Section Two
Government Economic Objectives
These are the objectives in which the government wants to achieve. The objectives in which the British Government want to achieve include:
- Low inflation
- Steady and sustained economic growth
- Low unemployment
- A balanced balance of payments
2.1 Low inflation
Inflation is defined as a sustained increase in the general level of prices for goods and services and is measured as an annual percentage increase. From the chart shown in the appendix (1.1), which researched (BBC News, Retrieved 22nd November 2011, from ) shows that the current inflation rate in Britain is 5.0% which has seen it risen since June 2011 from 4.2%. When there is inflation, then the value of the pound does not stay constant.
Causes of inflation
There are two types of inflation; Cost push inflation and Demand pull inflation. Cost push inflation occurs when businesses respond to rising production costs, by raising prices in order to maintain their profit margins. Cost-push inflation can be illustrated by an inward shift of the short run aggregate supply curve and this can be seen in the appendix (1.2) taken from (Tutor2U, Retrieved 22nd November 2011, from http://tutor2u.net/economics/revision-notes/a2-macro-causes-of-inflation.html)
There are a number of reasons why cost push inflation occurs which include (Tutor2U, Retrieved 22nd November 2011, from http://tutor2u.net/economics/revision-notes/a2-macro-causes-of-inflation.html);
Rising labour costs - caused by wage increases which exceed any improvement in productivity. This cause is important in those industries which are ‘labour-intensive’.
Higher indirect taxes imposed by the government – for example a rise in the rate of excise duty on alcohol and cigarettes, an increase in fuel duties or perhaps a rise in the standard rate of Value Added Tax or an extension to the range of products to which VAT is applied.
Demand Pull Inflation
Demand-pull inflation is likely when there is full employment of resources and when SRAS (Short-Run Aggregate Supply Curve) is inelastic. In these circumstances an increase in AD (Aggregate Demand) will lead to an increase in prices. AD might rise for a number of reasons, which have been listed and explained below;
A depreciation of the exchange rate- has the effect of increasing the price of imports and reduces the foreign price of UK exports
The rapid growth of the money supply – perhaps as a consequence of increased bank and building society borrowing if interest rates are low
(Tutor2U, Retrieved 22nd November 2011, from http://tutor2u.net/economics/revision-notes/a2-macro-causes-of-inflation.html)
2.2 Steady and sustained economic growth
Economic growth is the increase in the capacity of an economy to produce , compared from one period of time to another. Economic growth can be measured in nominal terms, which include inflation. (Investopedia, Retrieved 22nd November 2011, from )
From late 2009, fears of a sovereign debt crisis developed among investors concerning some European states, intensifying in early 2010 and thereafter. On the side of the excessively borrowing states the governments have had problems to finance further budget deficits and service existing high debt levels. This included Eurozone members Greece, Ireland, Italy, Spain and Portugal, and also some non-Eurozone European Union (EU) countries. In countries where government budget deficits and sovereign debts have increased sharply, a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on credit default swaps between these countries and other EU members, most importantly Germany.
The table shown in appendix 1.3, shows how each of these economies have improved with their GDP growth. Greece in 2009 had a GDP of -2.0% and in today’s economic situation they appear to be struggling greatly as their GDP has dropped by a further one per cent to 3.0%. However, countries such as Ireland who have increased their GDP by 8.1% since 2009, and Spain who’s GDP has increased by 4.5%, have shown significant improvement in their economy, although they still are not in a strong position and are contributing greatly to the crisis in Europe.
2.3 Low unemployment
Over the past number of years, unemployment figures have soared, particularly from the beginning of the recession in 2008. UK unemployment rose by 129,000 between July and September 2011 to 2.62 million, a 17-year high, according to official figures. Youth unemployment has risen which has seen the unemployment total for 16-24 year olds hit a record high of 1.02 million in the quarter, a jobless rate of 21.9%.
The table in appendix 1.4 shows how youth unemployment figures have risen in not only the UK but in countries around Europe particularly those who have been hit hard during the economic recession. From the beginning of the recession, Spain already had the highest youth unemployment rate in Europe at 24.6%, and today they still have the highest at 45%. Ireland has seen their youth unemployment rate increase by 16.5%. Out of the countries in difficulty, Italy has managed to have the lowest rate in 2011 at 27.7%, however, their rate did increase from 2008 but by a small percentage of 6.4%.
2.4 Balanced Balance of Payments
The balance of payments (BOP) records all of the many financial transactions that are made between consumers, businesses and the government in the UK with people across the rest of the World. The BOP figures tell us about how much is being spent by British consumers and firms on imported goods and services, and how successful UK firms have been in exporting to other countries and markets. It is an important measure of the relative performance of the UK in the global economy. (Tutor2U, Retrieved 22nd November 2011, from )
The Effects of Changes in the Balance of Payments on the UK Economy
This could occur if there is more money going out of the economy on imports than there is coming in on exports. This may be caused by a rise in the value of sterling compared to that of other currencies such as the Euro. If this was to occur then it would have further effects on the economy as a whole. There could then be reductions in demand in the circular flow, more jobs lost and a dip in business confidence and investment.
Overall, out of the four main government economic objectives, a steady and sustainable economy would be of most importance. If the government can secure a steady and sustainable economy, then there is less of a risk that the country will run into financial difficulty, and could then see a country come out of the recent recession. It will also interest further trade into the economy and also see businesses creating new jobs, helping to cut down the unemployment rate.
Section Three
3.1 Monetary Policy
Monetary Policy involves changes in the base rate of interest to influence the rate of growth of aggregate demand, the money supply and ultimately price inflation. Monetarist economists believe that monetary policy is a more powerful weapon than fiscal policy in controlling inflation. Monetary policy also involves changes in the value of the exchange rate.
Day-to-day operation of monetary policy in the UK is in the hands of the Bank of England. The Bank sets the official repo rate on the basis of a detailed monthly assessment of trends in the macro-economy and the associated balance of risks to cost and price inflation.
How Does Monetary Policy Affect Economic Growth?
The central bank tries to maintain price stability through controlling the level of money supply. Thus, monetary policy plays a stabilizing role in influencing economic growth through a number of channels. The contribution that monetary policy makes to sustainable growth is the maintenance of price stability. Since sustained increase in price levels is adjudged substantially to be a monetary phenomenon, monetary policy uses its tools to effectively check money supply with a view to maintaining price stability in the medium to long term. A monetary policy decision that cuts interest rate, for example, lowers the cost of borrowing, resulting in higher investment activity and the purchase of consumer durables.
3.2 Fiscal Policy
Fiscal policy can be contrasted with the other main type of macroeconomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and spending. The two main instruments of fiscal policy are government expenditure and taxation.
How does Fiscal Policy Affect Economic Growth?
1.Taxation and work incentives- Changes to the tax and benefit system also seek to reduce the risk of the ‘poverty trap’ – where households on low incomes see little net financial benefit from supplying extra hours of their labour. If tax and benefit reforms can improve incentives and lead to an increase in the labour supply, this will help to reduce the equilibrium rate of unemployment.
2.Taxation and business investment decisions- Lower rates of corporation tax and other business taxes can stimulate an increase in business fixed capital investment spending. If planned investment increases, the nation’s capital stock can rise and the capital stock per worker employed can rise. The government might also use tax allowances to stimulate increases in research and development and encourage more business start-ups.
(Tutor2U, Retrieved 22nd November 2011, from http://tutor2u.net/economics/revision-notes/a2-macro-fiscal-policy-effects.html)
Section Four
4.1 Competition Commission
The Competition Commission (CC) is an independent public body which conducts in-depth inquiries into mergers, markets and the regulation of the major regulated industries, ensuring healthy competition between companies in the UK for the benefit of companies, customers and the economy.
How the Competition Commission affects UK Airports
The competition commission has increased competition between airports in the UK dramatically. The evidence researched and found from airlines and airports has seen a rise in competition between some non-BAA airports in the UK, e.g. between Birmingham International Airport and East Midlands Airport; Belfast City Airport and Belfast International Airport. Evidence found also stated that there has been declining yields from airport charges at regional airports; switching of passengers between pairs of regional airports and some switching by airlines. There is also evidence of competition between airports for new routes and competition on service. The degree of competition between airports is, however, affected by other factors, and such competition is generally between airports with spare capacity or capacity that can readily be expanded.
(BAA Airports Market Investigation, Retrieved 25th November 2011, from http://www.competition-commission.org.uk/rep_pub/reports/2009/fulltext/545.pdf)
Conclusion
Findings from the report show that Europe is in a difficult situation and they need to find a solution to their debts. From the report it is also clear that government officials in Ireland, Greece and particularly Spain have to find an immediate solution to their youth unemployment which has increased to a great extent over the past three years. It has also shown that there may not be any major improvement that can help stabilise the current economic condition that Europe is in. With the competition commission, it may seem that there will be more competition between airports, which could lead to competition between UK and potentially European airports. This could be good as it could see more income within the aviation industry.
Appendix
1.1
1.2
1.3
1.4
References
(BBC News, Retrieved 22nd November 2011, from )
(Tutor2U, Retrieved 22nd November 2011, from )
(Investopedia, Retrieved 22nd November 2011, from )
(Tutor2U, Retrieved 22nd November 2011, from )
(Tutor2U, Retrieved 22nd November 2011, from )
(BAA Airports Market Investigation, Retrieved 25th November 2011, from http://www.competition-commission.org.uk/rep_pub/reports/2009/fulltext/545.pdf)
Bibliography
Investopedia. (n.d.). Retrieved November 22nd, 2011, from http://www.investopedia.com/terms/c/command-economy.asp#axzz1ekQHexkc
BBC News. (n.d). Retrieved 22nd November 2011, from
Tutor2U, (n.d). Retrieved 22nd November 2011, from
(Investopedia,(n.d). Retrieved 22nd November 2011, from )
Tutor2U, (n.d). Retrieved 22nd November 2011, from
http://tutor2u.net/economics/revision-notes/as-macro-balance-of-payments.html
Tutor2U, Retrieved 22nd November 2011, from
BAA Airports Market Investigation, Retrieved 25th November 2011, from
http://www.competition-commission.org.uk/rep_pub/reports/2009/fulltext/545.pdf
by
bronagh92 (student)
