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An increase of government spending in secondary education will mean that a larger portion of student

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The government has recently announced substantial increases in expenditure on secondary education. Using aggregate demand and supply analysis, examine the consequences of this for macroeconomic policy objectives in both the short and long run. An increase of government spending in secondary education will mean that a larger portion of students would stay on for longer education and become better skilled therefore producing a more productive labour force. While there is no expansion in the UK's total labour supply, there is a large increase in the productive potential of an economy. Increased quality will improve the productivity (efficiency) of labour. As with the product market policies, successful labour market supply side policies will shift the LRAS curve to the right. The same effect can also be illustrated by an outward shift in an economy's production possibility frontier. At first there would be a small leftward shift of the supply curve as more students are staying in education in the short-run, which is combined with a rightward shift to the aggregate demand curve as there is an increase in government spending with a little net change in price. ...read more.


Economies that have invested heavily in education are those that are well set for the future. Most economists agree, with the move away from industries that required manual skills to those that need mental skills, that investment in education, and the retraining of previously manual workers, is absolutely vital. It should also be noted that improved training, especially for those who lose their job in an old industry should improve the occupational mobility of workers in the economy. This should help to reduce the problem of structural unemployment. A well-educated workforce acts as a magnet for foreign investment in the economy, which adds to the aggregate demand of the economy helping to further shift the aggregate demand of the economy raising the average price and GDP. The international competitiveness of British firms in domestic and overseas markets, from improved productivity, businesses can develop a competitive advantage in markets where there is intense price and non-price competition from overseas suppliers, hence further maintaining the aggregate demand shift. The Irish economy is a great example of how supply side reforms designed to increase the qualifications and skills of the labour force, together with favourable tax rates for companies and workers - has encouraged a huge flow of inward investment from overseas (in particular from the United States). ...read more.


If the British economy can raise the rate of growth of productivity then the sustainable growth of national output can also pick up. This has implications for living standards, unemployment and tax revenues and government spending. Long run aggregate supply is determined by the productive resources available to meet demand and also by the productivity of factor inputs (labour, land and capital). Changes in technology also affect the potential level of national output in the long run, and hence add to the shift in the possibility production frontier of the UK economy. In the short run, producers respond to higher demand (and prices) by bringing more inputs into the production process and increasing the utilization of their existing inputs. Supply does respond to change in price in the short run - we move up or down the short run aggregate supply curve, proportionate to the price change depending on the price elasticity of supply. In the long run we assume that supply is independent of the price the productive potential of an economy is driven by improvements in productivity such as the rise in labour productivity through investment in secondary education. ?? ?? ?? ?? L8th Macroeconomics Homework Frederic S. Wolens Page 1 09/05/2007 ...read more.

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