Specialisation – the concentration by a worker or workers, firm, region or whole economy on a narrow range of goods and services.
Benefits of specialization:
-an increase in the output of goods and services when compared to circumstances where each country provides itself with everything it needs.
-a widening of the range of goods that are available in an economy.
-exchange between developed and developing economies.
Risks of specialization:
-some finite resources can run out and the economy is likely to suffer unless the revenues earned from exports have been wisely for the future.
-De-industrialization – the loss of manufacturing capacity and jobs.
-bad weather.
-the tastes or needs of consumers can may change.
-political situation in the country may change in the country.
Gains from trade are possible when the world price of a good is different from the price determined by the intersection of the domestic demand (shown in blue) and the domestic supply (shown in red).
If the world price is above the domestic no-trade price, producers will expand production to supply in the export market, and the producer surplus will be larger than it would be in the absence of trade. Consumers will face higher prices and experience a smaller consumer surplus, but the gain to the producers will be larger than the loss to the consumers. The difference between the producer surplus and the consumer surplus is represented by the pink shaded area.
If the world price is below the domestic no-trade price, the consumer surplus will be larger and the producer surplus will be smaller than it would be in the absence of trade. But the gain to the consumers is greater than the loss to the producers. The difference is represented by the blue shaded area.
Absolute advantage: A country, individual, or firm has an absolute advantage in producing a good if production of the good absorbs fewer resources (or less time, in the case of an individual) than are required in other countries or by other individuals or firms.
Comparative advantage: A comparative advantage in producing or selling a good is possessed by an individual or country if they experience the lowest opportunity cost in producing the good.
Government can achieve short run, long run or stable economic growth by using fiscal, monetary and supply-side policies.
Short run.
A government can increase AD and AS in the same time. Fro instance, a lower interest rate is likely to stimulate not only consumption but also investment. Higher investment will increase AS. Increases in some forms of government spending (for example, spending on education and research and development) will also shift the AS curve to the right.
Long run.
In case with long run economic growth the most important thing is AS (increasing in AS). To achieve the AS curve shifting to the right a government uses supply-side policy. For, example raise investment will increase AS. To extant production and use capital efficiency, it is important to have educated and healthy workers. Investment in human capital ( education, training and experience that a worker, or group of workers, possesses) should increase the productive capacity of the economy. However, all this changes should be done in the most effective ways.
Stable growth.
Actually, stable economic growth is the main aim of government. Governments try to avoid AD increasing faster than the trend growth rate permit, because this can result inflation and problems with balance of payments. The government try to AD rising more slowly that AS.
The balance of payments (international competitiveness)
There are two ways, in which government can improve the balance of payments: short run and long run.
In short run it is more likely to use demand-side policies (fiscal and monetary). In this case, there are three main ways a government can try to raise export revenue and reduce import expenditure in order to correct a current account deficit.
-Exchange rate adjustment. To make national products more competitive on the international market a government can reduce the exchange rate by using monetary policy (emission of money).
-Deflationary demand management. To reduce expenditure on import government can use fiscal and monetary policies. Domestic spending may be reduced by higher taxation, lower government spending and higher interest rates.
-Import restrictions. Government can reduce expenditure on import by imposing import restrictions including tariffs (a tax on import) and quotas (a limit on imports).
In long run view government uses supply-side policies. A government may give subsidies to infant industries in the belief that they have the potential to grow and become internationally competitive. Government also can increase spending on education, etc.
Positive economic growth would probably lead to decreasing in the inflation rate, on the other hand negative economic growth would probably lead to rising in inflation rate.
Employment
Positive economic growth - lead to increasing in production - increasing in the employment rate. Negative economic growth would lead to opposite changes in the employment rate.
Unemployment
Positive economic growth would lead to decreasing in unemployment rate, on the other hand negative economic growth would lead to increasing in unemployment rate.
Balance of payments
Positive economic growth increase the output of the country's economy, so export of the country would increase (in case with positive economic growth). This would lead to increasing in balance of payments. During negative economic growth the output would decline, so there would be a demand for import. In this case the balance of payments (which include current account) would decrease.
The government fiscal position
Positive economic growth would fortify the government fiscal position, in the other hand negative economic growth would have negative affect on the fiscal position (government dept, for instance)
The short-run variation of economic growth is termed the business cycle (economic cycle). The long-run path of economic growth is one of the central questions of economics; in spite of the problems of measurement, an increase in GDP of a country is generally taken as an increase in the standard of living of its inhabitants. Over long periods of time, even small rates of annual growth can have large effects through compounding.
The diagram below shows economic growth in the UK during last recent years.
Gross Domestic Product (GDP) decreased by 0.4 per cent in the third quarter of 2009, compared with a decrease of 0.6 per cent in the second quarter.Total production output declined in the third quarter, decreasing by 0.7 per cent, compared with a fall of 0.5 per cent in the previous quarter.
October 23 2009 - The unemployment rate has reached 7.9% - up 0.3% over the quarter and 2.1% on last year. Nearly 29 million people were in work in the period June to August according to the labour force survey (LFS). The number of people employed was down by 45,000 this quarter and down by 467,000 on the last year.
The Consumer Prices Index (CPI) dropped to an annual rate of 1.6% in August from 1.8% in July. But the Retail Prices Index (RPI) inflation measure, which includes mortgage interest payments and housing costs, rose, to -1.3% from -1.4%. The Bank of England aims to maintain inflation at 2% to keep both prices and the broader economy stable.
Investment into Britain fell by half to £97bn, while outflows, or British companies making investments abroad, collapsed to £111bn from £275bn the year before.
Firstly, look at the question. The prices don't decline during a recession. That means that they are not changing, which is, perhaps, impossible, because there is always inflation or deflation in the economy; or the prices are still growing. As we know, growing in prices is inflation. But the main point of inflation, especially inflation rate, is that during a recession inflation is, probably, decreasing, but we have to remember that inflation rate is decreasing and it doesn't mean that inflation decreases. So, during a recession the growing in prices would slow down, but there would not be a declining in prices. We also have to remember that supply for money is expanding, so there would be inflation in the economy.
Productivity is the key indicator of economic health - over the long haul, real income growth and hence living standards must follow the growth of labour productivity. But, as a new ESRC report, The UK's Productivity Gap: what research tells us and what we need to find out, confirms, there remains a significant productivity gap between the UK and the United States.
Lets just have a look on some examples, that prove us that there is productivity gap between UK and the US.
- In the market sector of the UK economy, output per hour worked - the most commonly used measure of labour productivity - is almost 40 per cent below that in the United States.
- The productivity gap between the UK and the United States is particularly evident in key services, including wholesale and retailing, hotels and restaurants and financial services. Indeed, just three sectors account for more than half of the gap.
There are the main causes of the productive gap between UK and the US:
- competition. Productivity growth is highest in economy with greater product market competition - where less productive firms contract and close while new more productive ones open and grow; and where competitive pressures force existing firms to improve. In fact, competition in UK is less than competition in the US.
- capital investment. Capital investment plays an important role in productivity growth. UK has less physical capital per worker than the United States.
- skills. Skills play a very important role on the economy. UK is behind US in this area (graduate skills), instead of a big amount of universities in UK.
- innovation. New technologies are improving better in the US and also their using in the production is more spacious in the US than in UK.
- international trade relationships. As we know, that United States has larger relationships with other countries in the trade area that UK.
Credit crunch is one of the accompanying effect of financial crisis. Actually financial crisis is credit crunch. Anyway, credit crunch is a reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. As we know that all business in the world works by using credits or loans. Thats why the credit crunch is very harmful for the whole economy.
So, lets have a look on causes of credit crunch. This may be due to an anticipated decline in the value of the collateral (for example, when the business is taking a credit, it has to prove security of the loan for bank by putting usually fixed assets as guarantee for repayment the loan); an exogenous change in monetary conditions (for example, where the central bank suddenly and unexpectedly raises reserve requirements or imposes new regulatory constraints on lending); the central government imposing direct credit controls on the banking system; or even an increased perception of risk regarding the solvency of other banks within the banking system. A credit crunch is often caused by a sustained period of careless and inappropriate lending which results in losses for lending institutions and investors in debt when the loans turn sour and the full extent of bad debts becomes known. These institutions may then reduce the availability of credit, and increase the cost of accessing credit by raising interest rates. In some cases lenders may be unable to lend further, even if they wish, as a result of earlier losses.
What does credit crunch mean to banks? Usually - losses! Because banks earn their money by giving credits (interest rate). Banks also have to pay their deposits (percentage). So credit crunch also has negative influence on the bank system.
Now I want to give some examples of influence by credit crunch on economy. Lets imagine a situation in the economy, where banks don't want to give credits (to business). Companies (especially retailers) are not able to work because they don't have money to built a new assets (like buildings), so their production slow down. People also are less wiling to buy a new property, because they cant take a credit from the bank(unless they have their own money, but usually people buy property on credit). So companies(builders) wouldn't sell their product, and then they would probably have to reduce their production by reducing labour (usually). So people would earn less money and also would not be able to take a credit.
I think that solution of credit crunch is government intervention. The government has to help banks by recrediting (emission government's bonds). It also could be another ways of solution (like using bank's reserve fund )
This is a macroeconomic theory based on the ideas of 20th-century British economist John Maynard Keynes. So, what is the main idea of this theory. Maynard Keynes thought that market economy cannot be stable. This means that aggregate demand doesn't equal aggregate supply (stable situation with full employment). The reason of this is that people are willing to save(ALWAYS!). It is impossible to overcome the willing to save. To solve this problem the government has to provide governments offers to stimulate aggregate demand (increase government spending).
So lets have a look on the situation without government's inculcation into the market economy. Decreasing in aggregate demand would cause decreasing in aggregate supply in the future. This would cause a destroying small firms, worker's discharge from big companies. It would cause high rate of unemployment. So people would spend less, because they would earn less. In conclusion, all this would bring to a shortage in aggregate demand. As we see, this is exclusive circle .
Maynard Keynes suggested that the government should provide offers for companies to create places for workers and it would finally cause an increasing in aggregate demand.
The UK government worry about the amount of alcohol consumed per person, that has risen by 10% since 2000 - despite drink sales remaining steady. Researcher company Mintel said wines and lagers were becoming stronger and people were unaware of the changes. It comes as latest figures show a third of men and a fifth of women drink more than the recommended daily limits. The NHS recommends a limit of three to four units of alcohol per day for men, and two to three units for women. "Consumers have limited information to help them make healthy choices about their alcohol consumption" - sad Don Shenker, of Alcohol Concern
22% fewer 18-24-year-olds agreed with the statement, "the point of drinking is to get drunk" than did five years ago, the report added. In total, drink sales have hardly changed since 2000, but the amount of pure alcohol consumed has risen by nearly a tenth from 8.4 litres per year per person to 9.2 litres. The report said the changes were likely to be down to the stronger drinks that were on sale. The alcohol content of wine is now normally around 13%, while in the past it would have been closer to 11%.
Jonny Forsyth, a senior drinks analyst at Mintel, added: "It may be that the majority of consumers are not aware of ABV (alcohol by volume).(this is also an example of information failure). "So despite a greater societal concern with being healthy leading to a decline in drinking penetration, by stealth we are drinking more pure alcohol than ever."
The government has attempted to encourage greater awareness of the alcohol content of drinks throught the Know Your Limits advertising campaign. Manufacturers have also been encouraged to provide labelling on drinks. But Don Shenker, chief executive of Alcohol Concern, said: "Consumers have limited information to help them make healthy choices about their alcohol consumption. There is often no information about units and even rarer information about sensible drinking levels on the labels of alcohol products. The increasing strength of wines and beers means we are often drinking at harmful levels without realising it." He also said there should be more lower-strength drinks on the market for people to "enjoy without harming their health". "With alcohol consumption being linked to more than 40 different diseases or conditions surely the drinks industry has a responsibility to provide clear information and a greater choice of lower strength beers, wines and ciders which people can enjoy without harming their health."
1) information failure - is a lack of information resulting in consumers and producers making decisions that do not maximize welfare. Just in simple examples (in the article) we can see that in some cases customers can consume more in situation where information failure exists.
2)
3) Yes, "stealth" drinking is an example of information failure. Because people really don't know about volume of alcohol and also about harmful of drinking. "Consumers have limited information to help them make healthy choices about their alcohol consumption" - sad Don Shenker, of Alcohol Concern.
4) In theory, the government should provide information campaign to show harmful of alcohol to people and the, probably, people will consume less (average consumption will decrease).
5) people don't know about volume of alcohol and people are not aware of harmful of alcohol.
Private sector funded, with more than half from private sources. Private health insurance available through employer, government or private schemes. Millions of people in the US are not covered by health insurance (15.3% of population (45.7 million people) do not have health insurance). Federal government is largest healthcare insurer - involved in two main schemes, Medicaid and Medicare, each covering about 13% of population.
Medicaid - this program is for low income and needy groups - eg children, disabled.
Medicare - for people 65 years old and above and some younger disabled people and those with permanent kidney failure (illness) undergoing dialysis or transplant.
Most doctors are in private practice and paid through combination of charges, discounted fees paid by private health plans, public programmes, and direct patient payments. In-patient care is provided in public and private hospitals.
UK - Universal, tax-funded system Public sector funded by taxation and some national insurance contributions. About 11% have private health insurance. Healthcare is free at point of delivery but charges for prescription drugs (except in Wales), and also you usually have to pay for ophthalmic (optic) and dental services. Exemptions (don't have to pay) include children, elderly, and unemployed. About 85% of prescriptions are exempt. Most walk-in care provided by GP practices but also some walk-in clinics and 24-hour NHS telephone helpline. Hospitals are semi-autonomous and self-governing public trusts.
France - Social insurance system All legal residents covered by public health insurance funded by compulsory (have to) social health insurance contributions from employers and employees with no option to opt out. Most people have extra private insurance to cover areas that are not eligible for reimbursement (that are not repaid ) by the public health insurance system and many make out of pocket payments to see a doctor. Patients pay doctor's bills and are reimbursed by sickness insurance funds (so people pay money to a doctor and then take their money back from public health insurance). Government regulates contribution rates paid to sickness funds, sets global budgets and salaries for public hospitals. In-patient care is provided in public and private hospitals (not-for-profit and for-profit). Doctors in public hospitals are salaried while those in private hospitals are paid on a fee-for-service basis. Some public hospital doctors are allowed to treat private patients in the hospital. A percentage of the private fee is payable to the hospital. Most out-patient care is delivered by doctors, dentists and medical auxiliaries (helpers) working in their own practices.
Singapore - Dual system
Dual system funded by private and public sectors. Public sector provides 80% of hospital care 20% primary care. Financed by combination of taxes, employee medical benefits, compulsory savings in the form of Medisave, insurance and out-of-pocket payments. Patients expected to pay part of their medical expenses and to pay more for higher level of service. Public sector health services are able for lower income groups who cannot afford private sector charges. In private hospitals and outpatient clinics, patients pay the amount charged by the hospitals and doctors on a fee-for-service basis.
What goods and services should be produced? How should the goods and services be produced? Who should get the goods and services?
Economic systems are the ways in which production is organized in a country.Three main economic systems : The Market Economy, The Command Economy, The Mixed Economy.
So lets think about the main point or aim of this systems - organization production. Actually questions what goods and services and how and for whom to produce are the main points in production
As I saw from the chapter UK has a large negative output gap. It means that economy is in recession and spare capacity is taking place. (the fall in GDP, low inflation and rise in unemployment). What can UK do to deal with this problem? Just talk about how the government can influence on the economy. By monetary policy (interest rate, Bank of England), fiscal policy (government spending and taxes) supply side policy (education, training, etc.).
Lets talk about UK's economy. So really UK's economy depends a lot on US economy and other countries (a lot of export and imports between this countries), because there is not a lot of goods that are produced in UK, because its cheaper to produce goods not in United Kingdom (because lack of resources and high cost of labour). Economy has always to develop and people (investors: private, government's) have to look for another counties for investments. As we know, there is a financial crisis in United States and in other countries with developing economy. So the amount of trade relationships fell down.
Some ideas about solving a recession. Investments in other countries (Vietnam, Brazil, Ukraine - developing countries with not high costs of production). It is risky also, but the money have to work. Also it is likely to reduce exchange rate (pound) - devaluation in terms of another currencies - by increasing the amount of money (by government's orders, for instance). Why do this? To make the prices for national products more competitive to sell more and increase the amount of money, that are going into the country. Also the government should reduce taxes (but not a VAT, because it increases the export of the country). Therefore government spending would decrease, avoiding a budget deficit (spending more than income). If it is impossible (to reduce government spending for some time), the government should to bring an emission of money (increasing the amount of money).
Remember that all this things are interdependence , so to do it successfully the government have to act very carefully and count all advantages and disadvantages off all actions - changes.
Up to 900 jobs could be lost at Zurich's general insurance company in the UK. The company is going to cut workforces by 10 % this year. The business employs 5,400 staff in 20 locations across the country but it is unclear which offices will be affected. The news comes on the same day as rival Aviva, owner of Norwich Insurance, said it would cut 1,800 jobs by 2010. Zurich said this actions would improve customer focus and help to achieve more sustainable growth in profits. It said that between 700 and 900 work places were likely to be lost. The business, which provides general cover for companies and individuals, operates from 20 sites, the largest being in Birmingham and Whiteley, Hampshire. "We recognize that there are difficult times ahead for our people," said Guy Munnoch, chief of the firm's general insurance arm. "However, it is clear that if we want to keep being competitive, we must act immediately to increase efficiencies so that we can achieve our growth plans and safeguard the future of our business in the UK.
Aviva, the owner of Norwich Union, will cut up to 1,800 jobs by 2010 as it restructures its insurance operations. Aviva called the move "rationalization" but the Unite union described the job cuts as "brutal" (cruel) . "This news for staff that their jobs are now in jeopardy is truly devastating," United added. Norwich Union insurance operations will be shifted away from cities including Glasgow, Leeds, Sheffield, Liverpool, Birmingham, Bristol and Southampton. Offices in Dundee, Basildon, Ipswich, Exeter, and Worthing will also be affected. However the firm said other parts of its business would be still in those locations. Now the business of this company would operate in Norwich, Perth, Bishopbriggs, Stretford, Manchester, Leicester and Southend. Andy Case of Unite said job losses had become 'a way of life' for Aviva staff. "We want to deliver excellent, consistent and reliable customer service with market leading efficiency," said the chief executive of Norwich Union Insurance, Igal Mayer. "To achieve this we will need to fundamentally simplify our business, consolidating our expertise into seven insurance centres of the future in the UK."
Aviva was formed from the merger of Norwich Union and CGU in 2000.It provides savings, investments and insurance products. Earlier this year, Aviva, announced it was ditching the 200-year-old Norwich Union brand to forge a single identity to compete in international markets. Unite's deputy secretary, Graham Goddard, said Aviva was "rapidly withdrawing" commitment to local communities and was "isolating themselves in a small number of cities". "The suggestion that employees will be able to relocate appears to be inconceivable for most of those affected," he added.
3) Efficiency is the best way of using resources for the benefit of consumers.
Allocative efficiency Achieved when the value consumers place on a good (reflected in the price they are willing to pay) equals the cost of the resources used up in production (i.e. price = marginal cost.) Another interpretation: Where resources are allocated to the production of the goods and services the society most values.
Productive efficiency Refers to a firm's costs of production and can be applied both to the short and long run. It is achieved when output is produced at minimum AC Productive efficiency includes - The least costly labour capital and land inputs are used - The best available technology and the most efficient production processes - Exploiting economies of scale (getting close to minimum efficient scale) - Minimizing the wastage of resources in their production processes
Dynamic efficiency Dynamic efficiency occurs in a market over a period of time. It focuses on changes in the amount of consumer choice available in markets together with the quality of goods and services available Dynamic efficiency can be boosted by: - Research and development spending and a faster pace of invention and innovation. - Investment in the human capital of the workforce leading to gains in product quality. - Greater competition in markets and the transfer of knowledge and ideas across countries.
Social efficiency Is where social welfare is maximised. Where social marginal benefit of production / consumption = social marginal cost. Markets need to take into account externalities for social welfare to be achieved.
X-inefficiency X-inefficiency occurs when a business uses more inputs than are necessary for a given level of output. Libenstein (1966) pointed to potential cost inefficiencies arising from a lack of effective competition within a market e.g. companies that face little or no real competition often allow their fixed costs of production to rise.
4,5) I think that losing jobs are lead to productive efficiency, because workers are labour, it is part of production. Losing jobs will involve decreasing in cost of production, so the firms would, probably, increase their profit or spend money on another part of their business (especially during recession when they might have debts).
Economies of scale - effects of scale. Another words, it is everything that occurs after large (really large!!!) projects. In our case, economies of scale are consequences after building large agriculture complex for growing tomatoes.
I think that the result of growing tomatoes in this case would be diseconomies of scale, because the company will need a lot of stuff for looking after such a big complex, also they will more managers to watch after production. So price will probably grew, because this production (point) will be upper the technical optimum on the long run average curve.
1)Economic growth – in the short run, an increase in real GDP, and in the long run, an increase in productive capacity, that is, in the maximum output that economy can produce.
2)Unemployment – a situation where people are out of work but are willing and able to work. All people, who are able to work (employed or unemployed) are called labour force. They are economically active. People of working age who are neither employed nor unemployed are called economically inactive.
3)Inflation – rising in general price level.
4)Deflation – a sustained fall in general price level.
5)Balance of payments – a record money flows coming in and going out of a country.
Objectives of government economic policy.
1) Economic growth.
Economic growth is very important for government, who also are trying to achieve economic growth. If the government do it well, there is sustainable economic growth. It means economic growth that can continue over time and does not endanger future generations’ ability to expand productive capacity. The first type of sustainable economic growth is when increasing in aggregate supply match increases in aggregate demand. How can government achieve growth? By matching trend growth. It meansexpected increase in potential output over time. It is measure of how fast the economy can grow without generating inflation. A good example of a possible source of sustainable economic growth can be wind firms.
2) Employment and unemployment.
The government also seek to high employment and low unemployment. Some governments state that their objective is full employment, that means a situation where those wanting and able to work can find employment at the going wage rate. But don’t be confused with full employment, because it doesn’t mean that unemployment equals zero, because there is always unemployment near 3 percentages in economy (because some people are loosing their jobs and looking for another everyday).
3) Inflation.
As we know from last chapter, inflation is rising in price level. The government doesn’t want to make inflation zero, the government seeks to low inflation, because low inflation can bring advantages. For example, it may enable firms to reduce their prices by not increasing wages in line with inflation rather that by making some workers redundant.
4) Balance of payments.
The government seeks to avoid current account deficit, when more money is leaving the country that entering, as result of sales of its exports, income and current transfers from abroad being less that imports and income and current transfers going abroad.
5) Economic stability.
6) Income redistribution.
The government can do this by transferring some income from the rich to the poor (by providing special taxes, for instance).
GDP and real GDP.
Economists always measure economy by nominal GDP ( output measured in current prices and so not adjusted for inflation.)
Measuring economic growth.
Economic growth is usually measured by the annual percentage change in real GDP.
Production and productivity.
Labour productivity – output per worker hour. If productivity rises by more than wages, then labour costs will fall and the country can become more price competitive.
Difficulties in interpreting changes in Real GDP.
One problem of interpretation is that the rise in output may be exceed by a rise in population.
Another problem is informal economy (economic activity that is not recorded or registered with the authorities in order to avoid paying tax or complying with regulations, or because the activity is illegal.
Measuring unemployment.
This can be measured by unemployment rate.
Formula: the unemployed x 100% / labour force
In the UK there are two preferred measure: Labour Force Survey (LFS) – a measure of unemployment based on e survey using the ILO definition of unemployment; and The International Labour Organisation(ILO) – a member organization of the United Nations that collects statistics on labour market conditions and seeks to improve working conditions.
Claimant count – a measure of unemployment that includes those receiving unemployment-related benefits.
Measuring inflation.
Inflation can be measured by Consumer Price Index (CPI) – a measure of changes in the price of representative basket of consumer goods and services. Differs from the retail price index (RPI) in methodology and coverage.
And also by Retail Price Index (RPI) – measure of inflation that us used for adjusting pensions and other benefits to take account of changes in inflation and frequently used in wage negotiations. Differs from the consumer price index (CPI) in methodology and coverage.
The structure of the current account of the balance of payments.
Current account includes trade in goods, trade in services, income and transfers. Trade in goods records the earnings from exports and the expenditure on imports. Trade in services, for instance, includes travel, insurance, financial and computer and information services. This part of current account sometimes called invisible balance (because we can’t see services). The income part includes investment income. Transfers cover the transfer of money made and received by government and individuals.
The causes of economic growth.
One of the causes is increase in AD (aggregate demand). Economic growth can also be caused by a cut in income tax or a rise in consumer confidence. All this changes can occur in the short run. We can show AD increasing on the diagram below.
Economic growth for long term can be caused by increases in quantity and quality of resources. The main causes of this is advanced technologies or improvements in education and training. Diagram below shows economic growth with increase in AS (aggregate supply)
The causes of unemployment.
We can look at cause from two different sides (changes in demand and changes in supply).
Cyclical unemployment – unemployment arising from a lack of aggregate demand.
Structural unemployment – unemployment caused by the decline of certain industries and occupations due to changes in demand and supply.
Frictional unemployment – short term unemployment occurring when workers are in-between jobs. Actually, these people have just dropped their jobs and looking for other jobs.
The causes of inflation.
As we know inflation is price growing. Therefore inflation is caused by changes in prices. Price can be changed, because of changes in aggregate demand and changes in cost of production. So we have two types of inflation:
-Demand-pull inflation – increases in price level caused by increases in aggregate demand.
-Cost-push inflation – increases in price level caused by increases in cost of production.
Deficit in the current account of the balance of payments.
When expenditure abroad is greater that income from abroad.
There are two main causes of deficit:
-because the country’s inhabitants have spent more on goods and services from abroad than residents have spent in the country’s products or services.
-because there has been a net outflow of investment income
Another causes: changes in income at home and abroad, changes in exchange rate and structural problems.
Surplus in the current account of the balance of payments.
When the country’s revenue form abroad is greater than expenditure abroad.
It can be when the quantity of country’s product is high and the cost of production is low (so expenditure will rise), also when there is a recession in the country ( import will decrease because people won’t be willing to but some products during a recession)
The consequences of unemployment.
-lost output. Having people who are ready to work is a waste of resources (labour). On the diagram below we can that real output is below potential output because of non-full using resources (labour).
-lost tax revenue. It is when real value of taxes is lower than potential. When people are working, the government receive more taxes, because people are earning more and spending more.
-government spending on unemployment benefits. The problem is that the government has to spend more on unemployment benefits with rising un. rate. Instead of spending on another areas, such as health, communication, education, etc. (opportunity cost!)
-hysteresis. This means unemployment can causing unemployment. And it also can caused long- term unemployment (for mare than one year).
The benefits of unemployment.
-for some people it may give more time to search a new job.
-it also makes easier for firms to find workers.(exactly they need)
-reducing inflation. (people will buy less with less income)
The consequences of inflation.
-Fall in value of money. With rising in price people will spend less, so the value of pounds will decrease.
-Menu cost – the costs of changing prices due to inflation.
-Shoeleather costs – costs in terms of the extra time and effort involved in reducing money.
-Administrative costs.
-Inflationary noise – the distortion of price signals caused by inflation.
-Random redistribution of income. Some people will lose their money and some people will earn. So there will be a big gap between rich and poor people.(like in Ukraine, where there is a hyper inflation).
-Fiscal drag – people’s income being dragged into higher tax bands as a result of tax brackets not being adjusted in line with inflation.
-Uncertainty. When firms are not certain about their costs in the future and also people are not certain about prices in the future.
-Inflation causing inflation.
-Loss of international competitiveness.
The benefits of inflation.
If the salaries are rising too during inflation, workers will be satisfied, even prices are growing. Also firms will increase their output, because aggregate demand will increase ( if it is demand-pull inflation). It will probably involve more places for unemployment, because firms will have to extend their production to increase their output.
Deflation – decreasing in price level.
The consequences of a deficit and a surplus on the current account of the balance of payments.
Deficit – raise unemployment; reduce economy’s output; fall in the exchange rate; less pressure on price level.
Surplus – increase in bank lending; growth in exchange rate; increasing in aggregate demand.
The costs of economic growth.
The graph below shows the opportunity cost ofeconomic growth (capital goods instead of consumer goods)
The benefits of economic growth.
1)A rise in people’s material standard of living.
2)Economic growth enables poverty within a country to be reduced without having to redistribute existing income.
3)A rise in the level of a country’s real output.
International Monetary Fund (IMF) – an international organization that helps co-ordinate the international monetary system.
World Trade Organization (WTO) – an international organization that promotes free international trade and rules on international trade disputes.
Exchange rate
Exchange rate – the price of one currency in terms of another currency or currencies.
Monetary Policy Committee (MPC) – a committee of the Bank of England with responsibility for setting the interest rate in order to meet the government’s inflation target.
Factors affected the exchange rate:
1)An increase in demand for pounds.
2)An increase in supply for pounds.
3)Changes in income abroad.
4)Changes in income in the country.
5)Speculation – buying and selling currency ( very common in Ukraine).
The relationships between the exchange rate and the interest rate.
Exchangerate is rising – interest rate is falling.
A reduction in interest rate – reduction in exchange rate.
The effect of a change in the exchange rate on export and import prices.
Fiscal policy. It includes taxation and spending decisions of a government. The government can change tax rates, the types of taxes it imposes and what it taxes, amount and timing of government spending. The main aim of fiscal policy is to influence Aggregate Demand (AD).
Increasing government spending and reduction taxes – increase in AD.
Rises in government spending and cuts in taxes designed to increase AD are referred to as reflationary (aim – increase AD), expansionary or loose fiscal policy.In contrast, deflationary (aim – decrease AD), contractionary or tight fiscal policy involves measures that reduce AD, that is, cuts in government spending and/or rises in taxes.
The nature of fiscal policy.
The main target of the government is to influence AD to match AS and so avoid both unemployment and inflation. This objective can be achieved by using what is called discretionary fiscal policy (deliberate changes in government spending and taxation designed to influence aggregate demand) or allow automatic stabilisers (forms of government spending and taxation that change automatically to offset fluctuations in economic activity) to operate. Not all forms of government spending and taxation are automatic stabilisers. For instance, spending on child benefits is not linked to the economic cycle (this is the tendency for economic activity to fluctuate its trend growth rate, moving from a high level of economic stability to negative economic growth.)
Types of taxes.
The most imposed tax in the UK is income tax. Income tax is a direct and progressive tax( higher percentage from the income of the rich). Another tax is VAT (value added tax). This is an indirect tax and largely regressive tax ( grater percentage from the income of the poor). Other taxes include excise duty, capital gains tax, corporation tax and inheritance tax.
Government spending
- Capital expenditure – e.g. hospitals, schools, roads.
- Current spending – public services (e.g. teachers´ pay)
- Transfer payments – money transferred from taxpayer to recipients of benefits (e.g. pensioners and unemployed)
- Debt interest payments – money transferred from holders of government debt (e.g. interest paid to holders of National Savings certificate)
The five most important individual areas of government spending in the UK recently have been social protection, health, education, defence and debt interest.
The budget. The budget position shows the relationships between government spending and tax revenue. When the two are equal it means that the budget is balanced.
Government spending exceeds tax revenue – budget deficit.
Tax revenue exceeds government spending – budget surplus.
Monetary policy.Includes the rate of interest, the money supply and exchange rate. The most used instrument of monetary policy is interest rate. A higher interest rate tends to reduce consumption and lower firms` investment. This is also likely to encourage foreigners to place more money into UK financial institutions because of their higher return. This would rise demand for pounds, whichwould push up the value of the pound. A higher exchange rate will make exports more expensive and imports cheaper. This is likely to reduce net exports. So, a rise in the interest rate is likely to decrease AD by reducing consumption and investment. Money supply can also be used to influence AD. An increase in money supply is likely to increase AD. If the government prints more money( devaluate ) or makes it easier for banks to lend money, people will have more money to spend. Changes in money supply and interest rates are inversely related. A rise in the money supply, by increasing the amount that banks have to lend, reduces the interest rate.
The monetary policy committee.
The monetary policy committee (MPC) of the Bank of England sets the rate of interest with the main objective of achieving the government’s target annual rate of inflation of 2%, as measured by the consumer price index.
Supply-side policies.
Education and training. The government encourages firms to increase their training, that should raise the occupational mobility of labour and labour productivity. This will shift AS curve to the right.
Government assistance to new firms. The government helps new businesses establish byproviding them with grant and low corporation tax.
Reduction in direct taxes. A cut on direct taxes such as corporation tax would increase incentives to firms, workers and potential workers, which would lead to increase in AS.
National minimum wage (NMW) . By providing a high NMW the government could encourage people to enter the labour market, that tends to increase in AS.
Reduction in unemployment benefit. A reduction in job seeker’s allowance the government would encourage unemployed to enter the labour market, that tends to increase in AS.
Reduction in other benefits. The government could reduce other benefits for those who are economically inactive.
Reduction in trade union power. This may cause either an increase in the efficiency in labour markets if a reduce in employment by pushing wage rates above the equilibrium level causes people to engage restrictive practices. But this can also work the other way if it helps labour markets work efficiently.
Privatisation. Some economists argue that there should be more power in the private sector because they believe private sector firms are in the best position to make decisions about what to produce, how to produce and what to charge. On the other side it is argued that government ownership of firms is beneficial in a number of cases where there is a high risk of market failure.
Deregulation: Deregulation is the removal of rules and regulations that affect firms in the belief that will give the firms greater freedom to make their own decisions and to increase competition by making it easier for new firms to enter an industry.
Policies to reduce unemployment.
Demand-side policies.
Expansionary fiscal and/or monetary policy can be used to create jobs. A government by using fiscal policy could increase its spending and/or cut taxes in order to raise AD. Increases in money supply or lower interest rates are also likely to raise AD. For instance, a fall in interest rates and/or an increase in the money supply should stimulate consumption and investment. It may also raise net exports if it causes a fall in the exchange rate.
Supply-side policies.
Supply-side policies can be used to increase economic incentives and the quality of labour services offered by the unemployed. The quantity and quality of information available to the unemployed about job vacancies and to employers about those seeking jobs can be increased. Improved education and training and the provision of work experience may raise the skills of the unemployed. Greater provision of low-cost child-care may enable more lone parents to work. Legislation and the subsidising of special equipment and adaptation of buildings may facilitate the employment of more disabled workers.
Policies to control inflation.
Cost-push inflation.
A government may try to reduce firms’ cost by reducing corporation tax. This will also have the advantage of stimulating investment.
A government also can provide subsides that would help firms to cover their cost, that lead to falling in prices. There is a danger that the firms may become reliant on subsidies and do not strive to keep their costs down.
Demand-pull inflation.
To reduce inflation a government may use deflationary fiscal and/or monetary policy instruments. These are ones that seek to reduce AD or at least a growth in AD by raising income tax, for instance.
Inflation targeting.
This can lower both cost-push and demand-pull inflation by reducing expectations of inflation. If people are convinced that a central bank has the determination, experience and ability to meet its target, they will act in a way that does not cause inflation. In the long run, a government is likely to seek to reduce the possibility of inflationary pressure by increasing AD. If the productive capacity of the economy grows in line with AD, with rightwards shifts in the AD curve being matched by rightwards shifts in the AS curve, the economy can grow with the price level rising. To ensure the quantity and quality of resources rise to supply more products, supply-side policies may be used.
Policies to promote economic growth
Short run.
Increases in output in the short run can occur due to increases in AD if the economy is initially producing below full capacity. Such an increase may be stimulated by expansionary or fiscal policy. Some monetary and fiscal policies have the ability to change both AD and AS. For instance, a lower rate of interest is likely to stimulate both consumption and investment.
Long run.
In the long run, increases in the country’s output can continue to be achieved only if the productive capacity of the economy increases. This is why AS is so important. For instance, measures that raise investment will increase AS. The extent of increase will depend on the amount of extra investment, its type, and how efficiently it is used. A way to increase the productive capacity of the economy is through investment in human capital. Human capital is education, training and experience that a worker, or group of workers, possesses.
Stable growth.
Stable growth is for actual growth to match trend growth and for that trend growth to rise over time. Governments try to avoid AD increasing faster than the trend growth rate permits, since this can result in the economy overheating with inflation and balance of payments problems arising. They also try to prevent AD rising more slowly than the trend growth rate, since this would mean a negative output gap developing with unemployed resources. In other words, governments seek to avoid economic cycles.
Policies to improve the balance of payments
There are several policy instruments a government can use to improve its balance of payments position.
Short run
Exchange rate adjustment.
A country may want to reduce the exchange rate if it believes that its current level is too high and as result is causing its products to be uncompetitive against rival countries` products. A lower Exchange rate will cause export prices to fall and import prices to rise. To succeed in increasing export revenue and reducing import expenditure, it is important that demand for exports and imports is price elastic, that other countries do not devalue and do not increase any import restriction.
Deflationary demand management
To discourage expenditure on imports, a government may adopt deflationary fiscal and monetary policy instruments. Higher tax, lower government spending and/or higher interest rates may reduce domestic spending. The risk is that a reduction in spending may cause aggregate output to fall and unemployment to rise.
Import restrictions
A country may seek to reduce expenditure on imports by imposing import restrictions including tariffs (tax on imports) and quotas (a limit on imports). However, these measures may inflationary side-effects. For instance, imposing tariffs will increase the price of some products bought in the country, raise the cost of imported raw materials and reduce competitive pressure on domestic firms to keep costs and prices low.
Long run
The most appropriate approach to long-run solutions would be to implement supply-side policies. How successful supply side policies are depends on the appropriateness of the policies.
Current account surplus
A disequilibrium may also arise because of a current account surplus. A government may seek to reduce or eliminate a surplus in order avoid inflationary pressure and to raise the amount of imports it can enjoy. To reduce it a government may seek to raise the value of its currency, introduce reflationary fiscal policy and monetary instruments and/or reduce imports restricitons.
Effectiveness of fiscal policy
Advantages
Number of taxes and forms of government spending adjust automatically to offset fluctuations in real GDP.
Some forms of government spending and taxation, including cuts in corporation tax and training grants, have the potential to increase both AD and AS.
Disadvantages
It takes time for government spending and tax to affect the economy and it takes time to recognise the need for a change in policy and at which base to change.
There is an time lag between introducing fiscal policy instruments and that instrument having an impact on the economy.
Number of government spending is inflexible (e.g. difficult to cut spending on health care and pensions).
Need to be based on accurate information (e.g. radio predict recession might lead to a change in expectations)
Households and firms may react in unexpected ways (e.g. cut in income taxes may not lead to higher consumption and investment if households and firms lack confidence).
May have an adverse effect on incentives and other macroeconomic objectives. (e.g. rise increase in state benefits may discourage some people from working).
Can be offset by changes in the economic activity in other countries.
Effectiveness of monetary policy
Disadvantages
Can be difficult to control the policy instruments (e.g. keep inflation in check by controlling the money supply)
The use of interest by MPC may be overestimating the prospects of inflation and so keeping the interest rate too high and limiting economic growth.
Take time for interest rate to work through the economy.
The interest rate may not change the AD s much as expected (e.g. if people are optimistic about the future, they may not reduce spending even after a rise in the interest rate).
A central bank’s ability to change its interest rate may be limited by the need for it to remain in line with other countries` interest rates (noticeable difference may cause inflow or outflow of hot money flows, which can disrupt financial markets).
When interest rates falls to very low levels, a further cut is likely to be ineffective in stimulating economic activity.
If interest rates is low when inflation is low and stable, it may not have big effect on the economy to change the interest if there is an increase in inflation.
Tend to be more concentrated on certain groups (e.g. rise in interest rate will hit firms that export a high proportion of their output more than it will affect other firms).
May have undesirable side-effects. A rise in the exchange rate, designed to reduce inflationary pressures, may worsen the balance of payments position.
The effectiveness of supply-side policies
Economists agree that if the supply-side performance of the economy can be improved, it may be easier for a government to achieve its objectives. However, increasing the productive potential on its own will not be sufficient in raising economic performance if there is a lack of AD.
Some supply-side policies take a relatively long time to have an effect, they can be exoensive to operate and there is no guarantee that they will work.
Possible conflicts between policy objectives
The objectives of economic growth and low unemployment may benefit from expansionary demand-side policy measures. In contrast, such measures may make it more difficult for a government to achieve low inflation and a satisfactory balance of payments position.
MPC may face a conflict when setting the interest rate because it may want to raise interest rate to reduce inflationary pressure but be concerned about the effects such a move will have on the exchange rate and so on the balance of paymenst and employment.
Advantages that may be gained from international trade
International trade involves the exchange of goods and services across national borders. These are the benefits from international trade:
lower prices and high quantity because of high competition
greater variety of products
high competition leads to firms accessing larger markets in which to sell their products and buy raw materials.
There are some challenges with international trade as well. Competition from other countries and access to their markets result in some industries contracting and some expanding. This requires the shifting of resources, which can be unsettling and may be difficult to achieve due to, for example, occupational immobility of labour (difficulty in moving from one type of job to another).
What also happens in international trade is that some countries put restrictions on the exports of certain products if they become in short supply.
Methods of protection
International free trade occurs when there are no restrictions imposed on the movement of goods and services into and out of countries. In contrast protectionism results in the deliberate restriction of the free movement of goods and services between countries and economic blocks. A government engage in protectionism when it introduces measures to protect its own industries from competition from the industries of other countries.
Tariffs.
Tariffs are taxes on imported products.
Quotas.
This is a limit of supply of a good or service.
Voluntary export restraint.
Voluntary export restraint (VER) is a limit placed on imports from a country with the agreement of that country’s government.
Foreign exchange restrictions.
Governments may seek to reduce imports by limiting the amount of foreign exchange made available to those wishing to buy imported goods and services or to invest or to travel abroad.
Embargoes.
An embargo is a ban on the export or import of a product and/or a ban on trade with a particular country.
Red tape.
Time-delaying procedures may be used to discourage imports.
Other measures.
Two additional measures are quality standards and government purchasing policies. Quality standards may be set high and complex requirements may be put in place with the intention of raising the costs of foreign firms seeking to export to the country. A government may also try to reduce imports by favouring domestic firms when it places orders.
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