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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.
Some argue that cutting taxes on activities such as saving and working would increase the productive potential of the economy. The level of taxes has an impact on investment and therefore LRAS. An increase in taxes on businesses will reduce the profitability of investment. With a lower rate of return, fewer investment projects will be carried out, limiting the productive potential and therefore growth in the economy. Higher tax rates will also affect investment coming from abroad as well as domestic investment.
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Now the arrangement of the formula is important too. Firstly we can see that C, I, G and X are positive while the M component is negative. This is because the consumption level will have a positive effect since consumer buying goods raises the money flow in the economy. Investment will also have a positive effect since more companies investing will raise the level of money available as more companies buying factories will have a positive effect since they will be able to buy bricks to build the factory raising demand for bricks.
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This ultimately leads to the real level of debts falling therefore debts become more manageable. A disadvantage of inflation for an economy is a possible loss of competitiveness. For example, if the UK has a higher inflation rate than the rest of the world, its price competitiveness in international markets will fall. A rise in a country's relative inflation rates may lead to a fall in its world share of exports and a consequent rise in import penetration. This ultimately leads to a fall in the rate of economic growth and the level of employment.
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Doing research in previously experiences, solve self-problem, in order to enhance the quality of the products to make the products more competitive. And reduce the cost of production to influence the price goes down. However, the supply side policy is a long run policy, which may take long time to achieve the result, and amount of money will be cost. Therefore there will not be effectiveness in the short run. Secondly, the exchange rate position is directly affect the export and import.
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However, unemployment improves labour mobility as there is a greater pool of workers who are keen to gain the necessary skills needed for employment. This benefits the economy as firms have a greater variety of workers to choose from. This increases efficiency as the best skilled workers selected use the capital to produce the maximum possible output. Unemployment causes work skills to be lost as people learn best by experience and by training in work. Therefore the long term unemployed lose basic work skills.
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Here workers are unemployed simply because there is insufficient demand to provide them jobs. Clearly attempts by government to boost demand by either policy will lower this type of unemployment. However, supply side unemployment needs careful consideration. Supply side has several different causes such as frictional, structural and technological or real wage unemployment. Frictional is basically workers moving between jobs and is sometimes referred to as 'the oil that lubricates the labour market'. Although some economists may argue the fact generally frictional unemployment is unavoidable in a market economy. Structural is mismatch between the skills demanded by employers and the skills, if any, possessed by the unemployed.
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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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Compare the effectiveness of the fiscal and monetary policy with some reference to supply side policy in running the UK economy. Fiscal policy is used to change taxation and government spending in order to control the level3 star(s)
Monetary policy isn't very effective when there is a recession, because even though it can create jobs but it still can't attack investments and it can cause inflation to increase if we are too close to Nairu. It's never ideal to just rely on just 1 policy, you have to use both together in order for the economy to run smoothly. If the fiscal policy is just used on its own then it may be overdone thus causing inflation to increase, these effects depend on whether or not we are close to Nairu.
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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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The two reasons that I will examine are to keep the tax levels down and to control inflation. Taxes are placed in two categories. First there is direct tax, which is tax levied directly to a person or organization, for example income tax. The second category is indirect taxes, which are taxes placed on goods and services. In Australia, the main indirect tax is the Goods and Services Tax (GST). This is relevant to the governments expenditure plan because of the affect increases or decreases in expenditure will have on the budget, which is a summary estimate of planned spending over a period of time.
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Additionally, my own family is currently coping with this issue. Four of my relatives are currently unemployed and collecting unemployment benefits. The problem is obvious, but the causes are not so apparent. The United States is considered one of the richest countries in the world, yet it still suffers from a significant level of unemployment. Today's high unemployment rate is a clear indication of an overall poor economy; however, replacement of workers by technologies, and outsourcing of jobs are definite factors to be considered.
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The benefit lost from that missed next 'best' choice is called the opportunity cost (Anderton, 2008). For instance, you may have enough money to buy one of your favourite magazines - magazaine A or magazine B. If you make a decision to buy magazine B, its opportunity cost will then be the benefit which would have been gained from having magazine A, and vice versa. As stated by Rubinfeld & Pindyck (2009), individual economic units could be divided into two groups by function accordingly - buyers and sellers.
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Evaluate the use of supply side policies in raising the level of real output in an economy which is near to full employment
Privatisation gives firms a profit incentive, which increases efficiency, also shifting LRAS to the right. All these policies will result in an increase of LRAS from LRAS1 to LRAS2. This will increase the real output from RO1 to RO2 and will decrease the price level from Pl1 to Pl2. The economy here is at Full Employment as the level of aggregate demand is at the level where the LRAS curve is vertical.
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This leads to lower unemployment. At the same time, lower rates will lead to outflow of money. Wealthy foreigners and pension funds would want to seek better return by placing their money in other countries that offer more favourable rates. Such process, leads to rise in supply of pound in foreign exchange market, thus weakening its value. Somehow, UK's exports will gain competitiveness ground. This should be able to solve the first imbalances and that is declining manufacturing output and yet a rise in employment Via tax cut, there will be a rise in disposable income.
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Explain what data might be employed in this assessment of economic health and discuss how useful it is likely to be
Of course, a fuller picture can be gained by examining trends in these figures. How useful this information is obviously depends on its accuracy and whether it can be used for international comparisons. Figures on economic growth, unemployment and inflation may not be very accurate if there is a large informal economy. Examining unemployment figures based on the Labour Force Survey method will be more useful than examining unemployment figures based on the claimant count when comparing the economic health of the nation with other countries.
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The most integrated trade bloc is an economic union. In this case, there is usually free movement not only of products but also of labour and capital and there is some harmonisation of economic policies. Members of trading blocs may benefit from the free trade within the group. Removing trade restrictions can raise output and employment, lower prices and increase choice and so result in higher living standards. Trade creation may occur with trading blocs promoting greater specialisation and trade.
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Critically examine the hypothesis that economic recovery in the 1930s was based upon the expansion of new trades and industries
By reducing the prices of British goods on international markets, depreciation switched demand towards domestically produced goods. Due to the depreciation, British industrial production stabilised in 1932, despite continuing to fall at a 10% annual rate elsewhere in Europe. This coincided with the stabilisation of the volume of British exports in the same year, despite these continuing to fall on the Continent at an alarming rate. If indexing the trade volume in advanced countries at 100.00 in 1929, we can see it reached an all time low of 76.5 in 1932, and had only reached 97.4 by 1937, according to Crafts' figures.
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Expansionary monetary policy is not the main explanation of either the turning point or the extent of the economic recovery in the 1930s Discuss.
Only 7% of new jobs between 1932 and 1937 were located in export-sensitive industries. A more prominent contribution of monetary policy to economic recovery came in the form of 'cheap money'. Broadberry (1986) found that the major effects of monetary policy were transmitted via interest rates and the external sector through the exchange rate, contributing to the 13% depreciation of sterling between 1931-1933, which raised output by around 3% through improvement in the balance of trade, and thus began the recovery.
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The budget himself is calculated through the receipts (the income the government gathers through taxes mainly) and outlays (expenditure, transfer payments and debt interests that the government "invests" in). The difference between receipts and outlays is the budget balance will can be negative (deficit) or positive (surplus). Neither of them is good because if we are having surplus we will have inflation and if we are in deficit the interest rates and prices will rise so there will be less consumption. Fiscal policies are policies adopted by the government to stabilize the economy. Fiscal policies can be either automatic or discretionary.
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Using the data and your knowledge of recent economic events, assess the contribution that fiscal and monetary policies can make in maintaining a stable economy
b) Explain two ways in which fiscal policy can influence the pattern of economic activity reasons (12 marks) * Up to 2 marks for correct definition of fiscal policy * Up to 2 marks for definition of pattern of economic activity > Taxes on demerit goods eg alcohol (2) - if taxes are increased, consumption will go down and stocks will pile up (2). This will mean producers profits will fall (2) and they will switch production and resources into the production of other goods which are more profitable (2) > If government reduces subsidies for education, eg EMA (2) this will mean fewer students staying on at college (2) and they will look for work instead (2)
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More moving companies went out of business in 2004 than in any of the previous ten years. This is believed to be directly related to the escalating cost of gasoline. Florists have been forced to increase their delivery charge and pizza delivery services have increased the cost of pizza. Small businesses are forced to absorb much of these costs for fear of losing their customers, putting them at risk of bankruptcy. Large corporations deal mostly with other businesses and are more able to absorb the rising costs.
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Economics source based paper. In the source, it is stating that economic prosperity is established by the practices of free market. It supports Adam Smiths theory of the Invisible Hand
I believe that the perspective in the source is highly critical of government involvement in the economy. Some of the beliefs in the source are plausible, but there is also a happy medium where private and government enterprises co-exist without hindering the growth of the economy. The "Great Depression" era is a good example of where the government was able to help move the United States' economy out of its extreme state by adopting Keynesian economics, which is an advocate of a mixed economy.
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There are few proofs of illegal immigrants in Japan. For example, Bangladeshi Abul Kalam Idrish, his son Jakin Prince Alsafa and daughter Saudia are part of the 270,000 so-called "undocumented foreigners" living in Japan long term who do not officially exist. It's no secret that Japanese are hiring illegal immigrants. By giving them jobs, they are providing the incentive for illegal immigrants to come to and stay in Japan. This sentence can be taken as a proof; Illegal immigrants from China, Korea, and Pakistan are smuggled into western Japan aboard in fishing boats.
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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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