled workers. In contrast, high-skilled public sector employees are most often
paid the same as their private sector counterparts or may even pay a penalty for working in the
public sector.

Task # 4: Find an application of Lucas critique in the context of

Bangladesh.

The Eastern Bank Ltd has never been robbed. Statistical analysis using high-level, aggregated
data would therefore indicate that the probability of a robbery is independent of the resources
spent on guards. The policy implication from such analysis would be to eliminate the guards and
save those resources. This analysis would, however, be subject to the Lucas Critique, and the
conclusion would be misleading. To properly analyze the trade-off between the probability of a
robbery and resources spent on guards, the "deep parameters" (preferences, technology, and
resource constraints) that govern individual behavior must be taken explicitly into account.
Criminals’ incentives to attempt to rob EBL depends on the presence of the guards. In other
words, with the heavy security that exists at the fort today, criminals are unlikely to attempt a
robbery because they know they are unlikely to succeed. However, a change in security policy,
such as eliminating the guards, would lead criminals to reappraise the costs and benefits of
robbing the fort. So just because there are no robberies under the current policy does not mean
this should be expected to continue under all possible policies.

TASK # 5: Why does the Bangladesh Bank still target monetary

aggregates as operating instruments?
Assignment 1
Md. Rabib Al Rafayed
2023-1-88-005
Bangladesh Bank still targets monetary aggregates as operating instruments as interest rate
targeting policy requires an active bonds market and an active call money market (overnight
inter-bank borrowing reserves market). Another inevitable prerequisite is denationalizing the
state-owned commercial banks (SOCBs). The government must participate in the financial
market to raise funds for deficit financing. That way, SOCBs would be free from the clutches of
the government - one that is a long-standing demand of all and sundry, including the IMF. Once
denationalized, they will have to compete with private commercial banks on an evenly leveled
playing field and become efficient - if they were to continue doing the business of banking.
Finally, the biggest impediment to IRT policy adoption is BB's operational status as being an
acquiescent entity of the ministry of finance, unlike the Federal Reserve, which is a
constitutionally independent institution.

Task # 6: Investigate the Marginal Tax Rate of Bangladesh

› Find out the MTR in Bangladesh.

› Find tax-deductible items in Bangladesh.

› Find evidence of tax avoidance and tax-shelter activities in

Bangladesh.

The Marginal Tax Rate of Bangladesh is 25%

Tax Exemptions:

1. Agriculture income: Income from agriculture is exempted from tax in Bangladesh.

However, if the agricultural income exceeds a certain threshold limit, then it becomes
taxable.
2. Educational scholarship: Educational scholarships received by students for their
education are exempted from tax.
3. Income from investments in specified bonds: Interest income earned from investments
in government-approved bonds is exempted from tax.
4. Income from foreign sources: Income received from foreign sources by a resident
Bangladeshi is exempted from tax.
5. Income from savings certificates: Interest income earned from investments in national
savings certificates is exempted from tax.
Tax Deductions:

1. Provident Fund: Employee contributions to a recognized provident fund are deductible

from taxable income up to a certain limit.
Assignment 1
Md. Rabib Al Rafayed
2023-1-88-005
2. Life insurance premiums: Premiums paid towards life insurance policies are
deductible from taxable income up to a certain limit.
3. Medical expenses: Medical expenses incurred for the treatment of the taxpayer,
spouse, and dependent children are deductible from taxable income up to a certain
limit.
4. Donations: Donations made to charitable organizations are deductible from taxable
income up to a certain limit.
5. House rent: Rent paid for accommodation is deductible from taxable income up to a
certain limit.
Review shows that several factors have impacts on the tax avoidance and tax evasion practices in
Bangladesh. These factors are classified under three categories namely,
(1) individual taxpayers,
(2) business taxpayers, and
(3) tax administration.
Income level, tax penalty, tax morale, inefficient tax return system, and tax assessment process
are associated with the individual’s tax avoidance and tax evasion activities. Profitability,
corporate governance, financial restrictions, are key factors under business taxpayers’ category
that influence tax avoidance and tax evasion. Factors which are related with tax administration
include lack of social interaction, distrust of national official, complexities of policies,
politicization of tax authority, lack of political stability, incompetent auditing, insufficient
recording, lack of administrative cooperation, lack of accountability, insufficient counselling, and
compromising in tax prosecution cases. Corruption, hassle of payment, complex tax assessment,
quality of tax collection services and high tax rate are common factors under all categories that
have an impact on the tax avoidance and tax evasion activities in Bangladesh.

Task # 7: Tax Elasticity

I could not find any published sources.