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Trade in Goods Trade in Services Income Current Transfers Balance of payments on Current Account - Capital Transfers - Financial Account
Balance of payments Unemployment
- Claimant Count (job seekers allowance) - ILO = International Labour Force Survey (people available for work)
Taxation Non – Economic Quality of Life Social Investment Measures
of Economic Performanc e
Frictional Unemployment Demand Deficient Technological Unemployment Seasonal Unemployment Real wage / Classical Structural Unemployment
Types Measured Measured Potential Growth Actual Growth Nominal Growth Real Growth
- By GDP - CPI (Expenditure and food survey, Price survey) - RPI
Income inequality = unskilled people are less likely to benefit from increased income.Long Term = Increase in AS . . How GDP is measured: Government measures all 3 All should amount to the same figure (1.Type of production changes= consumer to capital goods leads to short term unemployment for people with no flexibility. . . fuel). taxes. . This increases disposable income and encourages consumer spending c) Increased Govt spending.Potential Growth = an increase in the productive capacity of a country. . Increase in Labour productivity. . subsidies.Actual Growth = an increase in real income or growth domestic product. Terrorism. 2 speed world.Environmental Problems = depletion of non renewable resources. war.5.Government= higher tax revenue with no tax raise. .Employees= Incomes rise. .Government Instability = Economy cannot attract inward investment.3.Bottle necks = when there is little spare capacity factors of production rise in price. Benefits of Growth - . Discovering new raw material / lower costs . Increase in working population .6.Short term inflation . This occurred in the late 1980s and early 1990s.2.AD = C+I+G+(X-M) .Monopolies develop . (Labour.Increase for the following reasons . Increased Capital e. .Increase in any of the components .a) Lower interest rates – this reduces the cost of borrowing and so encourages spending and investment b) Increased wages.4. % increase in output. shares) increases.Terms Causes of Growth . through better education and training . Fewer unemployment benefits. investment in new factories or investment in infrastructure Economic Growth - . more external costs (CO2). TNCs. Real growth = real income rises.The country has a fiscal deficit = little power.4 trillion) However errors and omissions occur. If Economic growth is unsustainable then high inflationary growth may be followed by a recession.AD can increase for the following reasons.g.Boom and Bust Economic Cycles. .Short Term = Increase in AD . This rises consumer confidence. more disposable income. During boom – GDP rises very fast Recessions = falls for at least 2 consecutive quarters. G is a component of AD d) Cut in Income tax. GDP is the sum of all goods / services produced in a country in 1 year Also sum of incomes and expenditure. standard of living rises. Technological improvements to improve the productivity of Capital and labour . famine. As revenue rises firms can take on more workers and invest more. . . Increase in growth can mean wealth in assets (housing. . ease of access.External Constraints = trade is key driver of growth. Deregulation Costs of Growth . Good fiscal position Constraints on Growth .Labour market problems = shortage of skilled labour – rich countries = low birth rate which leads to small labour workforce.1. However governments have more money so can clean up. .Firms = forms make a profit as selling more goods.
Items only changed once a year = Tastes and fashion change a lot quicker. Fiscal Drag: The amount of tax we pay will increase if there is inflation. Mortgage payments are a large part of household spending. Menu Costs: cost of changing prices due to inflation. So if CPI rises by only 2% and control inflation. Pensioners have different spending habits e. so may not be representative and does not show people’s spending habits. Shoe leather costs: cost in terms of the extra time and effort involved in reducing money holdings. So are pensioners. CPI does not include housing costs. Random redistribution of income: Inflation will typically make borrowers better off and lenders worse off. Sustained rise in price level .g. Inflation reduces the value of savings. A rise in interest rates means many people will have higher mortgage payments. More inclusive than CPI but not as reliable for international comparisons. Eg bought a more expensive mobile this year than last year. imported costs. Measuring Inflation Consumer Price Index (CPI) 2 surveys . heating / bus travel account for a higher % of their expenditure. raw materials.000 households o Proportion of income spent on purchases. then 10% of weighting is assigned to food . Price change might not be result of inflation but because its been upgraded.) that cause a leftward shift in AS. Changes in Quality of goods. Low consumer confidence: people unwilling to spend or invest so firms revenue decreases. and food o Weighted.Expenditure and food survey = o Sample of 7. Wage increases measured by RPI. Eg if 10% of income spent on food.Causes of Inflation Demand-Pull – where aggregate demand (AD) rises at a faster rate than aggregate supply (AS) AD can increase due to an increase in any of its components C+I+G+X-M Cost-Push – increases in costs (labour. Inflation Problems Measuring Inflation CPI only measure an average household = Top and bottom 4% income brackets are ignored. etc.Price Survey o o o o o Collected once a month Basket of 650 items Selection of prices Basket updated each year PRICE CHANGE x WEIGHT = PRICE INDEX Costs of Inflation International competitiveness: high inflation rate will make British goods less competitive. This is because with rising wages more people will slip into the top income tax brackets. The measure breaks down as it is not comparing like with like. leading to a fall in exports.
Government Spending on unemployment benefit: Pressure on other forms: unemployed will have more health problems and crime.Claimant Count Costs of Unemployment Loss of output: waste of resources as workforce out of work.Demand side policies to increase AD .Stability .Lower interest rate .000 households o Questions= whether anyone is out of work for 4 weeks + and can start in next 2 weeks. so less income thus les tax revenue.Types and Causes of Unemployment Cyclical Unemployment Unemployment from a rise in AD Structural Unemployment Caused by decline in demand for certain jobs or due to changes in demand and supply Technological Unemployment Advances in technology causes lack of jobs International Unemployment Firms move abroad so jobs are lost in local country Measuring Unemployment 2 surveys . Unemploymen t o Records the no. .Fiscal Policy .Labour Force Survey (LFS) = o Face to face interviews and telephone surveys of 60. o More inclusive than claimant as involves 16+ o Time lag – 6 weeks out of date when published. of people receiving Job Seekers Allowance o Not many people are eligible to claim o Eg if you resigned from your job or refused 3 jobs Problems Measuring Unemployment Some people can be seeking jobs but not claiming JSA Sampling errors LFS is very expensive Claimant count cannot be international compared Policies to help Unemployment . Lost of tax revenue: less people in work.
Opposite to SPICED. Balance Of Payments An economy with high inflation and low productivity will have a deficit Financial Account Policies to Reduce Deficit Capital Account This refers to the transfer of funds associated with buying fixed assets such as land Devaluation = This involves lowering the value of the currency against others.g. insurance Net income flows (wages and investment income) Net current transfers (e. If producers cannot meet the demand then we have to import a lot more which leads to a deficit. Deflation = If government reduces AD by raising interest rates or taxes people will spend less and reduce consumption of imports.g. Balancing Item . Exports cheap imports expensive. Deflationary policies will also put pressure on manufacturers to reduce costs and competitive exports The success of this policy depends on the elasticity of demand for imports However this policy will conflict with other macroeconomic objectives with lower AD. Exchange Rate = a rise in exchange rate will raise exports prices and lower import market. Economic Growth = If there is an increase in AD and National Income increases. govt aid) This is a record of all transactions for financial investment.Causes of Deficit High Inflation = This makes exports less competitive and imports more competitive and expensive. tourism. It includes Net investment from abroad (e. growth is likely to fall causing higher unemployment. people will have more disposable income to consume goods.g. A record of money flows in and out This is a record of all payments for trade in goods and services plus income flow it is divided into 4 parts SPICED Balance of trade in goods (visibles) Balance of trade in services Deficit Current Account (invisibles) e. A UK firm buying a factory in Japan would be a debit item) Net financial flows These are mainly short term monetary flows such as “hot money flows” to take advantage of exchange rate changes Reserves Significance of Deficit A deficit forms a small percentage of real GDP = one that lasts a small time is not significant Deficit may indicate a growing economy= it could mean a healthy economy or could mean one with structural problems.
.Economy will slow down as less money in the circuit .Wealth is a stock concept whereas income is a flow concept . .The leakages determine the size of the multiplier I House Holds S G Factors of Production Goods and Services T X Firms M 3 injections Investment Government spending Exports .4 .These increase the circular flow and a change is magnified by the multiplier Multiplier .UK multiplier is 1. .In UK most wealth is held in housing 60% and others include shares and capital assets.Income Flows and Wealth Effects 3 leakages Savings Tax Imports .The multiplier is the number of times a change in income exceeds the change in net injections that caused it. . .Wealth does not have a direct impact on circular flow of income.The greater the leakages the smaller the multiplier . the final impact is much greater than the initial impact.However changes on wealth effect people spending and income patterns .The importance of the multiplier is that any change.Wealth is the sum of all assets in the economy.LEDC countries higher = higher growth Wealth Effects .
The stronger the currency the worse the net value exports. Firms borrow from banks to invest so if high interest rates cost of borrowing rises and firms are less likely to borrow.Exports minus imports gives total movement of funds .AD = C+I+G+(X-M) .At higher price levels.Reasons why value of net exports might change: . Spending . .Investment - .Down sloping because: . This happens when any levels rise. Inverse relationship between interest rates and investment. interest rates are raised.Net spending can also be increased ina recession.Changes in Global Economy = if USA have a recession they will buy fewer exports and will try to export more.AD is the total planned expenditure on goods and services produced in the UK. Demand for exports will fall and demand for imports rise.Lower prices in economy means increased international competitiveness so more exports and less imports. Housing markets. . . which will reverse the effect s of demand deficiency.Change in Exchange Rate = Strong Pound Imports Cheap Exports Dear.In summary when any AD components rise. However.Fiscal policy manipulates gov spending and taxation to change AD.Net exports . Short run price elasticity inelastic as deals have been made.A rise in Aggregate Demand is a necessary condition for a rise in Real National Output. .Almost half of all spending in economy . . . A change in investment will change the level of AD. if the economy is at full Capacity (inelastic LRAS) then an increase in AD may not increase real output. if consumers are confident then they will spend more Interest rates. Can be analysed using the accelerator. .Gov.Consumption Main component of AD. It measures the amount that consumers wish to spend at various price levels Determinants is consumer confidence. . So less investment and increased savings. When there’s a boom they tax more heavily. the AD curve shift to the right. . . . High interest rates leave consumers with less spending money after housing costs.Aggregate Demand and Supply Aggregate Demand .Does not need to equal tax revenue as the difference is either a budget deficit or surplus. They never fall just rise more slowly.The government can deliberately manipulate AD by overspending when there’s is a slowdown in economy. When house prices accelerate home owners can earn more form their houses. . however a change in AD will also change the level of investment.
Advances in technology .In the Long Run Aggregate Supply is determined by .Aggregate Supply . When AD increases short run extra spending but long run will be increased inflation with no increased output. level of investment. which in turn is influenced by cost of production. Eg 2012 Olypicis shortage of construction workers If AD increases then while the economy grows there will still be some inflation. or unemployed labour. Bottle Necks Constrictions in supply chain cause cost and wage pressure to build up. and real output would increase without causing an increase in price. - Keynesian View = The equilibrium level of output can occur below full employment level of output. supply side policies.Changes in quantity and quality of resources .Improvements in education and training .Largely influenced by productivity. Certain type of labour which when in short supply can have increased prices. Spare Capacity The economy can increase without any pressure on cost and prices This is because there are unused resources as firms are not working at full capacity.Amount that firms are willing to produce at various price levels.g. Full Employment Full capacity No spare workers. so firms have to offer higher wages to attract workers. through fiscal policy. 3 sections: Spare Capacity. AD would increase e. . Bottle necks. Full employment. .In the Short Run Aggregate Supply can be affected by Changes of cost in production Changes in cost of raw materials Change in wages Changes in producer tax .
. greater energy use – People’s income will increase so more travel abroad. – Less competitive. as more sold abroad – Growth resulted form increase in AS. Increase economic growth Control Inflation Decrease unemployment Protection of environment Restoration of balance of payment Equal distribution if income Inflation and Unemployment • Employment versus Inflation: – Policies to boost employment may be seen as desirable • But: – Could trigger economic growth that is too fast leads to inflation? – A shortage of labour can cause wage pressure to build up. • But: – Firm’s incentive to export stops. Conflicts between Objectives Econ Growth and Balance of Payments • Growth and balance of payments – Econ Growth = Consumer spend and demand for from imports – Good = Could be export lead growth which would help B OF P. more carbon use. – Spending will worsen the current account. – Green Taxes • But: – Higher employment means more congestion. and people spend causing increase demand and inflation – High unemployment will cause higher inflation 6 Objectives: Macro Objectives of Government Employment And Environment • Employment and environment – High employment means government has more tax revenue which can be spent on developing green technology.
interest rates. Target: Definition: Government changing the levels of Taxation and Govt Spending in order to influence AD UK the target of Monetary policy is to keep inflation within a target of CPI 2% +/-1. e. Basically.When a cut in interest rates fail to stimulate economic activity. because of low confidence.g. This involves looking at a range of economic variables such as: Unemployment. Difficult to control many objectives with one tool . Therefore the govt will increase spending (G) and cut taxes. e. This increases the disposable income of consumers with mortgage interest payments and should encourage spending. In a recession the opposite will occur with tax revenue falling but increased government spending on benefits. but. They also consider other macroeconomic variables such as growth and unemployment. The Purpose Of Fiscal Policy: How Monetary Policy Works The Bank of England study inflationary trends in the economy. avoiding the boom and bust economic cycle This involves increasing AD. But. If the Bank feels the economy is growing too quickly and inflation is expected to exceed the governments target. then they are likely to increase interest rates to reduce the rate of growth and inflationary pressures. the golden rule: over the economic cycle. The Bank could increase interest rates to reduce inflation. the Government will borrow only to invest and not to fund current spending. could cause homeowners to be unable to afford their mortgages. Changing interest rates has an effect on the exchange rate Interest rates may affect some parts of the economy more than others. this will help increase AD Liquidity Trap . Lower interest rates stimulate economic activity. Lower taxes will increase consumers spending because they have more disposable income(C) This will worsen the govt budget deficit Loose Fiscal Policy Fiscal Policy Tight Fiscal Policy This involves decreasing AD Therefore the govt will cut govt spending (G) And or increase taxes. fiscal policy aims to stabilize economic growth. as it reduces borrowing costs. Deman d Side . How Monetary Policy Works Reduce the rate of inflation. Higher taxes will reduce consumer spending (C) This will lead to an improvement in the government budget deficit Automatic Stabilizes If the economy is growing. (UK government has a target of 2%) Stimulate economic growth in a period of a recession.g. consumer confidence Monetary Spare capacity in the economy Exchange rate index Policy House prices Economic Growth If the Bank of England anticipates inflation falling below the governments target of 2% and economic growth is sluggish or the economy is facing a recession. higher interest rates increase the disposable income of people with savings. people will automatically pay more taxes ( VAT and Income tax) and the Government will spend less on unemployment benefits. They are likely to cut interest rates.Definition: involves using interest rates and other monetary tools to influence the levels of consumer spending and Aggregate Demand. it would cause economic growth to fall as well. The increased T and lower G will act as a check on AD.
Privatisation = Transfer from public to private. Private sector forms are in the best position to make decisions about what and how to produce. Supply Side Policies Education / Training = Investment in education and training and encouragement to firms to train should increase labour and productivity. Gives firms greater freedom to make their own decisions and increase competition. education. Firms cost of production also decreases and AS shift right. Cut marginal tax rates Improving health. Short run would increase costs AD continues to rise Enables AD to continue to rise over time without inflationary pressure building up Selective Targeted at specific markets and not as a whole Side effects on Demand Cutting taxes will give fiscal implications . if government fail to increase minimum wage then real wages would fall and there would be less unemployment. Easier for new firms to enter market Effectiveness of polices Time Lag = Some policies (education) can take many years to have an effect on production costs. Privatisation Deregulation Policies to designed to increase AS through labour and product markets 3 ways to increase AS Examples of Policies Improving Incentives = Function is to give higher rewards so people are more motivated. training sector Performance related pay and lower corporation tax. As firms compete they must either cut costs or become more efficient this shifts AS.Increasing price flexibility and signalling in a market = e. Deregulation = Removal of regulations that affect firms.g. Increasing Competition = reducing constraints can increase competition. Reduction in Tax = Lower taxes increase incentives to firms and potential workers.
. .Make exchange rate rise. Spending will be directed to health. however would help firms export .However tight fiscal policy is trying to lower price level.Tight monetary policy would worsen supply side.Tight monetary policy will have high interest rates. . education. . therefore prices would rise and output contract more than wanted .This is control inflation but will increase cost for firms if borrowing money.Increased Govt spending may be part of fiscal to increase AD. . ..Here fiscal and supply work together.Supply side would cancel out any effects of AD shifting right Monetary Policy VS Supply side Policy Conflicts Between Objectives Fiscal Policy VS Supply side Policy .AS shift left.