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Explain how monetary policy can be used to control the performance of the UK economy

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Introduction

Explain the factors which might determine the demand for foreign package holiday by UK households. There are many factors which might determine the demand for foreign package holiday by UK households, in this essay I will look at factors in more depth. UK holiday makers take 36 million overseas holidays each year, and about 46% of these are packaged holidays, which is when accommodation, flight and other costs are all bundled into one price. Package holiday travel does not necessarily mean international travel, though in this essay, I will only look at factors related to foreign holidays. This market is a highly competitive one, due to the fact that there are many potential substitutes with a small number of larger tour operators battling hard for market share. Package holidays were devised partly as a way of achieving high sales volumes and reducing unit costs by allowing tour operators to purchase the different elements in bulk, passing some of the savings on to consumers. We can look at the factors that influence the demand for package holiday in two perspectives. On the one side there are those factors influencing the demand, that is to say people who are actively able and willing to purchase any given amount of goods in defined amount period of time; for example the motivation, which is to say the human psychological drives of the end user to travel and the their ability to travel, whether directly or indirectly. ...read more.

Middle

The fall in AD was resulted by the reverse wealth effect forcing consumers to cut back expenditure, if this occurs, then the amount of people from UK being able to take foreign package holiday will fall. Supply side shocks cause cyclical instability by shifting SRAS although they are unlikely to have any major impact on the long-run productive potential of the economy. A negative supply-side shock might be caused by a rise in world oil prices, which causes an increase in the variable costs of firms for whom oil is an essential input into the production process. For this reason firms may seek to raise their prices to protect their profit margins. This will cause cost push effect, hence those potential holiday makers will have limited spending power, and a rise in price of regular purchases will probably lead to less total disposable income, which may lead to less probability of them taking a package holiday. Demand Pull inflation occurs when total demand for goods and services exceeds total supply, it happens when there has been excessive growth of AD. A depreciation of the exchange rate of GBP in comparison to other currency increases the price of imports and reduces the foreign price of UK exports. If consumers buy fewer imports, while foreigners buy more exports, demand in the UK economy will rise. ...read more.

Conclusion

A reduction in indirect taxes (taxes on goods and services such as VAT) will mean that a given amount of income will now buy a greater real volume of goods and services; this could potentially increase the probability of the consumers taking a package holiday at the same time give consumer much better holiday package for the same retailing price (but with no VAT). Likewise if the direct and indirect tax increase, there would be less potentially demand for it as people will either have lower amount of disposable income or will get a holiday package of less real value. Giving the global and nearly unlimited offer in tourism with capacities still on the rise at least in Europe the power in the market is clearly with the consumer. The potential buyer will only choose products which fit into his motivation and expectations. Taking the efforts to reduce seasonality in tourism as an example, we clearly see that the limitations to these efforts are only partly due to e.g. the motivation of spending a holiday under nice weather conditions. In addition we have to take into account the influences coming from general changes in consumer attitudes and, finally, the tourism industry itself, of course influencing the demand side of tourism. ?? ?? ?? ?? ...read more.

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4 star(s)

Response to the question

This essay engages well with the question. This is a simple analysis question, and requires no evaluative comments of which factors are most significant. I liked the length of this essay, as it shows a variety of points. You will ...

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Response to the question

This essay engages well with the question. This is a simple analysis question, and requires no evaluative comments of which factors are most significant. I liked the length of this essay, as it shows a variety of points. You will be penalised quite heavily if you focus too much on one point on these sorts of questions, as examiners can only allocate a certain number of marks for each new idea. For most of the essay the candidate is focused on foreign holidays, however the paragraph starting "Clearly international shocks affect different economies in different ways" seems to be a bit irrelevant.

Level of analysis

The analysis here is strong, but I would've liked to have seen some diagrams! The essay does well to differentiate between a number of factors which influence demand. Mechanisms are well explained. For example the paragraph talking about supply side shocks links each step. It states that it can cause oil prices to rise, which pushes the firms to increase their prices, which means holiday makers are less likely to spend on foreign visits. It is this sort of paragraph, which connects each point, that shows the examiner you are an able candidate. I feel that diagrams would've strengthened this essay at times. In particular when talking about the aggregate demand levels being affected by external shocks - it would be incredibly easy to show a shift in aggregate demand reducing real GDP levels, and then interpreting that as a reduction in employment so less people will afford foreign holidays. Such diagrammatical analysis is looked upon favourably, and I would always advise you draw a diagram in exams for the longer questions.

Quality of writing

The structure here is okay, but I feel points could be ordered more logically. Sometimes paragraphs have numerous sentences talking about mechanisms of the economy before linking it back to the question. I would always signpost my paragraphs so they are engaging with the question. For example "An external shock to oil prices can cause the demand for holidays to fall". Then you can spend a few sentences explaining the external shock without coming across as unfocused on the question. Technical terms are used well here, and the style is good.


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Reviewed by groat 11/04/2012

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