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AS and A Level: Macroeconomics
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The macroeconomic objectives
- 1 Growth is measured usually by the GDP per capita. Be aware that just looking at GDP as a measure of growth is flawed to some extent and know the criticisms of it e.g. ignores the distribution of income, exchange rate problems.
- 2 Full employment – This usually tracks GDP growth to a large extent. Some unemployment in an economy is normal as people change jobs (frictional unemployment) and some would say a little unemployment is useful for preventing big wage rises.
- 3 Low inflation – Inflation is a persistent rise in the level of prices. If a country has inflation its prices are likely to rise compared with foreign competitors so the country will become uncompetitive.
- 4 The balance of payments needs to be in equilibrium, where the value of imports equals the value of exports.
- 5 The most important objective varies – For many years it was the balance of payments and unemployment. Until very recently it was inflation and much more recently, growth has become the most important. Remember that all objectives need to be achieved at the same time.
- 1 The government tries to regulate the economy, mainly by affecting the level of Aggregate Demand (AD) and Aggregate Supply (AS). There are three main types of policy listed below.
- 2 Fiscal policy is using taxation and government spending to regulate AD by, for instance, increasing tax to reduce AD or borrowing more to spend on infrastructure projects to increase AD. Fiscal policy is used less to affect AD recently.
- 3 Monetary policy is essentially affecting the amount of money in the economy by changing the money supply, changing the exchange rate or altering the interest rate. In recent years, monetary policy has mainly come to mean just changing the interest rate with the main aim of affecting AD however quantitative easing is also monetary policy.
- 4 Supply side policies are designed to increase AS by improving the production potential of the economy. Examples include improving education and training, increasing competition for businesses and tax breaks for research and development.
- 5 In practice, governments use all three policies to regulate the economy. Supply side policies are seen as most effective as they also lead to lower inflation but their effects are in the long term.
Keynes versus Friedman
- 1 This is regarded as being a key ideological stand off regarding government regulation of the economy.
- 2 Keynes believed that the government had a big role to play in the economy by regulating aggregate demand. When AD was too low so there was low growth and unemployment, the government should borrow money and embark on public sector expenditure to stimulate AD and the economy. When AD was too high, the government should increase tax or reduce government spending to reduce AD.
- 3 Friedman was a monetarist. He believed that the free market should be left to itself to regulate the economy. He believed that left alone, the economy would provide full employment and growth. The government would only create inflation by injecting money into the economy. The government should regulate the money supply only.
- 4 The dominant ideology changes. From 1945 to 1979, Keynes was dominant. During the 1980s monetarism came back. Now there is arguably a more balanced view.
- 5 Avoid simplistic analysis. The debate concerning the role of the government in macroeconomics is complex.
- Marked by Teachers essays 5
- Peer Reviewed essays 35
Another way in which economic growth may be desirable is that it may lead to an improved fiscal position. Fiscal policy is one of the key economic policies that governments use to influence economic activity and achieve their macroeconomic objectives. If economic growth is rising, then the income of worker's may be considerably higher. If this economic growth is sustainable and stable, then the government may not be pressurised to change spending and tax rates regularly as revenues will tend to be higher and so the position will be more reliable.
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The aim of this essay is to discuss the relevance of John Keynes to the current macroeconomic situation in the UK.5 star(s)
A, 2007: 307). The government of any economy will set policies in order to achieve set economic objectives. These economic objectives include maintaining a stable and sustainable level of economic growth, controlling inflation within a certain level, a push for full employment or decrease in level of unemployment within the economy and monitoring the level of the balance of payments (bized.co.uk). Government policy objectives are highly important as they ensure efficient production of goods and services within an economy. The diagrams below display information relating the changes in different economic objectives over the past years. Inflation can be defined as "an increase in the overall of prices in the economy" (Mankiw G M, 2001: 13).
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When this occurs on a large scale unemployed workers shift into employment. This is beneficial as governments provide less social security for the population, so they can spend money on public services. As a result of increase government spending, the quality of services such as education, health and shelter will become better hence improving the standard of living. Previously unemployed workers will also now be able to afford higher quality essentials. This can be seen in the case of China's HDI which has risen from 0.46 in 1990 to 0.663 in 2010 in correlation to the high level of economic growth experienced during this period.
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I will be evaluating on the article "UK inflation drops to Bank target" by the BBC which only focuses on this problem. Brief summary: The main issue in the article3 star(s)
"an average measure of change in the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK. It is compiled and published monthly",(National statistics-UK). CPI excludes a number of items that are included in RPI. The CPI however includes the residents of institutional households such as student hostels, and also foreign visitors to the UK while RPI does not. They also have specific differences in price measurement. But, in terms of their basic usability, there is little to choose between them.
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Reduction in income means less spending and therefore lower standard of living. The cost of unemployment worsens the longer a person is unemployed because it affects as he becomes increasingly dejected, suffers from high levels of stress, anxiety and depression. This can further lead to relationship- breakdowns and higher levels of suicide among the unemployed, in extreme cases; especially in countries where the social-support system isn't strong enough. Unemployment, especially long-term unemployment, can pose threat to the society as a whole.
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An increase in government spending which could be spent on new roads or on education would lead to an increase in AD. These are based on the components of AD which is shown as AD = C+I+G+(X-M). The Central or National Bank uses loose monetary policies to help during a recession in the economy. This involves lowering interest rates which decreases savings and leads to an increase in investment and consumption to push up AD because there is lower opportunity cost associated with investment and consumption.
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figures when using the expenditure measure, it is necessary to remove the distorting effect of expenditure taxes and subsidies. This process is known as the factor cost adjustment and involves the deduction of the value of expenditure taxes and the addition of the value of any subsidies. A further distortion to Yn figures is the rate of increase in prices (inflation), and a statistical adjustment is necessary to remove the impact of inflation. This statistical adjustment is known as the GDP deflator. National income figures are used for measuring changes in the standard of living. In order to increase their accuracy, it is necessary to take account of different population sizes by dividing GDP by the size of the population.
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There could be a disadvantage to pulling the prices up. To begin with, by pulling prices up, in the future, demand will fall and we will see that profits fall for producers, as a result of less revenue. Thus redundancies have to be made as the margin of profit is not enough to subsidise the cost of production, due to profit margins falling. Aggregate Demand Shifts from AD1 to AD2 and so price goes up. (Below) Price AS AD2 AD1 Output When costs rise then eventually these costs will have to be subsidised and the only way to do this is if the cost is passed on to the consumer.
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This component can be positive or negative. c) 3 determinants of Consumption (C):- - Real Disposable Income: main influence on consumer expenditure. The rich tend to spend more than the poor as they have more disposable income. However, their APC (average propensity to consume) may fall as they will probably spend a smaller percentage of their income than a poorer person. - Consumer confidence: This may have a significant influence on consumption, as households tend to spend more if they are optimistic about the future and expecting good job prospects or high wages.
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On a microeconomic level, inflation can arise from the domestic economy. For example, major energy providers may decide to put up prices in line with projections for the year ahead, or monopolistic supermarket chains could engage in pricing wars, often to the detriment of the consumer and the pocket inflation they experience. Government VAT increases to fund its budget deficit would eventually feed through to inflation. On an international level, various commodity shortages or scarcity power from giant oil companies undoubtedly forces inflation further upwards.
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It is thought that national minimum wages can cause wage unemployment because the employees feel that the work is not worth the minimum amount. * Demand deficient unemployment: This is usually associated during a period of recession in the business cycle. This is because during recessions aggregate demand is low and so firms are more likely to become bankrupt as well as lay-off of employees. * Frictional unemployment: This is transitional unemployment due to people moving between jobs: For example, newly redundant workers or workers entering the labour market may take time to find appropriate jobs at wage rates they are prepared to accept.
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Use the aggregate supply-aggregate demand (AS-AD) model to examine the effects on real GDP and the price level of increases in American tourism to the UK.4 star(s)
The long-run aggregate supply curve is the "relationship between the quantity of real GDP supplied and the price level in the long run when real GDP equals potential GDP"( Parkin, 2000, page 465) . The long-run aggregate supply is shown always as a vertical line and is located at potential GDP. The curve is always vertical because potential GDP is does not depend on the price level. There is no dependence because a movement along the curve is accompanied by changes in two sets of prices: the prices of good and services and the prices of factors of production.
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Examine the factors which affect the international competitiveness of the UK's goods and services (40 marks). International Competitiveness is the ability of a nation to compete successfully4 star(s)
The UK's inflation target is set for RPIX inflation at 2.5% plus 1% or minus 1%. The Bank of England Monetary Policy Committee sets interest rates with the objective to maintain stable or low level of inflation. However even if the inflation rate for UK is high, when comparing with other countries, UK's inflation rate might be lower which means UK will be price competitive with those countries. Exchange rate is the rate between two currencies specifies how much one currency is worth in terms of the other. If the exchange rate is higher for UK's sterling pounds then, the price of UK's export will be high; therefore demand for UK's export will fall, therefore UK will be less price competitive.
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'The trade deficit on goods in the first three months of the year was £7.1bn.' Explain the meaning of this statement.4 star(s)
This is illustrated by the J-Curve effect below. (b) Examine the possible causes of such a deficit. There are a number of possible causes for a current account deficit. Because at a time when some countries will be running a current account deficit, in this case the UK for instance, other countries will be experiencing a current account surplus. Therefore it is essential to identify the underlying causes of a current account deficit before designing policies to correct the problem.
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Assume that, if the price rises, the rate of demand will lead to higher price thus there may be a temporary (short run) rise in real output and low unemployment. However, it may be arises the expectation of higher prices and wages among the people. Besides, if products or services price rises, the demand will go down, thus labour costs will increase the demand of workers fall. This is because firms pursuits to reduce their wage rates by doing discharge their employ.
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I will deal with each goal in turn. Economic growth is a desirable objective, it's the major cause of rising living standards its has been a dominant forces for industrial nations over 200 years. Even small differences in growth rates can lead to large differences in income per head due to the power of compound interest. Since the end of the 2nd world war the rate if economic growth has averaged 21/2 % per annum. The figure may be low when compared with some other countries.
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In this sample typical household expenditure such as, food and housing costs would be considered whereas tobacco would not. Therefore, The inflation figures that form the RPI is the annual percentage change in this index from the most recent month compared with the same month in the previous year. This is known as the headline rate of inflation. Alternatively the government will regularly publish the underlying rate of inflation, otherwise known as the RPIX. The 'X' doesn't actually mean anything; it's just a symbol that allows us to differentiate between the RPI and the RPIX. This comprises of exactly the same, as the headline rate of inflation except it does not include mortgage interest repayments.
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Hence, the consumer welfare is improved and their standard of living is raised. The purchase of cheaper imported raw materials and goods from countries that are more cost efficient helps to lower domestic inflation rate. On the other hand, Singapore faces higher demand for its domestically produced goods due to comparative advantage. Domestic firms in Singapore are able to sell their domestic goods abroad to enjoy economies of scale which is cost savings enjoyed by the firms due to expansion of output. This lowers the cost of production for the firms and improves the country's export competitiveness.
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Discuss appropriate policy measures that the Singapore government may undertake to increase the net benefits of globalization
This worsens the balance of trade, incurring a balance of payments deficit whereby international payments exceed international receipts excluding changes in official financing. A current account deficit is a net leakage from circular flow of income and has a negative effect aggregate demand and short term economic growth. To correct a balance of payments deficit for a short term, both expenditure-reducing policies and expenditure-switching policies could be used. Expenditure-reducing policies involve the reducing of level of expenditure on imports. This can be done using exchange rate policy whereby government depreciates Singapore currency which would make imports more expensive when converted to Singapore currency.
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You are to produce a report on the subject the balance of payments and exchange rates. In it you need to define what the various terms mean and examine critically their importance to the UK economy. You should concentrate on their role in how the economy
and consumer spending for short term aid and fiscal policy will also use to reduce the aggregate demand later on in this essay I am going to descried the policies in detail and how they are use in the balance of payment. The BOP tells the total amount of financial transaction in the whole economy that has entered from other counties and leaves the UK economy. The BOP also tells us how much money UK has spent on the import good and how much is sold on the export good, if there is more import then export it will be a deficit and export more than import will be a surplus.
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Evaluate the polices the government should adopt if it wishes to achieve a low level of unemployment.
This will bring the aggregate demand curve downwards and to the left. (See diagram 1) If the aggregate demand curve falls, GDP will fall significantly. This is also the same with investment, if income is low; people are less likely to invest. However, if the aggregate demand curve fluctuates to the right quite quickly, it can lead to inflation. There will be fewer jobs available because people are spending less, which in the long run, can cause unemployment. Another possible cause of unemployment is having a large majority of the population, being unskilled workers.
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Using the data and your economic knowledge, evaluate the contribution that the growth of government expenditure may make to the U.K. economic performance.
Economic growth can be affected both in the short and long run by aggregate demand, which includes government expenditure. Short-run economic growth is determined by aggregate demand, therefore if one of the components of AD was to increase, e.g. government expenditure, it is expected that this would stimulate short term economic growth, as shown in 'figure 1' - as AD rises from AD1 to AD2, real national output should rise from Y1 to Y2. Long term economic growth can also be affected by an increased amount of government spending. Changes in aggregate supply can lead to increases in the potential output of the economy.
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There are several types of tariffs, * An ad valorem tariff is a set percentage of the value of the good that is being imported. It could cause problems as fall in the international price of a good will lead to a decrease in the tariff. This makes the domestic industries more vulnerable to competition. * A specific tariff is a tariff of a specific amount of money that does not vary with the price of the good. However, it is difficult to decide the amount at which to set a tariff, and it may need to be updated frequently due to changes in the market or inflation.
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Variations in sunspots affect the power of the sun's rays, which consequently has a significant influence on the quality of the crop harvest and therefore the price of the commodities sold, which in turn promotes greater economic confidence and leads to the achievement of larger profits earned, these profits can then be reinvested into the circular flow of income - leading to further growth. Another factor is the role of speculative bubbles; rapid economic development and growth usually leads to hasty asset price increases.
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That is to say, direct taxes which were previously more dominant would give way to a larger quantity of indirect taxes that are regressive in nature - therefore hitting the poor the hardest as the proportion paid in tax falls as income rises. As a result, the effect of these changes can be illustrated on a Lorenz Curve in the diagram below: As the diagram reveals, the Lorenz Curve deviates by a considerable extent from the line of perfect inequality.
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