The aim of this essay is to discuss the relevance of John Keynes to the current macroeconomic situation in the UK.

The aim of this essay is to discuss the relevance of John Keynes to the current macroeconomic situation in the UK. Macroeconomics can be defined as "the study of whole economic systems aggregating over functioning of individual economic units" (Bannock G, 2003: 236). It considers aspects of the economy from a government perspective such as the general price levels in an economy instead of a price level in a single market. John Keynes and economists who share a similar view to his on macroeconomics strongly believe that an economy will frequently settle below full employment. In such a situation aggregate supply will most likely be price elastic and increases in aggregate demand will mainly affect output. Keynes theory suggests government intervention through demand side policies in order to boost aggregate demand and reduce unemployment. However, Keynes theory is opposed by classical economists who believe that an economy will be at full employment and as a result demand side policies implemented by the government with the intent to boost demand will likely lead to an increase in prices and cause inflation. On the contrary to Keynes's recommendation classical economist insist government should implement supply side policies aimed at shifting aggregate supply to the right (Gillespie. A, 2007: 307). The government of any economy will set policies in order to achieve set

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Discuss the effectiveness of a fiscal policy in reducing unemployment

A fiscal policy is a type of government introduced macro-economic policy that aims to influence aggregate demand. The policy uses taxation and government expenditure in the form of a loose or tight fiscal policy. A loose fiscal policy would be used to tackle unemployment as this involves cutting taxation and increasing government taxation, an increase in indirect or direct taxes and increasing government expenditure. This is effective policy in the sense that a reduction in taxation, in theory would increase consumer expenditure as since taxation is low, individual discretionary income would increase and be spent on purchasing goods in the economy. There are however limitations to its effectiveness as it only potentially only deceases demand deficient unemployment but not any of the other three forms of unemployment: structural unemployment, frictional unemployment and real wage unemployment, which are mostly long term and will be better solved by the application of supply side policies. Fiscal policy would only be used as a short term solution to unemployment and is not sustainable. There are other factors external to the fiscal policy that can limit its effectiveness such as interest rates. Interest rates have substantial impact on the levels of spending by consumers. If interest rates are high a loose fiscal policy is introduced then the levels of consumer expenditure

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Stimulating an economy in recession

Ranamae Zamora Economics Assignment: Stimulating an economy in recession March 27, 2007 . How might a government attempt to stimulate an economy which is in recession? Recession occurs when the economy experiences two consecutive quarters of falling Gross Domestic Product (GDP). GDP is the accounted money value of the goods and services produced in an economy. Recession shows how economic activity slows down and falls over a period in time. The decrease in GDP is shown in figure I where the real GDP trend goes below the potential real GDP. During this period there is rising unemployment, decreased output, decreased consumption and interest rates, and deflation (decrease in price level). A decrease in the components of aggregate demand (AD) such as consumption, investment and government spending as well as an increase in the components of aggregate supply (AS) such as the price of labor and price of inputs would be some of the causes of recession. So to stimulate an economy during this period the government can cause a change in the components of aggregate demand and aggregate supply. The government may use expansionary fiscal policies that influence the AD curve by decreased taxation and increased government spending. A decrease in tax would increase consumption because of an increase in disposable income and would therefore increase AD. This is shown in figure II as a

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To what extent is inflation a serious economic problem.

To what extent is inflation a serious economic problem Inflation is defined as the general and sustained increase in prices of goods and services. It is caused by many factors, but in particular three factors have a major effect on the value of inflation. The first cause is too much demand within the economy. This occurs when an increase in demand cannot be countered by an increase in production in the short term due to fixed factors (e.g. land) and so producers will increase the prices to decrease demand for their products. Aggregate demand, the demand within the whole economy, suddenly rises for a product for two reasons in particular. The first is that inflation has been so low in the economy that tax revenue, for example has been falling, due to less spending and increased saving, so in order to 're-flate' prices. They provide subsidies and ask for a lowering of interest rate to boost spending and 're-flate' the economy. The second reason maybe that greater consumer confidence within the economy has lead to increased spending and thus Aggregate demand increasing. This will mean that prices for consumers have risen, due to producers 'pulling' up their prices. 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

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Economic and Social consequences of Unemployment

Economic and Social consequences of Unemployment Unemployment has both social and economic costs. According to ILO (International Labor organization), unemployment is defined as, '' people of working age who are without work, available for work and actively seeking employment.'' In other words, it is a state of an individual looking for a job but not having one. Unemployment is one of the factors crucial in determining the economic stability of a country. There are several factors which might lead to unemployment such as labor market conflicts (trade-unions) and downturns in economy. Seasonal unemployment occurs when a person is unemployed or their profession is not in demand during a certain season. On the other hand, cyclical unemployment is when there is less demand for goods and services in the marker so the supply needs to be reduced. There is myriad number of social and economic problems related with unemployment. The reason why government stresses much on reducing the unemployment levels is because it poses a great cost on an economy. In case of unemployed people themselves, they will receive less or no income based on whether or not they receive unemployment benefits from the government. 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

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GDP, or Gross Domestic Product.

GDP, or Gross Domestic Product measures the total value of goods and services produced in the economy over a given time period. This time period is usually yearly, but Gross Domestic Product can also be measured quarterly. There are three methods of measuring national income, and all three of them can be applied to Gross Domestic Product. They are income, expenditure and output. In theory, all three methods should produce the same outcome, but in practice differences arise due to errors and difficulties in the compilation of the statistics. Gross domestic product can be shown as follows: GDP = C + I + G + X - M where C = Consumption I = Investment G = Government spending X = Exports M = Imports I is composed of two parts. GDFCF is gross domestic fixed capital formation and secondly, net change in stocks. In order to increase the accuracy of National Income (Yn) 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.

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How can inflation be reduced?

How Can Inflation Be Reduced? Inflation is a persistent rise in average price level over a year, it is measured through CPI (Consumer Price Index). CPI takes a basket of goods ,which are weighted due to expenditure in a household budget (so you spend more money on food then shoes therefore food has a higher weight). CPI then looks at how the prices have changed and dictates a rate in accordance to the statistics. Inflation usually carries negative connotations as it usually comes in conjunction with economic instability therefore many different methods have been devised in order to avert the problems of inflation and reduce it. An example of high inflation which was reduced is in Britain. In the 1970's inflation was phenomenal and peaked at over 20%, through successful monetary policy however this was mitigated. By raising interest rates it reduces the growth of aggregate demand it encourages saving (which would stifle consumer spending and investment) as well as reducing disposable income. Monetary policy is a proven technique used to reduce inflation. Favoured by the US and UK it looks at the modification of interest rates in order to control inflation (and reduce) this is know as tightening monetary policy. Monetary policy is the control of money supply by the central bank (so in Britain it is the Bank of England and in the US it's the Federal Reserve). Inflation can

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Discuss the benefits of economic growth

Discuss the benefits of economic growth Economic growth is simply, in the short run, the rise in real GDP due to rise in aggregate demand: and in the long run an increase in productive capacity (the maximum output that the economy can produce), meaning that the Factors of Production are either more efficiently used or more are discovered or found. Governments tend to try and achieve economic growth as it has many advantages, one of which is higher employment levels, which incidentally should lead to a decrease in unemployment. If more people who are willing and able to work in a country have a job (and therefore earning an income) the GDP of that country will inevitably increase and so if this high employment rate is stable and sustainable, economic growth, in the long run, will occur. Hence, employment figures could be seen as proportional to the GDP of a country. The employed workers are a Factor of Production called the labour force. If there is unemployment, then our Factors of Production are not being used as efficiently as possible and so the point on the Production Possibility Frontier will not be on the frontier itself, indicating that economic growth is not occurring as the productive capacity will not be increasing. However, if low levels of unemployment are sustained consistently, then you are using at least one Factor of Production to its full extent and so the

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Define and determine the types and trends of UK unemployment

"Define and determine the types and trends of UK unemployment" Unemployment is when individuals are jobless but are willing and able to work at the going wage rate. The official government figures only count those that are registered as being unemployed and are actively seeking work. Different Measures of Unemployment There are several different measures of unemployment: * ILO - Any person without a job, available to work, willing to work and sought work in the past four weeks * Labour Force Survey (LFS) - Available to work within the next two weeks, currently without work, but have sought work in the past four weeks * The Claimant Count - This measures the number of people who are eligible and claim the Job Seekers' Allowance, as such, this method generally records fewer unemployed (around 400,000) From these figures is it possible to calculate the Unemployment Rate: Number of unemployed/number of economically active x 100 Types of Unemployment There are many different types and causes for unemployment: * Real wage unemployment: This is thought to be the result of wages being above the market clearing level, leading to an excess supply of labour. 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

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Export Essay

Explain why the recent devaluation of the £ has not resulted in a significant improvement in the export performance of the UK. (25 Marks) Under normal circumstances a devaluation of the pound should make exports more price competitive and lead to greater export performance with greater quantities being sold. However this may not always be the case and might not always lead to a fall in the value of products imported. A fall in the exchange rate should lead to an improvement in the current accounts however following recent figures this is not true. Over the past few years given the 25% devaluation in sterling our export performance is not that impressive. Firstly, the demand from other countries to buy UK exports has not been too good due to the recent recession. Therefore aggregate demand (AD) decreased leading to a fall in UK exports. The UK has been running a persistent current account deficit for several years, but as the economy emerges from recession and domestic spending will return thus helping growth, import growth has still been stronger than exports. The rest of the world may also have a slow recovery in demand, especially in the European Union where household spending has not been up to scratch. Another reason it seems is that Britain's main trading partners have been stuck in low or no growth and are therefore unable to buy more goods and services. Here the

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