ECONOMICS and BS

Chapter 23

2010-02-11T23:08:00.001Z

Making operational decisions

Operations management – the process that uses the resources of an organization to provide the right goods or services for the customer.

Aspects of operations management:

- Deciding on the location of a business in order to meet the needs of the business and its customers

- Choosing the mix of resources to use in production

- Managing capacity utilization

- Organizing stock control to meet the needs of customers quickly and cheaply

- Ensuring(обеспечение, 确保, Осигуравање, Bảo đảm) high quality of goods and services in an organization

- Providing excellent customer service in order to meet customer expectations

- Working closely with suppliers in order to improve efficiency

- Using technology in order to improve business operations

Operational targets- the goals or aims of the operations function of the business.

Some of examples of operational targets are explained below.

Unit cost

Unit cost – the cost of producing 1 unit of output. It is calculated by the formula:

Measures of quality

Quality could defined as those features of a product or service that allow it to satisfy customers.

There are some examples of measures of quality:

- Customer satisfaction ratings.

- Customer complains. This is basically the number of customers who complain. It is a good way in identifying possible problems ( bad quality, etc.) that the company has.

- Scrap(Phế liệu, Отпад, 废钢, остатки )rate. This calculates the number of items rejected during the production process as a percentage of the number of units produced.

- Punctuality. This calculates the degree to which a business delivers its products on time.

Capacity utilization

Capacity utilization – the percentage of a firms’ total possible production level that is being reached. If a company is a large enough to produce 100 units a week, but is actually producing 92 units, its capacity utilization is 92%

Capacity – the maximum total level of output or production that a business can produce in a given time period. A company producing at this level is said to be producing at full capacity.

Link between capacity utilization and other operational targets.

- Capacity utilization and unit costs

- Capacity utilization and quality

Managing capacity utilization.

- Under-utilization of capacity ( also known as spare capacity) – when a firms’ output is below the maximum possible. This is also know as excess capacity or spare capacity. It represents a waste of resources and means that the organization is spending unnecessarily on its fixed assets.

- Capacity shortage – when a firms’ capacity is not large enough to deal with the level of demand for its products. This means that certain customers will be disappointed. Further sales may be lost if unhappy customers decide not to buy from the firm again or if negative publicity results from the firms’ failure to supply.

Causes of spare capacity

- New competitors or new products entering the market

- Fall in demand for the product due to changes in taste or fashion

- Unsuccessful marketing

- Seasonal demand

- Over-investment in fixed assets

- A merger or takeover leading to duplication of many resources and sites

Disadvantages of spare capacity

- Firms have a higher proportion of fixed costs per unit. If utilization falls, the fixed costs must be spread over fewer units of output. This leads to higher unit costs

- These higher unit costs will lead to either lower profit levels or the need to increase price to maintain the same profit levels, and therefore to lower sales volume

- Spare capacity can portray(изобразить , 描绘, осликати, vai) a negative image on a firm, suggesting that it unsuccessful.

- With less work to do, employees may become bored and demoralized, lowering their motivation and efficiency.

Advantages of spare capacity

- It means that there is more time for maintenance and repair of machinery, for training and for improving existing systems

- There may be less pressure and stress for employees, who may become overworked at full capacity

- Under-utilization allows a company to cope with sudden increase in demand.

Ways of reducing capacity

-selling off all or a part of its production area

- changing to a shorter working week or shorter day

- laying off workers

- transferring resources from another area

Ways of increasing capacity

- Building or extending factories/plans

- asking staff to work overtime or longer hours

- hiring new staff

- a flexible workforce

Subcontracting – when an organization asks another business to make all or part of its product.

Advantages

- business will be able to react to changes in demand more quickly if they have access to a number of different firms’ plants

- subcontractors may be more specialized and therefore more efficient in a particular line of activity

- it lets a firm focus on its core business

- a non-standard order can be given to a subcontractor so that the business benefits from the order but suffers no disruption to its normal production

Disadvantages

- firms must recognize that the quality if their products is no longer directly under their control

- excessive subcontracting erodes a company’s operations base and its ability to initiate research and market changes

- the opportunity cost

- confidential information

Stock of control

The management of levels of raw materials, work in progress and finished goods in order to reduce storage costs while still meeting the demands of the customer

Non-standard orders

A business decision relating to a one-off contract. Usually, the nonstandard order requires a response to a request to supply a product at a particular price.

Key factors:

- The effect that the decision has on production

- The flexibility of capacity in the organization

- The impact on costs

- Is there potential for future orders?

- The effect on staff

Some Business Study stuff

2010-02-09T20:53:00.001Z

Chapter21/ Developing an effective workforce: recruitment, selection and training.

Recruitment – attract the ‘best’ candidates and then select the most suitable.

Workforce planning ( considering what human resources are required)

Job descriptions (tell what the job is about – skills, responsibilities, duties and performance level)

Specification (should include details of skills, aptitude^{способности}, knowledge and expertise; qualifications; personal qualities relevant to the job, such as ability to work as part of a team)

Internal or external recruitment ( internal – filling a job vacancy for selecting a person who is already employed in the organization; external – filling a job vacancy by advertising outside the firm

For internal: the employees’ abilities are known already, internal promotion opportunities are motivating for the workforce, the recruitment and selection process is quicker, a shorter induction period is required, it is less expensive, it reduces the risk of employing the wrong person

For external: it tends to provide a larger choice of well-qualified applicants, it brings in new blood with new ways of thinking, it overcomes jealousies^{ЗАВИСТЬ} that may occur if one member of a group is promoted above his or her colleagues, it can help a firm to improve its understanding of how other firms operate)

Advertise ( newspaper or magazine; job centre, commercial employment agencies; headhunting)

Application (qualifications, work experiences, references)

Assessment^ОЦЕНКА (interview, aptitude and attainment^{приобретение} test, psychometric test, assessment centres)

Appointment

Factors affecting methods of recruitment and selection

- The level of the job in the organization, whether shop-floor or senior management level

- The size of the organization, whether a large multinational or a small shop

- The resources available to fund the recruitment and selection process

- The cost of any particular method – recruitment and selection can be an expensive process and includes the cost of advertising, the cost of administering, perhaps, thousands of applications, and the time spent shortlisting, interviewing and assessing

- The supply of labour – whether there are plenty of potential applicants with relevant skills and experiences or whether there are few

- The culture of the organization and the extent of which this dictates that internal recruitment and promotion are the norm

Practice exercise

1) vacancy arises – job description – personal (job) specification – deciding on internal or external recruitment – advertising – application forms – assessment – appointment

2) Recruiting an internal candidate for job

- The employees’ abilities are known already. The company has already known what this worker is able to do and how he\ she is responsible. So there is no risk that the company employees the wrong person, unless this worker will be changed.

- The cost of internal recruitment is quite low, so the company doesn’t have to spend a lot of funds on recruitment.

Recruiting an external candidate for job

- It involves new way of thinking to the company, which could be a big benefit for the whole business

- Larger choice of possible employees

3) Job description – tells us about the job, what kind of person we want to do a job, gives us a job title, the purpose of the job, accountability, responsibilities and duties. Personal specification – characteristic needed, skills and qualifications, experiences

4) Headhunting organization – recruitment agency, looking for people who tend to be top workers.

5) Aptitude and attainment , psychometric or personally tests, assessment centres

6) Level of job; resources available; costs; supply of labour; internal or external

7) Reducing labour turnover , increasing productivity, increasing profit, motivation.

Case study. Searching for stars on the shop floor.

1) They use internal recruitment. They are training their managers (talent spotting)., having regular meetings with their staff. To identify a potential of their workers.

2) Benefits of staff meetings

- Motivation

- Fill the gap

- Short induction

- it reduces labour turnover

- reduces absenteeism

- less risky

3) In general

- Productivity increases

- Low labour turnover

- Low absenteeism

- More cost effective

- Moving upwards

Store management

- Management become more effective and efficient

- Internal recruitment

4) Advantages of internal recruitment for senior management

- short induction training period

- labour turnover decreases

- costs decrease

- available stuff

- already trained by the company

Disadvantages of internal recruitment of senior management

- Lack of new ideas, new ways of thinking

- Very competitive, so some people could be demotivated

- It could gaps to fill

- It might lead to decrease in productivity, because of different ways of thinking that could be a negative while changing managers in different departments

Training

Training – the provision of work-related education, either on-the-job or off-the-job, involving employees being taught new skills they already have.

Training is often a response to some changes:

- The development and introduction of new products

- Restructuring of the firm

- The development and introduction of new technology

- Changes to procedure, including improvements to customer service

- High labour turnover

- Low morale

- Changes in regulation

Benefits of training

1) It helps new employees reach the level of performance expected of experienced workers

2) It ensures^{обеспечивает} that employees have the necessary skills, knowledge, attributes and qualifications for the job, both at present and in the future

3) It develops a knowledge and committed workforce, with increased motivation and job satisfaction

4) It increases efficiency and productivity, enabling the firm to produce high-quality products and services, which may in turn lead to improved profits

5) It can identify employees’ potential and thus increase employees’ job prospects and changes of promotion, which may improve motivation

6) It reduces costs in the long term by, for example, reducing the number of accidences and injuries, reducing wastage and poor-quality work, and increasing workers’ productivity

7) It encourages employees to deal with change more effectively and to be more flexible – for example, about the introduction of new technology.

8) It encourages employees to work towards the organisation’s aims and objectives

9) It improves the image of the company. Customers will have more confidence in well-trained stuff, and a better image will attract more able recruits.

Induction^{введение}^в^{должность} training

Education for new employees, which usually involves learning about the way the business works rather than about the particular job that the individual will do.

Benefits

- Reduction in labour turnover

- Improve employees’ understanding of both the corporate culture and the situation in which the organization is placed

- Means that employees contribute to he organization more quickly

- Increases motivation

On-the-job training – where an employee learns a job by seeing how it is carried out by an experienced employee

Off-the-job training – all forms of employee education apart from that at the immediate workplace.

Practice exercise

1) Training is a process of instructing people about how to carry out tasks directly related to their current job. Development, on the other hand, involves helping individuals to realize their full potential. It covers general growth and not necessarily related specifically to employees’ existing posts.

2) It reduces labour turnover. As employees get new information about how the whole company is works, it is becoming more interesting and existing to work for the organization in order to aim general goals. As people get interested with their jobs they are less likely to leave the company, so the labor turnover is decreasing.

3) External training gives employees opportunities to meet other workers from other companies, allowing an interchange of ideas and a broadening ^{расширение}of understanding. It also makes employees feel valued and increases motivation. Internal training could be very efficient if the worker need a particular skill. Here internal training is less expensive than external.

4) On-the-job training: cheaper; no loss of output. Off-the-job training: less pressure from work; focused on skills that are needed.

5) Market failure- when free market system fails to achieve economic efficiency (productive and allocative). Poaching employees means attractive workers who have already been trained by another business. One company attracts employees from another company by offering higher salaries. ( loss to company that have trained employees and lost them because of higher wages, that were offered by another company)

New teacher! New home work)

2010-02-03T20:46:00.006Z

Analyse the impact of the following scenarios.

1) Government announces a large increase in spending on health and education.

An increase in spending on health and education (increase in government spending ) is likely to impact on aggregate demand. As we know that government spending is a component of aggregate demand, so increase in spending is likely to lead to an increase in aggregate demand (assuming that other thing are not changing – CETERIS PERABUS ). Therefore the aggregate demand curve will shift to the right. This will lead to a rise in inflation (demand pull inflation), if aggregate supply would not increase. As AD shifts to the right, the Real GDP rises and we will expect higher economic growth (assuming that AS will be changing too, in case to avoid a high inflation). This, in turn, would suggest that unemployment is likely to fall.

2) Bank of England signals rise in interest rates of 0.5 %

An increase in interest rates is likely to have an influence on both aggregate supply and aggregate demand. One of the main components of AD is consumption and it is affected by interest rates. Consumers borrow money and spend them (consumer expenditure = consumption). If they know that interest rate has increased they will borrow less and therefore spend less (in case they will wait for declining in interest rates to buy a new car, for instance). Changes in interest rate also affect investment ( in case with AD, investment means money spent on capital goods by firms). Obviously, firm will spend less on capital goods if interest rate rises (less investment). Interest rates might also affect government spending. One of the sources of money for the government is borrowing. As interest rate rises, it is more expensive for the government to borrow, so it would probably cut its spending. Interest rate could affect a balance of payments, because changes in interest rate lead to changes in exchange rate. If interest rate rises, the currency falls, therefore import is becoming more expensive and export is becoming cheaper. In some cases it could lead to increase in trade surplus (more exports than imports, because imports are more expensive and exports are becoming more competitive in some cases). A rise in interest rate also would probably lead to fall in production, because it would more expensive for firms to borrow in case to expand or cover their debts. Considering all this consequences of a rise in interest rate we can say that the AD curve and the AS curve shift to the left, causing a fall in a capacity of the economy, which tends to fall in economic growth, rise in unemployment level.

3) Government “stealth taxes” increase a tax burden to highest level for 50 years.

This type of tax is actually not recognized by firms or households, so it doesn’t affect consumption or investment or production process. What it might affect is government spending, because the government can raise money from increasing “stealth taxes” , but the task doesn’t say anything about increasing government spending.

4) UK productivity levels at their highest level for 10 years.

Providing this information tends to raise firms’ confidence ( how they are optimistic about future economic prospects), that would lead to increase in capital investment and probably increase in production. Consumer confidence also will increase, that means that consumption will rise. As the result AS and AD will increase and the both curves will shift to the right. This will tend to rise in economic growth and fall in unemployment rate. Inflation rate would depend on how AD and AS will increase.

2010-01-15T00:39:00.000Z

Retail prices in US are falling

2010-01-14T20:38:00.006Z

Suddenly, US retail prices has fallen in December 2009. A huge fall in prices was recorded in sales of electrical goods and cars.( hence prices for fuel, building materials and steel fell). US Commerce Department showed that prices fell by 0.3 % compared with November.

This sudden declining in price was caused by decreasing in consumption. People consumed less than over the festive season last year. Finally December sales has fallen by 6.2 % compared with last year.

For many firms this event was unexpected, since they could experience declining in their profits. Concerns over job security are expected to continue to restrict spending, with unemployment still at 10%. Many economists expect unemployment to keep rising until the middle of the year. This event was experienced also in other big countries, such as UK, Japan, China, etc. But economists are expecting a warming (improvement) in economic situation next year. "I don't think that portends a new downturn in the economy, but it does serve as a warning that the recovery is going to take some time to put in place here," commented Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi in New York.

P.S.

I was really pleasant when I read (in the past) this chapter on BBC, because my headphones have just broken and I realized that I had a good opportunity to buy it (prices has declined). Unfortunately, I realized that this chapter was about US retail prices!!!!!. When I went to the shop in Oxford, I saw the same price as 3 month ago((((( 79 POUNDS ((((

Interest rate

2010-01-10T17:05:00.002Z

Reasons for changes in interest rate (determinants of interest rate)

- consumption. When people are taking borrowings (loans), they usually spend this money immediately (they buy cars, houses, trips, etc.). So people prefer goods now, not in the future, that why demand for loans is increasing and , therefore, in a free market system there will be a positive interest rate (growing interest rate).

- inflationary expectations (expectations about inflation rate in the nearest future). The lender ( a person who gives a loan) has to secure from expecting losses because of increasing rate of inflation.

- risks of investment. There is always a risk that the borrower will go bankrupt or otherwise default on the loan. This means that a lender generally charges a risk premium to ensure(guarantee) that, across his investments, he is compensated for those that fail.

- taxes. Some of the gains from loans ( profit from loans) may be subject to taxes, the lender has to insist on higher rate to compensate losses.

Interest rate and Balance of Payments.

Higher interest rate will lead to:

- decrease in consumption of import goods. Consumers would, probably, consume less because of high expenses on borrowing.

- decrease in production goods ( goods for export) because it would be more expensive to produce goods (more money is needed to pay interest rate), therefore goods for export will be more expensive and less competitive.

Lower interest rate will lead to:

-increase in the amount of import goods. Consumption is rising since people have more money to spend (easier to borrow money).

-increase in production in the country, the amount of goods for export is rising.

Is the Bank of England's decision correct?

From my point of view the Bank of England made a right decision. I’m going to look at this closely.

There are advantages and disadvantages in this decision.

One of the main disadvantages is that with low interest rate banks would decrease their rate for deposits. For people, who have their own money, there wont be a reason to keep their money in the bank on a deposit account, because they will receive a very low interest. On the other hand low rate of deposit will encourage “money keepers” to invest ( put their money into investment funds), because they can make more profit from dividends. Low interest rate will boost economy. Households will purchase more and, on the other hand, firms and companies will produce more (they will receive chipper funds to expand their production). Low interest rate would also reduce inflation, large number of firms and companies (suppliers) will keep inflation at low rate.

Of course all this changes in interest rates would lead to a positive effects on the economy if the government would not change other factors in the economy in a positive way (changes in fiscal policy, supply side policy, tariffs of trade, in others).

Freeze on UK interest rates continues

2010-01-08T00:06:00.003Z

Here is an example of using methods of monetary policy to prove economy in recession.

UK interest rates have been left at 0.5% following the Bank of England's latest meeting. The cost of borrowing has been at a record low since March 2009 and economists do not expect the central bank to raise rates in the near term. The Bank's Monetary Policy Committee (MPC) also maintained the quantitative easing (QE), or asset buying, programme at £200bn. The UK is thought to have exited recession in the last quarter of 2009. The MPC said it expected its QE programme to take another month to complete and that the scale of the programme would be kept under review.

The data below shows how the rate of borrowing money has fallen immediately in March 2009.

Supermarkets are at snow buttle stations.

2010-01-06T22:35:00.002Z

I felt very surprise when I saw a void on the shelves in my local supermarket. The cause of this was the weather.

For last two days there was a snowstorm in England. Many drivers spent night on the motorways in their cubs. So in the morning retailers didn't recieve their orders (products) in time. However, stores faced a "punic buying". Consumtion of first-need products (like food, for instance) has increased roughly.

Stores have faced problems with delivery. A lot of vans were blocked on motorways in snow captured. Christopher Sturman, chief executive of the federation which represents 45 storage companies and 16 distribution companies, said members were worried about the level of gritting of roads. He described the weather conditions as the worst for 20 years and said one of the key problems was drivers being able to get to work.

There were also problems with home delivery. As people decided to stay at home, demand for online delivery has increased roughly.

Analysing this event, some scientists have started a discucion about consumer psychology. Paul Buckley, a lecturer at the University of Wales Institute, said that "social influence theory" meant that some shoppers followed the crowd if they saw their friends and neighbours stocking up with food now.

Swine flu. True or false??

2010-01-06T20:16:00.005Z

I would like to tell you about situation with swine flue that has happened in November - December in Ukraine. Ukrainian government ( in head with Juliya Timoshenko) sad to publicity that we had the most dangerous epidemic in our history. They also published some numbers about people who were ill with N1h1 virus (swine flu).

The government also announced that we had the biggest percentage of ill people for recent decades. But all this data was misleading. As you know, perhaps you know, there is an election period in Ukraine now. So the government ( Juliya Timoshenko) has created misleading (non-existing) epidemic of swine flu to ban all mass events ( like rally, for instance). All schools and universities have been closed for 4 weeks in average. Some schools have not been opened for even 3 months. So pupils and students have faced a lot of problems with studying (now they have to go to school on Saturdays).

Vincent Cable

2009-12-02T21:37:00.002Z

John Vincent Cable is a politician, who was a leader of the Liberal Democrats until the election of Nick Clegg. He is Member of Parliament for Twickenham and has been the Liberal Democrats' main economic spokesperson since 2003, having previously served as Chief Economist for the oil company Shell from 1995 to 1997. He was elected as deputy leader of the Liberal Democrats in the House of Commons in March, 2006. He was acting leader of the Liberal Democrats on 15 October 2007 following Sir Menzies Campbell's resignation, but announced soon after that he would not be a candidate in the leadership election.

At university, Cable was a member of the Liberal Party but joined the Labour Party after graduation. In 1981, he joined the newly-created Social Democratic Party (SDP). He was parliamentary candidate for his home city of York in both the 1983 and 1987 general elections.He won the seat of Twickenham at the 1997 General Election, and increased his majority in the elections of 2001 and 2005.

In 2004, Cable contributed to the Orange Book and is identified with the economic liberal wing of the party. He believes that the Liberal Democrats should stand for "fairer taxes, not higher taxes".
In late 2005/early 2006, Cable presented Charles Kennedy a letter signed by eleven out of the twenty-three frontbenchers, including himself, expressing a lack of confidence in Kennedy's leadership of the Liberal Democrats. On 5 January 2006, due to pressure from his frontbench team and an ITN News report documenting his alcoholism, Charles Kennedy announced a leadership election in which he pledged (promised) to stand for re-election. However he resigned on 7 January. Cable passed over the opportunity to run for the party leadership himself, instead supporting Sir Menzies Campbell's bid.

Cable is credited by some with prescience of the Global financial crisis of 2008–2009. In November 2003, Cable asked Gordon Brown, then Chancellor, "Is not the brutal truth that … the growth of the British economy is sustained by consumer spending pinned against record levels of personal debt, which is secured, if at all, against house prices that the Bank of England describes as well above equilibrium level?" Brown replied, "As the Bank of England said yesterday, consumer spending is returning to trend. The Governor said: 'there is no indication that the scale of debt problems have… risen markedly in the last five years.' He also said that the fraction of household income used up in debt service is lower than it was then." In his book The Storm, Cable writes "The trigger (in this case it means cause) for the current global financial crisis was the US mortgage market and, indeed, the scale of improvident and unscrupulous lending on that side of the Atlantic dwarfs into insignificance the escapades of our own banks."

Vincent Cable thinks that the government ( Chancellor) has to encourage banks to start lending money for good companies to cover the amount of bad debts. He also thinks that the Government needs to have a clearly articulated strategy about how to get the budget back into balance once the crisis is over. It will have to have severe discipline when it comes to public-sector spending and that can't just be done by salami-slicing. It is going to have to involve real decisions. Cable considers that the government has to reduce taxes for low income families (redistribution of income). To cover this gap in budget, that might be after reducing some taxes , the government could provide regressive tax (more income - more percantage of tax). Politician also thinks that government has to help banks in covering their debts. Vincent Cable considers that to encourage small businesses the government has to boost banks in terms of lending money ( by providing security, for instance).

Obesity

2009-11-28T13:27:00.004Z

In last recent years UK government discovered a very big problem in society - OBESITY

Obesity is a high accumulation of fat in people's body. We can measure obesity by Body Mass Index (BMI). It is calculated as your weight (in kg) divided by your height (in metres) squared. People of average weight have BMI between 18 and 25 and people with overweight have BMI over 30. This group of people is considered obese.

Here is some facts about obesity in the UK

- 70% of men and 63% of women are overweight or obese

- Obesity accounts for 30000 deaths a year

- Obesity is estimated to cost the British economy over 2 bn of pounds every year

- One in five children in Britain eats no fruit at all

Lets talk about cause of obesity. From some estimation the main causes of obesity are:

1) Changing lifestyle - for example people are likely to eat fast food today, because they have a daily work, so their spare time is very limited, therefore most people are not able to cook and they have to "have a snack" every day, which can cause an obesity.

2) The falling real cost of processed foods because of economies of scale. Big food companies such as Mcdonalds are growing very fast, so prices for their food are falling (economies of scale - getting bigger - minimizing cost of production of each unit). This is (low prices) ,of course, very attractive for people, so most of them are starting to consume cheap fast food.

3) Calories. There has been an increase in calorific consumption per day and decline in every day exercises taken.

4) A rise in relative poverty. Lower income consumers prefer cheap food. As I sad before prices for fast food are falling (because of economies of scale, for example), so poverty would buy fast food more than expensive healthy food.

5) Bigger portions.

In conclusion I would like to say that government has to fight with obesity. It can be done by subsidizing healthy food production, also by providing information campaign about harm of consuming fast food. Probably providing taxation on producers obese food could be useful to stop obesity rising. All these actions are part of government intervention, that government has to do to solve market failure (obesity is one of examples of market failure).

A2 Glossary

2009-11-16T00:15:00.002Z

Absolute advantage: when a country can make more of a given product using fewer resources than another nation. Unit cost of production is lower.

Absolute poverty: occurs when income is inadequate to enjoy a minimum standard of living

Accelerator: a theory that links the change in investment to the rate of change in GDP

Active demand management: government use of fiscal or monetary policy to change levels of aggregate demand

Actual GDP: the level of real GDP produced by a country in, say, one year

Actual economic growth: an increase in real GDP from using more of an economy’s existing resources. Short run economic growth

Aggregate demand: total spending on domestic output at a given price level, over a given time period, usually one year

Aggregate supply: shows the total output domestic producers are willing and able to produce at a given price level, over a given time period, usually one year

Anticipated inflation: the expected rate of inflation for the near future.

Appreciation: an increase in the value of an asset or the exchange rate

Automatic stabilisers: changes in taxes and government spending beyond the control of government and brought about by the economic cycle

Average propensity to consume: the proportion of household income spent on products

Balance of Payments: a record of economic transactions between residents of a country and the rest of the world, over a period of time, usually one year.

Balanced budget: government revenue equals government expenditure

Bank: a financial institution that accepts deposits from savers and makes loans to borrowers

Base rate: the interest rate set by the Bank of England. Commercial banks set their own interest rates for mortgages and loans around this base rate

Bilateral exchange rate: the exchange rate between two currencies eg $2/£

Billion: £ billion denotes £1,000 million ie £1,000,000,000

Bloc: a group of countries in alliance e.g. the EU

Borrowing: gaining credit from a lender to be repaid, with interest, within a defined time period

Budget: expected annual government income & expenditure

Budget deficit: government revenue is less than government expenditure

Budget surplus: government revenue is greater than government expenditure

Capacity: the maximum amount of output a firm or country can produce given its current resources, in a given time period

Capital accumulation : an increase in a country’s stock (amount) of plant building and machinery over time.

Capital & Finance Account: a record of money flows between UK & overseas residents from the purchase of fixed or financial assets eg factories shares and loans

Capital output ratio: is the amount of capital needed to generate £1 of GDP, each year

Central bank: a country’s main bank, which issues currency, enacts monetary policy, and is banker to the government & commercial banks

Circular flow of income: the movement of spending and income across an economy

Commodities: primary products such as gold, oil, wheat or rubber

Common external tariff: a tax on imports imposed on goods imported in a trade bloc from non member countries

Common market: See single market

Comparative advantage: the ability to produce a product at a relatively lower opportunity cost than other countries, regions or individuals

Comprehensive Spending Review: government spending plans for the medium term eg next three years

Consumption: domestic household spending on consumer products

Cost push inflation: inflation caused by increasing prices of inputs eg wage rise, increased import price (imported inflation) or higher indirect taxation.

Credibility: the government’s commitment to long-term stability commands trust from the public business and markets.

Current Account: a record of money flows between UK & overseas residents arising from trade in goods & services and investment income from owning overseas assets

Customs union: a trading bloc where member countries abolish tariffs on trade between members and impose a common external tariff on trade with non members

Cyclical deficit: a budget deficit caused by the operation of automatic stabilisers during the down turn stages of the economic cycle: G>T

Cyclical unemployment: the number of jobless as a result of insufficient aggregate demand compared to aggregate supply.

Deflation: a sustained decrease in the general price level

Deflationary policies : government measures to lower total aggregate demand and spending eg higher interest rates and taxes

Demand management: government intervention in the economy to change the level of aggregate demand

Demand pull inflation: inflation resulting from increases in aggregate demand unaccompanied by an increase in aggregate supply: “too much money chasing too few goods”

Depreciation: a fall in the value of an asset or an exchange rate.

Developed economy: A country with a high per capita income and modern secondary and tertiary sectors.

Developing economy : A country with a low per capita income, and undeveloped secondary and tertiary sectors.

Discretionary fiscal policy: the government deliberately adjusts its spending and taxation to influence the overall level of economic activity

Disposable income : income left after deducting direct taxes, and adding state benefits

Discretionary income: income left after deducting direct taxes, adding state benefits and paying for essentials such as food and shelter

Dumping: when exports are priced below unit cost, or at a lower price than in the exporter’s home market

Dynamic efficiencies: improvements in productivity causing lower unit costs that occur over time as a result of eg investment trade or knowledge transfers

Economic inactivity: people of working age who are not seeking a job because of early retirement, family, long-term sickness or full-time study

Economic agents : a term used in model building to categorise groups of individuals or organisations eg : consumers, firms, the government and international

Economic convergence: the extent to which the economies of different countries share the structure and economic performance

Economic cycle: fluctuations in the level of real GDP over time over four stages: recession, recovery, boom and slowdown

Economic development: the process of improving individual’s economic well being and quality of life.

Economic growth : an increase in the capacity of the economy to produce goods and services, over time. An increase in productive potential is usually means a rise in GDP

Economic indicator: Any economic metric (statistic) that measures economic activity eg GDP, economic growth, inflation or unemployment rate, or current account

Economic performance: how well a country uses it scarce resources.

Economic shocks: unanticipated events that affect aggregate demand or supply

Economic stability: the absence of excessive fluctuations in the level of economic activity.

Economic Union: a trading bloc with a single market that also harmonises policies across member countries eg coordinated social and macroeconomic policies

Effective exchange rate: the weighted average of a currency’s exchange rates with its major trading partners’ currencies – weightings reflect the proportion trade

Euro zone: the 11 EU countries that have adopted a common currency, the euro

European Union: an association between 27 European member states seeking economic and political co-operation and integration.

Expenditure reducing: policies lowers domestic aggregate demand hence the demand for imports

Expenditure switching: policies that encourage economic agents to substitute domestic for overseas made products.

Exports: spending by overseas residents on domestically made products

External economic shocks: a significant unexpected economic event occurring outside the economy eg recession in the USA

Factor endowment: the quantity and quality of land, labour, capital and enterprise a country possesses

Fine tuning: government use of fiscal, monetary or exchange rate policy to change levels of aggregate demand

Fiscal policy: the use of government expenditure, benefit payments and taxation to manipulate the level and makeup of aggregate demand

Fiscal position: the current stat of the government budget ie deficit or surplus

Fiscal stance: the intended impact of government spending & taxation plans on the level of future economic activity

Fiscal transfers: taxes raised in one country are made available to finance government spending in another country

Fixed exchange rate : the value of one currency against other currencies is held constant

Flexibility: government can adjust fiscal and monetary policy in response to an economic shock without losing credibility

Floating exchange rate: The value of the currency is determined in markets called Foreign Exchange Market (Forex), without any government intervention

Foreign Exchange Market: the place where currencies are traded (FOREX)

Foreign direct investment (FDI): the purchase of physical assets such plant, buildings and land or a company

Foreign currency reserves : official international reserves (deposits) of overseas currencies of $, €, ¥ etc held by the government at the Central Bank.

Free trade: a county has no government controls or restrictions, such as tariffs or quotas, to limit international trade

Free trade area: an agreement between two or more countries to abolish tariffs in the new bloc

Frictional unemployment: the jobless have appropriate skills for vacancies are jobless but need time to find new employment

Full employment : all workers seeking jobs can find employment at the going wage rate. There is no cyclical unemployment

Futures market: markets where economic agents trade contracts to buy or sell commodities of currencies at a fixed price at a set date in the future

Gini coefficient: measures the degree of income inequality between different households The lower its value, the more equally household income is distributed

Globalisation: the process of ever closer links between national economies

Golden rule: over the economic cycle the government borrows only to invest and not to fund current expenditure

Government: the body that passes and enforces laws, collects taxes to finance public expenditure, and intervenes in the free market to change behaviour

Government intervention : the state takes action to try to correct market failure and so improve economic efficiency.

Gross Domestic Product (GDP): the total value of goods & services produced within a country’s borders in a given time period eg a year. The sum of all economic activity in UK territory

Gross National Income: the total income earned by the citizens of a country in one year from economic activity, during a given period, usually one year

Gross National Product: measures economic activity a nation’s citizens where ever they are in the world

Hedging: techniques that aim to reduce financial risk and uncertainty from unexpected changes in the price of commodities or currencies

Hot money flows: highly liquid funds that move around the world in search of the highest short term rate of return from expected interest rates and exchange rate changes

Human capital: the skill knowledge and expertise of the labour force acquired through experience education and training

Imports: spending by domestic residents on goods and services produced overseas

Income distribution : the extent to which total income is shared out between households

Index of Sustainable Economic Welfare : a Genuine Progress Indicator that adjusts traditional GDP data to take account of activities that raise or reduce well being

Infant industry : industries with a potential comparative advantage that need short run protection from lower cost overseas rivals while they establish themselves

Inflation: a sustained rise in the price level

Inflation rate: The percentage increase in the price level over a given period of time

Informal economy: undeclared or illegal economic activity which goes unrecorded in official data such as GDP

Infrastructure: the stock of capital used to support the economic system

Injection: Additions of extra expenditure into the circular flow of income generated by investment, government spending, or exports

Integration: when economic activity in separate regions or countries become increasingly interlinked and interdependent eg the European Union.

Interdependent: when economic agents are interlinked eg trading partners become mutually dependent on one another for products

Interest: the charge made for the use of borrowed money for a period of time; the reward for lending; the price of money

Interest rate: the sum charged for borrowing money, expressed as a percentage.

International competitiveness: the ability of firms in an economy to match the price and quality of other nation’s output.

International finance: capital flows across national borders

International trade: the exchange of goods and services across national borders.

International sector: the importing and exporting of products between one or more countries

Investment: spending by domestic firms on capital goods

Intra-industry trade : the exchange of products made by the same industry.

Inter-industry trade: the exchange of products made by different industries

Inter regional trade: the exchange of products between nations in different geographical areas

Inverted J curve effect: the current account initially improves following an appreciation of a currency where the trade balance initially improves before it worsens.

J Curve effect: the path followed by the current account following an exchange rate depreciation where the trade balance initially worsens before it improves.

Keynesian school: economists influenced by the work of J M Keynes who believe that markets often fail to clear requiring government intervention.

Labour force: the total number of people employed and those registered as unemployed. B400

Labour Force Survey : a measure of unemployment which totals all those who have looked for work in the past month and are able to start employment in the next two weeks.

Labour intensive: the use of a high proportion of labour in production relative to other resources

Laffer curve: a graph showing the relationship between tax rates and tax revenues.

Leakage: household withdrawals of potential spending from the circular flow of income through saving taxes or imports

Legitimacy: wide spread support from economic agents for government macro economic objectives and policies

Lending: extending credit to a borrower to be repaid, with interest, within a defined time period

Liberalisation: reductions in the barriers to international trade eg removal of quotas tariffs and exchange controls

Long run economic growth: an increase in the economy’s capacity to produce goods and services. Potential economic growth

Long term capital flows: the movement of money between countries to finance overseas investment in assets such as land, buildings, stocks and shares

Macroeconomic equilibrium: when aggregate demand equal aggregate supply with no tendency for output or the price level to change

Macroeconomic objectives: a whole economy aim of the government eg low unemployment

Market economy: an economic system where the market forces of supply & demand are used to allocate scarce resources between alternative uses

Marginal propensity to consume (mpc) : The proportion of extra income spent on consumption: mpc = ∆C/∆Y

Marginal propensity to save (mps): the proportion of extra income saved: mps = ∆S/∆Y

Marginal propensity to tax (mpt): the proportion of extra income taken in tax: mpt = ∆T/∆Y

Marginal propensity to import (mpm): the proportion of extra income spent on imports: mpm = ∆M/∆Y

Marginal propensity to withdraw (mpw): the proportion of extra income not consumed mpw = mps + mpt + mpm or ∆W/∆Y

Marshall-Lerner condition: predicts that depreciation improves the current account only if the combined elasticities of demand for imports & exports are greater than one.

Mixed economy: an economic system that uses both market forces and state control to allocate scarce resources between alternative uses

Model: a simplified view of complex relationships and processes, used to make predictions

Monetary policy: the use of interest rates to affect aggregate demand via the transmissions mechanism.

Monetary Policy Committee: a Bank of England group that meets monthly to set an interest rate to influence aggregate demand and achieve the government’s inflation target

Monetary Union: a bloc with both economic union and a single currency eg the Eurozone. The deepest form of economic integration

Multiplier effect: the process by which a change in an injection or leakage in the circular flow of income brings about a greater change in GDP

Multinational corporations (MNCs): a multinational corporation or company is a business that makes products in more than one country

National debt: the total amount owed by the government. The sum of previous budget deficits

Nationalisation: the transfer of ownership of a firm from the private to public sector

Negative output gap: actual GDP is less than potential GDP causing cyclical unemployment

Net exports: the difference between a country’s exports earnings [X] and its total spending on imports [M] ie [X-M]

Net investment: investment after such depreciation of fixed assets is taken into account. Net investment = gross investment – depreciation

New Classical school: economists who argue that free markets are self regulating and always clear quickly so that wages & prices adjust rapidly to changes without state action.

Nominal GDP: GDP valued at current prices eg 2008 output valued at 2008 prices

Non-renewable resources: natural resources such as oil which cannot be replaced and so can only be used once

Non trade barriers: imposing restrictions on trade other than tariffs eg foreign exchange controls

Opportunity cost: the best alternative sacrificed when an economic choice is made. The opportunity cost of more leisure time is the lost wages sacrificed.

Optimal currency area : a bloc of countries are better off with a single currency

Output gap: the difference between an economy’s potential and actual GDP

Performance indicators: the measures used to judge the success of an organisation eg prices, profits or productivity

Planned economy: an economic system where the state decides what to produce, how to produce it, and for whom to produce goods & services.

Positive output gap: actual GDP exceed potential GDP, generating inflationary pressure

Potential economic growth: an increase in the economy’s capacity to produce goods and services. Long run economic growth

Potential output: highest level of output a country can produce with current resources that delivers both full employment and stable inflation

Presbisch-Singer hypothesis : states the terms of trade between primary products and manufactured goods tend to deteriorate over time

Price level: the average market prices of a group of selected products eg the Retail Price Index (RPI). Changes in the price level are inflation or deflation

Price stability: no or minimal changes in the price level

Price transparency: The ability of economic agents to compare the price of given products in different countries

Primary sector: The part of the economy that extracts natural resources eg farming, fishing, quarrying and mining.

Privatisation: the transfer of ownership of a firm from the public to private sector

Productive capacity: the maximum possible GDP of an economy given its current stock of resources ie labour and capital. Potential output

Protectionism: measures taken by the government to shield domestic firms from foreign rivals eg tariffs, quotas and regulation

Public expenditure: government spending

Public sector: that part of the economy made up central government local government, and public corporations

Public sector net cash requirement : the difference between the revenue of general government and its spending

Purchasing power: The amount of products a unit of currency, eg one pound, can buy

Purchasing power parity: The exchange rate at which one unit of currency will purchase the same amount of products in the USA and another country

Quaternary sector: The part of the economy that creates intellectual and information processing services eg scientific research, R&D, education, and IT.

Quota: the legal limit on the amount of a product that can be imported

Rate of inflation: the percentage increase in the general price level, during a given period, usually one year

Real GDP: nominal GDP adjusted for inflation ie current output valued at constant (base year) prices.

Recession: two or more consecutive falls in quarterly GDP

Reflationary policies : government measures to stimulate aggregate demand eg lower interest rates and taxes

Relative opportunity cost: The cost of making one product in one country in terms of the best alternative item sacrificed, compared to another nation

Relative poverty: households receiving less than 60% of the median average income

Rules based policy: governments adjust macroeconomic policies to ensure published rules are kept eg the national debt must not exceed 40% of GDP

Saving: For households, savings is that part of disposable income which is not spent

Secondary sector : The part of the economy that manufactures goods eg, cars, construction & energy utilities

Short run aggregate supply: total output at a given price level, in a given time period, assuming costs such as wage rates, oil prices and components remain constant

Short run economic growth: an increase in real GDP from using more of an economy’s existing resources. Actual economic growth

Short term capital flows: speculative funds that move between countries hoping to make a capital gain from expected changes in interest and exchange rates ie hot money

Single currency: a currency shared by more than one nation eg the Euro

Single market: a trade bloc with no tariffs and non trade barriers between members, a common external tariff, and free movement of labour and capital between members

Social exclusion: low income groups are denied access to products

Stability and Growth Pact: an agreement between members of the Eurozone that the budget deficit is less than 3% of GDP and the total government debt is 60% or less of GDP

Stagflation: an economy experiencing both inflation and unemployment

Standard of living: the average amount of GDP for each person in a country ie per capita GDP.

Stocks: stored goods held ready for future use or sale ie inventory

Strong pound: the value of sterling is appreciating relative to other currencies

Structural change : a change in the relative importance of the primary, secondary and tertiary sectors of an economy over time

Structural unemployment : the jobless have inappropriate skills for vacancies

Subsidy: a payment made by the government to consumers or producers to encourage consumption or production

Supply side policy: measures designed to raise productive capacity and so increase aggregate supply by making labour and product markets work better

Sustainability: meeting the needs of the present without compromising the ability of future generations to meet their own needs

Sustainable development : economic development that meets the needs of the present without compromising the ability of future generations to meet their own needs

Sustainable growth: an increase in GDP that does not compromise the ability of future generations to meet their own needs

Sustainable investment rule: the national debt, as a percentage of GDP is held at a stable and prudent level of no more than 40% of real GDP.

Symmetrical inflation target : inflation rates above or below the set inflation target rate are equally unacceptable

Tariff: a tax on imports and can be used to restrict imports and raise revenue for the government.

Taxes: compulsory charges imposed by government on individuals & firms

Terms of trade: the ratio of export prices to import prices expressed as an index value

Tertiary sector : the part of the economy that creates services eg transport, tourism, banking, insurance and retail

Trade: the exchange of products

Trade barriers : barriers and restrictions on the import or export of products

Trade in goods: exports and imports of tangible products eg oil, manufactures and components.

Trade in services : exports and imports of intangible products eg banking, insurance, & tourism

Trade off: The process of making a choice between alternatives eg deciding if is worth sacrificing a new car for a holiday in Hawaii

Trade creation: when high-cost domestic producers are replaced by low-cost imports from efficient partner countries during integration

Trade deficit: The value of exports is less than the value of imports ie net exports is negative lowering aggregate demand

Trade diversion: when economic integration results in low-cost producers outside the integration area being replaced by high cost producers in partner countries.

Trade surplus: The value of exports is greater than the value of imports, ie, net exports is positive boosting aggregate demand

Transaction: the act of buying or selling (exchanging) a product

Transaction costs: the expenses involved in trading eg time and transport

Transfer payments: unearned benefits paid out to households by the government eg unemployment, disability and child allowances

Transition economies: countries moving from a planned to market economic system.

Transmissions mechanism: the process by which a change in interest rates affects economic activity and inflation

Treasury: the government department responsible for the UK’s economic policy.

Trend growth: the average rate of economic growth in a given period of time – usually the course of the economic cycle

Unanticipated inflation: The failure of economic agents to estimate the future rate of inflation, accurately

Unemployment: people who are willing and able to work are unable to find a paying job

Unemployment rate: the proportion of the labour force registered as unemployed. Given by the equation: total unemployed/ number in the labour force x 100

Unemployment trap: lost benefits and extra tax mean employees earn less income from working than if they remain unemployed

Weak pound: the value of sterling is depreciating relative to other currencies

Wealth: the current value of an individual’s assets eg house and shares

Wealth distribution: the extent to which total wealth is shared out between households

World Trade Organisation (WTO): an inter-governmental body where member countries develop and enforce rules for international trade

Working age population: in the UK, the total number of men aged 16 to 64 and women aged 16 to 59

Money As Debt (5 of 5)

2009-11-07T00:03:00.003Z

Money As Debt (4 of 5)

2009-11-07T00:03:00.001Z

Money As Debt (3 of 5)

2009-11-07T00:02:00.003Z

Money As Debt (2 of 5)

2009-11-07T00:02:00.001Z

Money As Debt (1 of 5)

2009-11-07T00:01:00.001Z

Terms of trade.

2009-11-03T19:32:00.008Z

In international economics and international trade, terms of trade or TOT is the relative prices of a country's export to import. "Terms of trade" are sometimes used as a proxy for the relative social welfare of a country. An improvement in a nation's terms of trade (the increase of the ratio) is good for that country in the sense that it has to pay less for the products it imports. That is, it has to give up fewer exports for the imports it receives.

In the simplified case of two countries and two commodities (two different goods), terms of trade is defined as the ratio of the price a country receives for its export good to the price it pays for its import good. In this simple case the imports of one country are the exports of the other country. For example, if a country exports 50 dollars worth of product in exchange for 100 dollars worth of imported product, that country's terms of trade are 50/100 = 0.5. The terms of trade for the other country must be the reciprocal (100/50 = 2). When this number is falling, the country is said to have "deteriorating terms of trade". If multiplied by 100, these calculations can be expressed as a percentage (50% and 200% respectively). If a country's terms of trade fall from say 100% to 70% (from 1.0 to 0.7), it has experienced a 30% deterioration (declining) in its terms of trade. When doing longitudinal (time series) calculations, it is common to set the base year[citation needed] to make interpretation of the results easier.

In basic Microeconomics, the terms of trade are usually set in the interval between the opportunity costs for the production of a given good of two countries.

Terms of trade is the ratio of a country's export price index to its import price index, multiplied by 100

In the more realistic case of many products exchanged between many countries, terms of trade can be calculated using a Laspeyres index. In this case, a nation's terms of trade is the ratio of the Laspeyre price index of exports to the Laspeyre price index of imports. The Laspeyre export index is the current value of the base period exports divided by the base period value of the base period exports. Similarly, the Laspeyres import index is the current value of the base period imports divided by the base period value of the base period imports.

Where

price of exports in the current period

quantity of exports in the base period

price of exports in the base period

price of imports in the current period

quantity of imports in the base period

price of imports in the base period

Basically: Export Price Over Import price times 100 If the percentage is over 100% then your economy is doing well (Capital Accumulation) If the percentage is under 100% then your economy is not going well (More money going out then coming in)

Other terms-of-trade calculations

The net barter terms of trade is the ratio (expressed as a percentage) of relative export and import prices when volume is held constant.

The gross barter terms of trade is the ratio (expressed as a percent) of a quantity index of exports to a quantity index of inputs.

The income terms of trade is the ratio (expressed as a percent) of the value of exports to the price of imports.

The single factorial terms of trade is the net barter terms of trade adjusted for changes in the productivity of exports.

The double factorial terms of trade adjusts for both the productivity of exports and the productivity of imports.

Specialisation and gains from trade.

2009-10-31T23:42:00.001Z

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.

(http://demonstrations.wolfram.com/GainsFromTrade/)

Absolute and comparative advantage

2009-10-31T15:27:00.000Z

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.

Policy issues – role of fiscal, monetary, supply-side policies in promoting economic stability, growth and international competitiveness

2009-10-30T15:18:00.002Z

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.

Causes of Economic growth: short run and long run

2009-10-30T14:35:00.001Z

Causes of Long Run Economic Growth:
- improvement in productivity and efficiency;
- increase in resources;
- changes in technology.

Causes of Short Run Economic Growth:

- Raise in Aggregate Demand due to increase of one of it's components, ceteri paribus.

(http://szwajcarmaciek.blogspot.com/2009/10/economic-growth-short-run-vs-long-run.html)

Consequences of economic growth for inflation, employment, unemployment, balance of payments and the government’s fiscal position

2009-10-27T21:22:00.002Z

Inflation.

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)

Economic growth – short run/long run

2009-10-27T21:13:00.000Z

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.

(http://en.wikipedia.org/wiki/Economic_growth#Short-term_stabilization_and_long-term_growth)

The recent macroeconomic performance of the UK

2009-10-27T20:52:00.003Z

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.

(http://www.statistics.gov.uk/cci/nugget.asp?id=192)

The table below shows GDP (Gross Domestic Product) per capita in the UK.

( http://en.wikipedia.org/wiki/Countries_of_the_United_Kingdom_by_GDP_per_capita)

As of July 2009, the UK's government debt was 56.8% of GDP.

( http://en.wikipedia.org/wiki/United_Kingdom#Economy)

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.

(http://www.hrmguide.co.uk/jobmarket/unemployment.htm)

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.

(http://news.bbc.co.uk/1/hi/business/8256181.stm)

Investment into Britain fell by half to £97bn, while outflows, or British companies making investments abroad, collapsed to £111bn from £275bn the year before.

(http://www.guardian.co.uk/business/2009/sep/17/uk-inward-investment-slump)

Why don't prices decline during a recession?

2009-10-22T20:52:00.002+01:00

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.

The significant productivity gap between UK and the US

2009-10-22T20:31:00.003+01:00

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.

2009-10-21T20:12:00.007+01:00

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 )

Keynesian Economics

2009-10-20T17:19:00.003+01:00

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.

Drinking

2009-10-18T13:46:00.007+01:00

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."

b)http://news.bbc.co.uk/1/hi/health/8223294.stm

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.

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.

Healthcare around the world

2009-10-15T18:57:00.003+01:00

United States - Private system

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.

General DATA.

b) Link to the article - http://news.bbc.co.uk/1/hi/health/8201711.stm

c) Lets list three main questions:

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

Large output gap in UK

2009-10-14T20:33:00.002+01:00

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.

Feel surprised?????

2009-10-13T23:15:00.003+01:00

THIS IS TRUE!!!!!

Ukraine forever))))))

http://hottestheadsofstate.wordpress.com/list/

http://news.bbc.co.uk/sport1/hi/football/internationals/8293515.stm

AS Economics homework: Efficiency

2009-10-13T21:20:00.003+01:00

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.

http://news.bbc.co.uk/1/hi/business/7440733.stm - Zurich's company

http://news.bbc.co.uk/1/hi/business/7439589.stm - Aviva

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).

SUGAR

2009-10-11T16:50:00.003+01:00

a) one factor is heavy rains, another factor is a dismal monsoon season in India (the biggest consumer of sugar).

b) demand for sugar has grown and it is still growing.

d) price elasticity of supply shows how supply responds to changes in prices. formula: %changes quantity supplied / % changes in price.

e)the price elasticity of supply will be inelastic .

f) price elasticity of demand shows how demand responds to changes in prices. formula: %changes quantity demanded / % changes in price.

g) I think that demand for sugar is inelastic, because a lot of people do like sugar and there are not a lot substitutes of sugar.

Economies of scale

2009-10-11T16:24:00.004+01:00

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.

Chapter 5. The government economic policy objectives and indicators of national economic performance.

2009-10-10T20:58:00.009+01:00

Key performance indicators.

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 means expected 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 of economic 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.

Exchange rate 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.

SPICED – strong pound import cheap export dear (expensive)!!!!!!!!!

Changes in the exchange rate and the macroeconomy.

The possible effect of a lower exchange rate on the economy is showed on the diagram below.

Chapter 6. The application of macroeconomic policy instruments and the international economy.

2009-10-09T16:04:00.002+01:00

Demand-side policies.

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, which would 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 by providing 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.

ECONOMICS are EVERYWHERE......

2009-10-08T22:35:00.002+01:00

COMING SOON ON BLOG!!!!!!!!!!!!!!!

2009-10-06T21:32:00.002+01:00

I have read a book ' More sex is safer sex' by author Steven Landsburg. He maintains that if more people, especially more sexually conservative people, had sex the AIDS (virus) epidemic could be reduced. As I understood this idea, author mens that if people, who are in couple (married or just a boyfriend and a girlfriend) will have more sex, the rate of the AIDS' people would fall, because it would be less current sex relationships. I mean if a men, for example, can have sex at home with his wife, he, probably, would not go to a bar and take prostitute(which involves current sex and increasing in AIDS' rate). Another famous person Elizabeth Pisani did some research in Thailand. She got that now people are having more sex than 20-30 years ago and she thinks that if they will have more sex, the rate of AIDS' people will decrease.

Chapter 4. Aggregate demand and aggregate supply and their interaction.

2009-10-04T20:16:00.017+01:00

Aggregate demand.

Aggregate demand is the total demand for a country’s goods and services at a given price level (the average of each of the prices of all the products produced in an economy) and in a given time period.

It is made up of consumer expenditure _C_(spending by households on consumer products), investment _I_ (spending on capital goods), government spending _G_ (spending by central government and local government on goods and services), net export (exports _X_ minus import _M_)

So we have a formula of aggregate demand:

AD = C + I + G + (X – M)

So lets have a look on the components of aggregate demand.

Consumer expenditure (consumption)

There are some things that can have influence on consumption:

- real disposable income. This is the main influence on consumption. If people have more income they spend more, if they are poor they spend less. This can be measured by average propensity to consume (APC). The formula: spending/disposable income.

- wealth. Everything that people own ( houses, cars, assets, shares, money in a savings account, etc.) is wealth. It’s very simple to understand. For example, people who have more property or more savings in their accounts will be willing to spend more.

- consumer confidence and expectations. When consumers are filling optimistic about their future and they also are waiting for increasing their wages, they spend more money.

- the rate of interest. It is important influence on consumption. Firstly, interest rate is the charge for borrowing money and the amount paid for lending money. For instance, if rate of interest fell, people would borrow more money, thus, they would spend more. But for people who save money for borrowing (net savers) a fall in rate of interest has negative sequels, because they will earn less by lending money than they could before a fall in interest rate. So their spending will reduce. Usually, a fall in spending of net savers bigger than a fall in spending of ordinary people. That’s why a fall in interest rate can be often a cause of decreasing in spending.

- the age structure of the population. As we know the young and the elderly spend a high proportional of their disposable income, because these groups of people don’t earn a lot, they usually spend more than their income.

- distribution of income. It shows how income is shared out between households in a country.

- inflation. It is a sustained rise in the price level. So, if there is inflation in the country, people are waiting for increasing in prices, thus, they will spend more now (spending will increase).

Talking about consumer expenditure we can also pay attention on saving.

Saving is real disposable income minus spending.

Here is a list of things that have influence on saving:

- real disposable income. It is measured by average propensity to save (APS). Formula: saving/ disposable income.

- the rate of interest ( not a rate of borrowing!). If it increases people will save more. There is also group of people who save with a target figure in mind. They are target savers. In their case high interest rate would reduce the amount they have to save.

- confidence and expectation. Households and firms are likely to save more if they are not certain about their future. Fro instance, if people expect losing their jobs, they will save more.

- saving schemes. Some saving are contractual (when people agree to save a certain amount on regular basis in insurance and pension schemes).

- range of financial institutions. If financial system in the country is stable and developing, people will trust more financial institutions, so they will save more. But sometimes when financial system becomes more developed people will find borrowing money easier so they will save less.

- government policies. If the government introduce tax-free saving schemes people will save more.

- the age structure of the population. Yong people don’t usually save money. People often start to save in middle age. They save money for their retirement. In developing countries (effective economic system) it is very popular to save money for pension (after retirement) age.

Investment

The main reason of investment is rewards (for example, percentage of the company). So investors are looking for some factors when they are making decision about investment to make the highest profit. So, what actually can influence on investment:

- changes in real disposable income. Usually, if income increases, demand will increase. So it is likely for firms to invest in this period. But they have to know that with increasing demand they have to supply more to avoid a highly increase in price. So they will have to invest more.

- expectations. Firms are likely to invest more if they are optimistic about their future.

- capacity utilization - the extent to which firms are using their capital goods. Firms are likely to invest more if the have currently operating close to full capacity.

- current profit levels. High profit level encourage firms to invest more and also encourage firms to be optimistic about their future.

- corporation tax. This is a tax on firm’s profits. If this tax increases firms will invest less. In contrast, cut in corporate tax would encourage firms to invest more.

- the rate of interest. Interest rate has high influence on investments, because firms, that invest money into the market, depends on changes in particular market. Changes in interest rate will cause changes in the market ( interest rate rises – people spend less, etc.)

- advances in technology. With new technologies production always develop. If firm will involve new technology in production they will, probably, spend less money on producing, so their profit will increase. We can say that new technologies encourage firms to invest more.

- price of capital equipment. It is very simple. Cheaper equipment – more firms are able to buy – more firms are willing to invest.

Government spending.

Lets have a look at first on two definitions: Real GDP (the country’s output measured in constant prices and so adjusted for inflation) and GDP (the total output of goods and services produced in a country).

Factors, which have influence on government spending:

- the government’s view on the extent of market failure and its ability to correct it.

- the level of economic activity in the economy. For example, if it is a high level of unemployment government can increase spending to increase aggregate demand and national output.

- a desire to please the electorate. The government can spend money on education, health, etc. to prove to their voters that their government works efficiency ( also to attract more people for next election)

- war, terrorist attacks and rising crime, or their threat, can also increase government spending.

Net exports.

Factors which have influence on net exports:

- real disposable income abroad. A rise in income abroad is likely to result in more exports being sold.

- real disposable income at home. In contrast, a rise in income at home can result a fall in export, because some firms can change their selling policy and sell products at home because they will be certain about demand at home.

- the domestic price level. The value of exports can fall and a value of imports can increase if the domestic price level rises relative to the price levels in the partner-traders countries.

- the exchange rate. It is the price of one currency in terms of another currency. Exchange rate is very important in international trade. SPICED. If exchange rate goes up (for instance, pound) import prices will be cheaper, export prices will be more expensive.

- government restrictions on free trade. The government can provide special payments for imports. It is called tariffs. For example, if you want to sell China steel in the UK, you have to pay tariff.

The relationship between aggregate demand and the price level.

So lets have a look on diagram below.

As we can see that x-axis is Real GDP (GDP after inflation) and y-axis is Price Level). The aggregate demand curve slopes down left to right. There are three effects, that explain this:

- the wealth effect. This relates to changes in households’ and firms’ wealth.

- the rate of interest effect. A rise in the price level means that some people will sell financial assets, such as government bonds (a financial asset issued by the central or local government as a means of borrowing money)

- the international trade effect. A rise in the price level will make international product less competitive, so export will decrease, and people also will start to buy more import. As a result it will be budget deficit (import is greater the export), so demand will contract.

Shifts in aggregate demand curve.

On the diagram below we can see an increase in aggregate demand. There are a lot of reasons of this (we have talked about it before).

Aggregate supply.

What is it? It is the total amount that producers in an economy are willing and able to supply at a given price level in a given time period.

On the diagram below we can see a varying elasticity along an aggregate supply curve. This diagram (from points O and Y) shows situation with a high level of unemployment and low output ( AS is perfectly elastic)

Shifts in aggregate supply curve.

The main causes of changes in AS in the short run are changes in the costs of production. On the figure below we can see that AS decreases, because of increase in the cost of production, for instance.

Increasing in AS can also be caused by increasing in labour productivity (output, or production, of a good or service per worker per unit of a factor of production in a given time period.). Diagram below shows the productive capacity of the economy increasing.

Macroeconomic equilibrium.

Macroeconomic equilibrium occurs in situation where aggregate demand (AD) equals aggregate supply (AS) and real GDP is not changing.

Example of macroeconomic equilibrium in the point P,Y:

The circular flow of income.

The circular flow of income shows show us how the whole economy works and how changes AD. On the picture below you can see diagram of the circular flow of income.

Factor services – the services provided by the factors of production.

Leakages – withdraws of possible spending form the circular flow of income.

Injections – additions of extra spending into the circular flow.

Multiplier effect...

Is the process by which any change in a component of aggregate demand results in a greater final change in real GDP.

The diagram below shows the increase in AD of 5 billion pounds and the final increase in AD of 15 billion pounds. The main thing of multiplier effect that government has to recognize is that any change in government spending or taxes will have a knock-on effect on the economy.

Changes in aggregate demand.

An increase in aggregate demand raising the country’s output but leaving the price level unchanged.

An increase in aggregate demand raising both the country’s output and its price level

An increase in aggregate demand raising the price level but having no effect on the country’s output.

Changes in aggregate supply.

An increase in aggregate supply increasing the country’s output and lowering the price level.

An increase in aggregate supply raising potential output but having no effect on the country’s output or price level.

Changes in AD and AS.

An increase in aggregate supply matching an increase in aggregate demand.

AD growing more rapidly than AS. This diagram also shows an economy overheating( the growth in AD outstripping the growth in AS, resulting in inflation)

Output gap.

Output gap – the difference between an economy’s actual and potential GDP. It can be positive and negative.

Positive output gap (actual output is above potential output)

Negative output gap (actual output us below potential output)

Chapter 3: Market failure and government intervention.

2009-10-01T19:27:00.006+01:00

As we know that the main aim of market is to produce the best ( efficiency ) allocation of scare resources. In an ideal situation market does it, but in practice markets do not always work in this way. In this case we have the term market failure.
Market failure occurs where the free market mechanism (the system by which the market forces of demand and supply determine prices and the decisions made by customers and firms) fails to achieve achieve economic efficiency. Using simple words, during this process market is failing to produce the best use of scarce resources.
Lets talk about efficiency. There are two recognizable types of efficiency: allocative efficiency (we looked before) and productive efficiency. Economists explain productive efficiency as a process when everything that is produced is produced using the least amount of scare resources. Both terms (allocative efficiency and productive efficiency) are parts of economic efficiency.
What does it mean? Economic efficiency is a process where both allocative productive efficiency are achieved. There also the opposite term of efficiency. Inefficiency. This means any situation where economic efficiency is not achieved (resources are not used in the best possible way)
Information failure.
As we know all people, when they are making decisions what product buy or what product don’t buy, are using some sources of information about particular product (advertisement, for example). So information is very important for people while they are making decisions. We have to remember that almost in all cases people think rational, so they are thinking about advantages and disadvantages of buying something new. Lets have a look on this using some examples.
We can conditionally divide all goods into two groups (merit goods and demerit goods). You have to remember that difference between this two groups of goods is that demerit goods have bad influence for society (for example, cigarettes).
- merit goods

As we can see on the graph without information people would by less than with information. If people will know that product is good (for example, healthy food), they will buy it.

- demerit goods

We can notice from this graph that with information (about how goods are harmful) people would by less.

Speaking about information failure we also should to pay attention on asymmetric information. This means that information nit equally shared between two parties. Lets have a look on partical examples for better understanding:
Health care. When you visit your doctor with illness, you do not have the same medical knowledge as your doctor. You rely on the doctor’s experience and competence to give you treatment you need.
Insurance. When applying for travel or car insurance, as a purchaser you know far more about your circumstances (particular situation) than the company that is selling the insurance.
In these examples we can see that the lack of information has distorted how the market allocates resources.

Externalities.
All production has influence (sometimes positive, sometimes negative). In Economics this calls externality, that means an effect whereby those not directly involved in taking a decision are affected by the actions of others. The group of people, that is affected by others without taking decisions, calls third parties. Lets look at example just for better understanding.
Suppose a new airport was built. Noise from planes is negative influence (externality) on people (third parties) who live in this area.

Lets look at costs and benefits of externality.
There are three types of costs and benefits:
1) Private costs and benefits. In the case with airport, private costs are costs incurred by firm(airport) and privet benefits are directly received by airport. Private costs are the costs incurred by those taking particular action. Private benefits are the benefits directly accruing to those taking a particular action.
2) External costs and benefits. In the case with airport, people who live on the flight path of the airport will experience additional noise pollution problems. They may be forced to soundproof their homes at their own expenses trough no fault or doing of their own. An external benefits could be if some frights transfer to the airport from elsewhere, resulting in less noise pollution for those people who live near airport.
3) Social costs and benefits. You have to remember that external and social costs and benefits are not the same. For example, in the case of airport, the social cost could include cost of increased CO2 pollution, and social benefit might include the additional jobs for people who live in this area (near airport).

Negative externalities.
Negative externality exists where the social cost of an activity is greater than the private cost. Here some examples:
Chewing gum. This can poses major problems in all towns and cities. Westminster Council claims to spend over 100,000 pounds annually removing gum from its streets.
Illegal dumping of waste. The private cost to those dumping such things is minimal (unless they are found out!); the external cost has to be covered by those, such as local councils, responsible for maintaining the environmental.
Each of these situations we can show on the graph below.

The price is P and the quantity bought and sold is Q. At this price the supply curve only takes into account the private costs of a given action. If the external costs is also accounted, the supply curve would shift to the left, to S1. The result would increase in price to P1 and fall in equilibrium quantity to Q1. The problem with negative externality is that there is over-production of Q-Q1 and that the price is lower than it should be. Too many scare resources are being used.

Positive externalities.
Positive externality exists where the social benefit of an activity exceeds (is greater than) the private benefit.
Lets have a look at the graph below.

At the price P the private benefit are not taken into account. If they are, the demand curve will shift to the right and, as a result, the market equilibrium would be at the price P1 and quantity Q1. Where the market fail to operate in this way, there is under-production. This is shown by the difference between Q1 and Q. Too few scarce resources are being used, hence the market failure.

As you remember, we have looked on two types of goods (merit and demerit) before. There is also another group of goods.

Public goods.
Public goods are goods that are collectively consumed and have characteristics of non-excludability and non-rivalry. There are two types of public goods:
1) non-excludability – situation existing where individual consumers cannot be excluded from consumption. Free rider – someone who directly benefits from the consumption of a public good but who doesn’t contribute (develop) towards its position.
2) non-rivalry – situation existing where consumption by one person doesn’t affect the consumption of all others.
Economists also notice a further type of public good – quasi-public good (goods having some but not all of the characteristics of a public good)

Government intervention to correct market failure.
The government can intervene into market by two ways (methods):
1) by manipulation of the market mechanism – subsidies, indirect taxation and the provision of information.
2) by direct provision and various forms of regulation and control.

TAXATION
There are two types of taxes:
- direct taxes, such as income tax, corporation tax and national insurance contributions, all of which are taxes on the incomes of individuals and firms.
- indirect taxes, such as value added tax (VAT) and excuse duties, that tax the sale of certain products, council tax and business rates are charged locally on the ownership of houses and business premises.

SUBSIDIES
Subsidy is a direct payment made by government to producers of a good or service or, in some cases, to its consumers. This company is aimed to reduce the cost and increase level of production and consumption. Lets have a look on some examples:
- subsidies to producers . payments to train-operating companies to operate franchised service, payments to local bus companies to run loss-making services in rural areas, etc.
- subsidies to consumers . the winter full payment to people aged 60 and over, the educational maintenance allowance for 16-18-years-olds in further education,etc.
Lets look on the graph below, that shows us the effects of introducing a subsidy.

As we can see that in almost all situations introducing a subsidy involves an increasing in supply (supply curve shifts to the left)

Regulations, standards and legal controls.
The best way of understanding this topic is looking through some examples in our book.

Tradable permits.
Tradable permits are the permits that allows owner to emit a certain amount of pollution and that, if unused or only partially used, can be sold to another polluter.
The graph below shows how, in theory, the price of permit is determined. As we see that supply of permits (S) is constant(vertical straight line). So if demand will change from D to D1 only prices will change (from P to P1).

Role of government in information provision.
Lets have a look at some examples to understand exactly how the government plays role in information provision:
- health warnings on cigarette packets
- advice on the maximum number of units of alcohol that should be consumed
- improved labeling on food products, such as the ‘traffic light’ system that indicates fat, sugar and salt content
- advice on the consumption of junk food and on links to child obesity.