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
How does level of aggregate demand affect level of unemployment
To what extent can government attempts to influence the level of aggregate demand affect the level of unemployment The government can attempt to influence the level of Aggregate demand through Fiscal policy and Monetary policy. If unemployment is relatively high then either interest rates can be lowered to expand demand (Monetary Policy) or, alternatively, the government could lower taxes and boost government spending (Fiscal policy). These measures should expand demand and lead to a fall in unemployment but the overall impact of both policies can be quiet different. Unemployment can be caused by both demand side and supply side factors. On the demand side unemployment is attributable to Demand Deficient Unemployment or Cyclical Unemployment. 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
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
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
Discuss whether deflation or inflation is a more serious problem for the economy
Discuss whether inflation or deflation is a more serious problem for an economy (12) To begin with we need to define the terms inflation and deflation. The term inflation is defined as a general and sustained rise in prices. The term deflation is opposite to this and is defined as a reduction in the general level of prices sustained over several months, usually accompanied by declining employment and output. An advantage of inflation for an economy can be it helps smaller firms grow larger. This is beneficial to the economy as it helps unemployment to reduce and increases morale for those smaller firms. Inflation will help firms and individuals who have built up debts as the rate of interest does not fully compensate for the increase in the general price level. 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. Another disadvantage of inflation for any economy is the
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
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
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
