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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Defining Aggregate Demand and Aggregate Supply

Defining Aggregate Demand and Aggregate Supply First of all we need to start by defining Aggregate Demand itself. Aggregate Demand can be defined as the total demand in the economy for goods and services at a given time. The formula for Aggregate Demand is important in that is allows us to look at Aggregate Demand in detail. AD = C + I + G + (X-M) Before we move on we must define the components of this formula. AD is the Aggregate Demand. C is the level of consumption in the economy by consumers. I is the investment that occurs in the economy, done mainly by firms. G is the level of Government investment in the economy. X is the level of exports in the economy, while M is the level of imports in the economy. 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. Government expenditure has a positive impact since it means that for example consumers will have more money to spend if G is in the form of

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Discuss the effectiveness of expansionary monetary policy in achieving an increase in Aggregate Demand in an economy

Discuss the effectiveness of expansionary monetary policy in achieving an increase in AD in an economy Expansionary monetary policy is monetary policy which is designed to increase aggregate demand. This is achieved, by channelling more savings into investment, therefore if expansionary monetary policy has forced an increase in aggregate demand (AD), and then there will be more capital/ cash available to flow around the country. This increase in aggregate demand is forced by a decrease in interest rates. By decreasing interest rates, it is easier to take out a loan, and therefore people will have more confidence to increase their personal spending. Furthermore, if interest rates fall, homeowners who have variable rate mortgages, will have a much higher amount of expendable cash to spend (as shown in the graph below). Although, in the short run, homeowners using fixed rate mortgages may not be affected to severely, although, with lower interest rates, there will be an increase in mortgage approvals, and may cause an expansion in the housing market. As there is a drop in interest rates, aggregate demand increases, and forces aggregate price levels to increase. Also, the long run aggregate supply will shift right, increasing the real GDP substantially. Although it would be beneficial to have expansionary monetary policy to get money circulating around the economy,

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Discuss the economic consequences of unemployment

Discuss the economic consequences of unemployment? In this essay the economic benefits and consequences of unemployment will be discussed. Unemployment can be defined as the percentage of the working age group willing and able to find employment but without work. It can be separated into five categories; cyclical deficient, classical, structural, frictional and seasonal unemployment. There are two methods for measuring unemployment. Firstly, the claimant count measure adds up all those claiming unemployment benefits. It is cheap and easy to collect however; it is not very accurate and exaggerates the unemployed figure as many claimants are untruthful thus exaggerating the unemployment rate. In contrast the International Labour Organisation measure is more expensive but also more accurate. The main advantage of the ILO is that it can be compared with other countries directly. Firstly, unemployment will lead to an economy producing under the PPC showing inefficiency and a waste of resources which will do little good to the basic economic problem of unlimited demand and limited resources. 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

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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

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Should the Government be Prepared to Increase Spending in Order to Eliminate Unemployment?

Should the Government be Prepared to Increase Spending in Order to Eliminate Unemployment? Government spending can be categorised in two ways: capital or current spending. Capital spending is spending which aims to create future long-term and long-lasting benefits. In the case of the Government, this can include improving infrastructure (roads, telecommunications equipment and so on) - these are things that allow or aid the production and sale of goods and services. Current spending is expenditure which aims to provide things which only last for a limited time. This can include increased wages or salaries. One of those types of spending is much more effective, when it comes to decreasing unemployment; capital spending can cause what is known as a 'multiplier effect'. Should the Government chose to invest in creating a much more efficient road or transport network, there is the opportunity of employment for those with the skills to allow this to happen (builders, engineers, surveyors, etc). The multiplying effect comes into play, when the long term effects of the investment are considered - a more efficient transport network will allow businesses to transport their products more efficiently. The increased efficiency means that the businesses are able to use the saved time/money elsewhere. This again, leads to more opportunity for employment. These newly employed workers

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Reasons for unemployment and the main economic theories explaining it.

The unemployment is a common issue of macroeconomic policy. Unemployment is often debate on two difference views of economist has been considered known as Keynesian between Monetarist. Sunhee an ( Group M) The definition of unemployment described people who are able and willing to work at a prevailing wage but they are unable to find a job. To begin with, economists recognised the four key classes of unemployment discussed above - frictional, seasonal, cyclical and structural. In this essay, I will discuss how economists considered the main roots of unemployment as they are seeking different theories and will assess how two economist (Keynesian and Monetarists) approaches to the unemployment problem. Fundamentally, monetarist and Milton Friedman believed that the money supply is the most important component of economic growth and affects aggregate demand. Monetarist claims that there are various factors of unemployment. Firstly, monetarist believed that the unemployment arise due to excessive growth of the money supply leading to excess demand for goods and services. Assume that, if the price rises, the rate of demand will lead to higher price thus there may be a temporary (short run) rise in real output and low unemployment. However, it may be arises the expectation of higher prices and wages among the people. Besides, if products or services price rises, the demand

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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

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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 level

Economics Homework **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 level of aggregate demand, which can reflate or deflate the economy. Monetary policy is the control of money supply by changes in interest rates that affect bank lending, which then changes the level of AD. Fiscal policy is far more effective than the monetary policy as it can target many things, whereas the monetary policy is limited on its effectiveness. Fiscal policy can be very effective when used at the right time, such as in a deep recession, because fiscal policy can cause a multiplier effect which can create jobs quickly and it gives people a boost in confidence, which then increases spending and investments. 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. Too many injections from the

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Fiscal and monetary policy - a comparison

fiscal and monetary policy - comparison Introduction Fiscal policy should not be seen is isolation from monetary policy. For most of the last thirty years, the operation of fiscal and monetary policy was in the hands of just one person - the Chancellor of the Exchequer. However the degree of coordination the two policies often left a lot to be desired. Even though the BoE has operational independence that allows it to set interest rates, the decisions of the Monetary Policy Committee are taken in full knowledge of the Government's fiscal policy stance. Indeed the Treasury has a non-voting representative at MPC meetings. The government lets the MPC know of fiscal policy decisions that will appear in the annual budget. Impact on the Composition of Output Monetary policy is seen as something of a blunt policy instrument - affecting all sectors of the economy although in different ways and with a variable impact Fiscal policy changes can be targeted to affect certain groups (e.g. increases in means-tested benefits for low income households, reductions in the rate of corporation tax for small-medium sized enterprises, investment allowances for businesses in certain regions) Consider too the effects of using either monetary or fiscal policy to achieve a given increase in national income because actual GDP lies below potential GDP (i.e. there is a negative output gap)

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