What are the effects of inflation on an economy? Inflation can be defined as a sustained rise in general price levels. This is a very general definition as there are so many factors that have to be taken into account when considering the General price level of an entire economy. In the UK, inflation figures published and announced once a month give certain percentage rates of inflation. These are annual percentage rates indicating the change in inflation between the current year and the previous of the same month. The Retail Price Index (RPI) is the most famous, but the government prefers to quote the RPIX. Although other measures are used for calculating inflation, these are the most widely used methods in the UK. The RPI is a set of numbers that show the monthly change in the average of a sample of goods and services. There is an annual family expenditure survey that is used to decide which services are to be used in the sample and which are most important of those. 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
Explain how supply side measures can be used to promote economic growth (15) Supply side policies are government policies designed to increase the productive potential of the economy and push the LRAS curve to the right. They can affect the economy in a number of ways: increasing the supply of the quantity and quality of labour, raise the amount of capital employed, further the exploitation of natural resources and increase efficiency of the factors of production. 'Fixing infrastructure' was one of the factors David Cameron has mentioned that would provide immediate economic boosts and help with growth in the long term as well. To promote economic growth, supply side policies focus on shifting the LRAS curve to the right. Supply side policies are an economic theory that states that a reduction in taxes will stimulate the economy through increased consumer spending. Over time, the increased economic growth will generate a larger tax base, which will recoup the revenue lost from the tax cut. 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
Explain the possible impact of a world-wide recession on the components of the circular flow of income for a small and open economy such as Singapore.
Song Teck 023A 4a.) Explain the possible impact of a world-wide recession on the components of the circular flow of income for a small and open economy such as Singapore. [10m] The circular flow of income for an open economy is a model that shows the flows of goods and services and factors of productions between firms and household and in the process injections and withdrawals are made by the government and the rest of the world. This model shows that household provides the factors of production for firms who produce goods and services. In return the factors of production receive the factor payments (such as wages, dividend, and profits) which are in turn spent on the firm's output. The circular flow of income can be expanded by injections (addition to the circular flow which does not come from the domestic expenditure of the household in the form of investment, government expenditure, export revenue) and reduced by withdrawals (any part of income not passed on within circular flow of income in the form of savings, taxes, imports). Being a small and open economy, Singapore have place a strong emphasis on export orientated growth due to our small domestic market, thus resulting in a strong dependence on export revenue to sustain our economic growth. Moreover, with limited domestic investment and the openness to international capital flow, we are more dependent on foreign
'The trade deficit on goods in the first three months of the year was £7.1bn.' Explain the meaning of this statement.
Bernice Berschader 'The trade deficit on goods in the first three months of the year was £7.1bn.' (a) Explain the meaning of this statement. The above statements states that between January and March 1999 the UK lost £7.1 billion on trade, as a result of a trade deficit or current account deficit on the Balance of Payments. A Current Account deficit is where imports into a country exceed exports. This leads to a disequilibrium of injections and withdrawals. Withdrawals from the circular flow of income exceed injections into the circular flow of income. Though the current account consists of 4 elements, visible goods, invisible services, net income and investment income, the statement above discusses the deficit of an element of the current account, the visible goods element Even though a current account deficit results in the value of imported goods exceeds the value of exported goods, the demands for exports and imports will not be affected in the short run due to the Martial Lerner Conditions. Though eventually this will result in the foreign currency price of UK exports to decline, it will take some time for countries to react to these changes. In the short run the volume of exports will remain the same before it increases as a result of devaluation in the long run. This is illustrated by the J-Curve effect below. (b) Examine the possible causes of
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
DISCUSS THE ALTERNATIVE POLICIES A GOVERNMENT MAY USE TO IMPROVE ADEFICIT IN THE BALANCE OF PAYMENT The deficit in the balance of payment means import bigger than export in the record of transaction in one economy to the rest of the world. The deficits mainly occur through various reasons such as: structural problem, exchange rate position, excess economic demand etc. hence the alternative policies could adopted to reduce this problem. First of all, the structural problem which indicate the products non-competitive, low quality or high price, and this problem will lead reduce in export, and effect the deficit in the balance of payment. In order to tackle this problem the supply side polices has been used, such as reaching and develop the new technologies etc. 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. When the exchange rate high, it will be hard to export, because the export become more expensive, the importer may choose other
Question 2 What are the current targets of macroeconomic policy in the UK and how can they be achieved? The United Kingdom is a highly developed country; it's the fifth largest economy in the world, and the third most populous country in Europe with a population of over 60 million people. The UK has a very sound macroeconomics system with four main objectives which helps sustain its status as a G8 member. The macroeconomic policy in the UK is influenced by two set of forces, the market by looking at supply and demand and those induced by government intervention. As a whole macroeconomic objectives in the UK are concerned with the overall performance of the economy. It relates to high economic growth, relatively stable price level and low and stable level of unemployment in addition the last goal is related to the balance of payments and the exchange rate may be distinguished, but it has no immediate or lasting advantage to the country of its payment position. 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
I will be evaluating on the article "UK inflation drops to Bank target" by the BBC which only focuses on this problem. Brief summary: The main issue in the article
Recently in United Kingdom- a powerful and wealthy economy, there has been an issue being discussed with growing worry. The problem, not so strange to most countries in the world, is inflation, more specifically "the surge in UK inflation rate" in 2005. I will be evaluating on the article "UK inflation drops to Bank target" by the BBC which only focuses on this problem. Brief summary: The main issue in the article is the drop in the inflation rate in 2005 in three successive months, what causes have led to such a decrease after months of increasing inflation, what actions have been taken to bring down the rate of inflation and the effects that such a drop created. The major concepts involved in the article are inflation itself, CPI, RPI, inflation rate, cost push inflation, interest rate. The first concept, inflation itself is actually a sustained increase over a period of time in the general price level, in other words a fall in the real purchasing power of money. To understand about inflation, another concept is involved which is CPI: The consumer price index (CPI)-the measure of the consumer price level. What is CPI? CPI reports the cost of a fixed "market basket" of consumer goods and services over time. The formula of calculating CPI for a particular year is found as follows: Price of the most recent market basket in the particular year CPI =