• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Macro Economics Commentar

Extracts from this document...

Introduction

Macroeconomics Commentary: By James Campbell As the prices for food and energy continue to climb, many governments are turning to short-term demand-side policy to limit the hike in inflation. Demand-side policy adheres to the theory that government intervention is necessary to ensure an active and vibrant economy. It is defined as: "an economic theory that advocates use of government spending and growth in the money supply to stimulate the demand for goods and services and therefore expand economic activity." Examples of such policies are subsidies, tax rebates and cash grants. Many governments, especially in Asia, are expanding these short-term policies to protect consumers and slow down inflation. On Monday March 1, India expanded their longstanding subsidies on diesel cooking fuels; experts expect food subsidies to come in the coming weeks. ...read more.

Middle

The Indian government finds it necessary to implement these policies to firstly, improve quality of living as the essentials will cost less and secondly to reduce the rate of inflation. Inflation is defined as "a rise in the general level of prices of goods and services in an economy over a period of time." It is desirable to maintain a reasonably low rate as inflation erodes international competitiveness making exports cost more abroad. This can cause a decrease in demand for exports. This would result in less revenue for many firms, and less money coming into the country. Last week in Hong Kong, authorities turned to a different method of price control. This includes waving public-housing rents for two months and providing residents with cash handouts of 6000 Hong Kong dollars (US$770.) ...read more.

Conclusion

However subsidies and handouts let governments avoid more painful moves, such as big interest-rate increases, which many governments fear will slow growth. Frederic Neumann, and economist at HSBC in Hong Kong says, "...subsidies and price controls are counterproductive." He also says that "giving people more money to spend through subsidies and handouts is the last thing governments should be doing when prices are rising." What he means, is that by enable more consumer spending, the governments are increasing aggregate demand. This is known as demand-pull inflation. Which is shown in figure 2 and defined as "when aggregate demand in an economy outpaces aggregate supply" Figure 2 As we see here in figure 2, as demand shifts right, price goes from P1 to P2. This is what Frederic Neumann fears will happen in to the countries that have recently turned to demand side policy. Overall, although handouts and subsidies are an effective short-term fix, which improve quality of life, they may prove costly in the long run. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our International Baccalaureate Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related International Baccalaureate Economics essays

  1. Growth and Development Problem Set - IB Economics exam questions and answers.

    * Trying to achieve economic growth people pollute the environment and cause to environmental threats, such as climate changes. Plus, they do not protect the things that other people need or value, like wildlife while aiming for a growth. But these oppose the principal of effective protection of the environment because it intends people to limit environmental threats.

  2. IB Macroeconomics Commentary

    These individuals are, for the moment, cyclically unemployed. Cyclical unemployment is a type of unemployment that occurs when an economy is at the trough of its business cycle. Point A of Figure 2 is positioned at the trough which illustrates the point where an economy experiences low levels of economic activity.

  1. Economics Macro commentary

    Cutting down on maintenance cost would affect the safety of the customers. People would not like to travel by ferry which would decrease the demand further. Other than high operation costs, Ferry operators are also uncertain about they future services as land substitutes (bridge)

  2. The Economics of Housing. Factors affecting prices and demand.

    The main factors that changes in supply are 1. The price of the product 2. The price of other product 3. Technology 4. Number of producers 5. Future price expectation 6. The price of the resources EMPIRICAL EXAMINATION: Here I have done the Trend analysis of house prices in the last five years in UK.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work