Discuss the extent to which an increase in exports will improve an economy's macroeconomic performance.
Good macroeconomic performance is normative in nature therefore hard to be validated. However for the purpose of this essay, good macroeconomic performance basically involves low unemployment, high and stable economic growth, stable and low inflation and an acceptable and positive current account of the balance of payments. An increase in exports will bring about and increase in aggregate demand in the short run. Aggregate demand is made up of consumer expenditure, government expenditure, investment and net export, export minus imports. Therefore an increase in exports will increase net export and subsequently increase aggregate demand. An increase in aggregate demand would mean an increase in economic growth, which shows good economic performance. Diagram below shows the increase n aggregate demand. Exports will also improve the county's balance of payments. Balance of payments is the net trade in goods, services, investment and transfers. An increase in exports will mean that overall balance of payments will not be in a deficit but in a surplus. An improving balance of payments will also mean that the county's industries and firms are competitive and therefore show that the firms are economically healthy and performing well. However there are problems arising from an increase in exports. In the short run, with a short run supply curve, although an increase in exports will
Current UK economic policies. Government management of the economy is a key political issue and each government sets targets and objectives. These are: stable economic growth, low stable inflation and low unemployment rates.
Government management of the economy is a key political issue and each government sets targets and objectives. These are: stable economic growth, low stable inflation and low unemployment rates. UK government, similarly to all governments around the world, uses different policies to achieve the main objectives listed above. Economic growth can be achieved by using policies in the short and long run. One of the policies that can be used is a monetary policy. In theory, reflationary monetary policy is to reduce interest rates. The lower the interest rates are, the higher economic growth is. What is more, it increases bank lending. People are more likely to borrow money from banks as they feel confident. This is because of the low interest rates and the awareness that they do not have to give back much more than they had lent before. Moreover, reflationary policy lowers value of LSterling because the value of UK currency becomes cheaper in comparison to other currency's. All these factors causes an increase in AD and overall the economic growth. Another short-run policy to increase economic growth to the UK objective level, i.e. 2.25%, is a fiscal policy. A reflationary fiscal policy is used and results in reducing taxes and raising government spending. Reduction in taxes cause that people have more money to consume. As a result they spend more. Government spending increases
Explain the possible causes of inflation
Inflation in an economy is defined as the sustained increase in the general price level, resulting in a decrease in purchasing power of consumers and a fall in the value of money. Some inflation is vital for the macro economy in order to maintain adequate levels of economic growth, and since 1997, the UK government has recognised this fact by allowing The Bank of England Monetary Policy Committee to target a rate of 2.0% over the past fifteen years or so. The measure currently used by EU countries, including Britain, is that of the CPI (Consumer Price Index). This takes a weighted, indexed mean of a basket of goods deemed to be most influential in current household spending across the country. Other measures include the RPI and RPIX (the RPI, excluding mortgage interest repayments, as these fluctuate too readily). The UK has preserved one of the lowest inflation rates among EU countries in recent years, due to a thorough understanding of the causes of inflation and the policies necessary to manage it. On a microeconomic level, inflation can arise from the domestic economy. For example, major energy providers may decide to put up prices in line with projections for the year ahead, or monopolistic supermarket chains could engage in pricing wars, often to the detriment of the consumer and the pocket inflation they experience. Government VAT increases to fund its budget deficit
Using an appropriate diagram explain how a government may attempt to close a deflationary gap.
Using an appropriate diagram explain how a government may attempt to close a deflationary gap. Inflation is a sustained general increase in the level of prices. The level of inflation may be 3% per annum, which means that $100 will buy 3% less goods next year than it does now. The opposite of inflation is deflation. This technically means that the price level, or the average prices of goods and services in an economy, is decreasing. In effect, this means that money is worth more over time. However, the word deflation has gained another meaning, and is more often used to describe a situation where an economy's output growth is slowing. A situation representing deflation can be drawn using the Keynesian 45? Line, which shows combinations of points where the two axes are equal. AD represents aggregate demand, which is the sum total of all demands in the economy at any given price. Real Y represents the real (adjusted for inflation) income of consumers. Keynesian 45? Diagram In this diagram, we can see that the level of aggregate demand is lower than the level of output at full employment, therefore the economy is overproducing and a decline in growth will occur. For example, say the level of current aggregate demand is $500, and aggregate demand at full employment is $600. This means that the value of the deflation is $100, that is, people are spending $100 dollars less than
Examine the factors which affect the international competitiveness of the UK's goods and services (40 marks). International Competitiveness is the ability of a nation to compete successfully
Examine the factors which affect the international competitiveness of the UK's goods and services (40 marks). International Competitiveness is the ability of a nation to compete successfully internationally and sustain improvements in real output and wealth. The factors which affect the interantional competitiveness of the UK's goods and services are Price competitiveness and Non-Price Competitiveness; Price competitiveness such as inflation, exchange rates and unit labour costs and Non price competitiveness such as quality of UK's goods and Income Elasticity of Demand for UK's exports and imports. Inflation is an increase in the general level of prices of a given kind in a given currency. If the inflation rate for UK is high then UK's goods will be expensive, therefore UK will be less price competitive. If the UK goods are expensive as a result of higher inflation, then there will be less demand for UK's exports and increase in demand for Imports, which will result in a balance of payment deficit. So the inflation rate should be controlled in order to be price competitive. Many countries operate inflation target. The UK's inflation target is set for RPIX inflation at 2.5% plus 1% or minus 1%. The Bank of England Monetary Policy Committee sets interest rates with the objective to maintain stable or low level of inflation. However even if the inflation rate for UK is high,
Use the aggregate supply-aggregate demand (AS-AD) model to examine the effects on real GDP and the price level of increases in American tourism to the UK.
Hamit Keswani Keswani .)Distinguish between the short-run and long-run aggregate supply curves, and explain why they are important for the definition of a macroeconomic equilibrium. Use the aggregate supply-aggregate demand (AS-AD) model to examine the effects on real GDP and the price level of increases in American tourism to the UK. The aggregate supply and aggregate demand model helps building up our knowledge of the three factors of macroeconomic performance which are: explain fluctuations in economic activity and how economic agents respond to economic events, provides a basis for understanding movements in the price levels (inflation), and it also helps us understand the process of economic growth. Aggregate supply and aggregate demand are concepts that help us determine the real GDP and the price level (GDP deflator), other things remaining the same. The quantity of real GDP supplied (Y) depends on three important things: The quantity of labour (N), the quantity of capital (K), and the state of technology (T). In order to explain this better we have to study in depth the two aggregate-supply branches: long-run aggregate supply and short-run aggregate supply. The long-run aggregate supply curve is the "relationship between the quantity of real GDP supplied and the price level in the long run when real GDP equals potential GDP"( Parkin, 2000, page 465) . The
Discuss the extent to which a reduction in the rate of interest can be effective in increasing consumer expenditure and investment.
Interest rates are rates charged by the banks and financial institutions on borrowers and savers and depend hugely on the base rate set by the central bank. A cut in interest rates is mainly used in monetarist policies, and in this case a cut in interest rates will belong in a loose monetary policy. Interest rates are normally used to influence levels of aggregate demand. Lower interest rates would mean that saving becomes unattractive as the rate of return on savings is much less, it would mean that mortgage payments will also be lower as it is based on interest rates and also credit is easier to obtain. Consumers will therefore increase their spending on goods and services within the economy as their discretionary income would have increased dramatically. Increases in consumer expenditure will most likely increase aggregate demand as consumer expenditure is a component of aggregate demand. Increases in aggregate demand will promote further rounds of spending in the future as unemployment levels will be lower and economic growth will be higher hence giving consumers more confidence to spend more, therefore interest rates are effective in increasing consumer expenditure. Lower interest rates will also increase investment levels within the economy due to the same reasons mentioned above that will increase consumer expenditure. Lower interest rates would mean to businesses
Discuss the effectiveness of fiscal policy measures in reducing aggregate demand?
Discuss the effectiveness of fiscal policy measures in reducing aggregate demand. Fiscal policy is the use of taxation and government spending to influence the economy. In most cases, fiscal policy is used to manage the total spending on goods and services produced in the economy. Total spending is also known as aggregate demand, which contains consumption, a major part, investment, government spending, and export - import. Theoretically, any increase in all sorts of taxes could lower the total demand, which could also be achieved through a reduction in the government spending. But AD does not work solely in the economy, its interaction with AS could bring different changes in the economy as in different situations. That is because the resources in the whole economy are constant in the short run, which would only produce certain amount goods and services at a certain period of time. At the very beginning, resources are not being fully used, spare capacity enable an expansion in the production. This process would generate more income without raising too much inflation. In the second stage, part of resources are used up, any increase in demand won't bring any increase in the level of output, but on the other hand, inflation could occur because any increase in prices would discourage potential buyers which cut off the excess demand. Next, almost all the resources are being
To what extent is economic growth desirable
To what extent is economic growth desirable? In economics, short term economic growth translates to a rise in real GDP, and in the long term an increase in the maximum output (aggregate goods and services) an economy can produce. Growth is caused by an increase in aggregate demand; this may be as a result of higher consumer expenditure, more investment or as seen recently in BRIC, a substantial increase in exports which all form a component of AD. Economic growth is seen to be extremely desirable by all governments as it solves many problems of modern life; there are of course many consequences but this is a small price to pay compared to what could be gained, so economic growth is desirable. The benefits of economic growth for all economies and especially LEDCs are increased employment, reduced poverty and a higher standard of living. These events occur because as AD increases, more factors of production, most notably labour are needed to produce goods and services for the economy. When this occurs on a large scale unemployed workers shift into employment. This is beneficial as governments provide less social security for the population, so they can spend money on public services. As a result of increase government spending, the quality of services such as education, health and shelter will become better hence improving the standard of living. Previously unemployed workers
An Introduction to Aggregate Demand
Macroeconomics H/W 3 - An Introduction to Aggregate Demand The formula for AD is C + I + G + (X-M) a) C - Consumer expenditure - spending by households on consumer products (e.g. clothing, food and insurance). I - Investment - spending on capital goods. G - Government spending - spending by the central government and local government on goods and services. X - Exports - products sold abroad. M - Imports - products bought from abroad. (X-M) - Net exports - the value of exports minus the value of imports. b) Consumer expenditure, or consumption, is the largest component in most countries. It is basically spending by households on consumer goods and so tells us how much vaguely how much demand there is for these certain goods. Investment is similar, except capital goods are bought instead of consumer. It is the most volatile component of AD, as it may rise by 60% on year, but fall by 20% the next year. Government spending does not include transfer payments or job seeker's allowance as they do not involve the government itself buying goods and services.Net exports add foreigners' spending on the country's goods and services and deduct spending by the country's population on imports. This component can be positive or negative. c) 3 determinants of Consumption (C):- - Real Disposable Income: main influence on consumer expenditure. The rich tend to spend more than the
