'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
What should the MPC do to ensure that inflation is kept within the 2% target?
"The voices which... tell us that the path of escape is to be found in strict economy and in refraining, wherever possible, from utilising the world's potential production are the voices of fools and madmen." These are the words spoken by John Maynard Keynes during the most tumultuous period of the Great Depression. It is clear to me that the monetary policy committee (MPC) of our day are resolute in not repeating the same mistakes as those 'fools and madmen' who failed to heed Keynes' advice in the past. The Governor remarked in the August 2008 foreword that the world stimulus package has been 'extensive'. At home, the MPC announced their own plans of 'asset purchases totalling £175 billion' and keeping the interest rates 'at almost zero' (0.5%). The objective of this plan is fairly straightforward: by increasing the supply of money, the rate of 'nominal spending' should also increase, which in turn, would result in a higher level of aggregate demand (as consumption makes up 65% of aggregate demand) and finally result in the inflation rate meeting the 2% target. The reason behind the interest rates being kept at 0.5% has also been an attempt to boost consumer spending as the public would be required to pay less in mortgage interest repayments, and therefore, have more money to spend. Moreover, they would also be less likely to keep the money in banks accounts due to
Income and Price Elasticity of Demand
A guide for income elasticity of demand Income elasticity of demand measures the relationship between a change in quantity demanded and a change in income The formula IED = % Change in Quantity Demanded % Change in Income Levels The numbers If IED is LESS than 1 it is income INELASTIC. If IED is GREATER than 1 it is income ELASTIC. Higher the IED the more responsive demand is to a change in income. Lower the IED the less responsive demand is to a change in income. Plus or Minus Significance NEGATIVE - = INFERIOR GOOD POSITIVE + = NORMAL GOOD Inferior Good Inferior goods are when demand for a product falls, income levels rise. Normal Good Normal goods are when demand for a product rises, income levels rise. Necessities and luxuries are normal goods. Examples of necessity would be toilet roll. Examples of luxury goods are expensive cars and designer clothes. Between 0 and +1 is a normal necessity. Greater than +1 is a superior/luxury good. Example In this current climate people income decreased and started to buy more inferior goods. E.g. Before the recession people would have bought Andrex toilet roll, however in the recession they would have bought supermarkets own brand toilet roll which would be a lot cheaper. Usefulness Using the IED formula a business can work out the change in quantity demand if the income level changes. This way they can
The effect of Trade Unions on causing Labour Market Failure Today
Comment on The effect of trade unions on causing labour market failure today Labour Market Failure (LMF) occurs when the market forces of demand and supply do not results in an efficient allocation of labour resources. A major cause of LMF is the abuse of trade union. However as the market changes, this cause of LMF is losing significance. Trane Unions are organisations which act on behalf of workers to gain better rights and benefits through collective bargaining, they are attractive to workers as the bargaining power of a union is always more powerful than that of an individual. Trade union have, for many years been a major cause of LMF and to an extent, still are.since their inception, trade unions main aim has been to increase wage rate for workers. Whilst this is a great benefit for union memebers, it can cause signifigant market failure. The below diagram shows, that the new wage rate my cause market failure through unemployment. As the market forces of supply and demand settle on a wage rate of W1, the presense of a union increasing the rate to W2 will cause LMF by causing employment to drop from L1 to L3 This is despite their being L2 amount of labour supplied, the gap between potential labour force and the actual employment rate means there are unused resources. And thus the market is not efficient, meaning LMF. This effect is still present today. As the gov't
Asses the extent to which the internet has made markets more competitive
The internet, created for access by the world's population approximately twenty years ago, has evolved exponentially to improve market competition among firms and businesses. Its uniqueness has come from its ability for easy use and freedom of information, though with these fundamental principles, other characteristics have brought us closer to a sense of perfect competition than ever before. Indeed, the internet is rapidly becoming a necessity rather than the luxury it once was. In theory, the internet should mean that every market works perfectly. However, even the internet provides detrimental effects, often different to those of conventional means such as typical market failure. The internet has been used to widen the customer base of particular businesses, creating greater profit margins than could ever have been imagined. This has been accentuated through the tactic of pricing internet-ordered goods and services cheaper than those on the high street. Consumers who may be disadvantaged due to disabilities, age, time constraints and so on are those who use the internet the most to buy. Previously, these people would have found it difficult to buy, but with the internet comes these frequent buyers. Even people who would have normally bought from high street shops would have the option of buying from the internet. Usually, a lot of people go out and buy things to socialise
What are some of the problems of WTO mechanisms will pose for national governments?
Question 2: What are some of the problems of WTO mechanisms will pose for national governments? World Trade Organization (WTO) was established in 1995 at the Uruguay Round of General Agreement of Trade and Tariffs (GATT). It was the successor of GATT, and is the only international organization dealing with the global rules of trade between nations. At the year of 2006, WTO has 149 members and is accounted for over 97% of the world trade. As the main objective of WTO is to establish a single global market with uniform rules, the goals of WTO mechanisms are to minimize government interference in the conduct of trade and eliminate the nation-state's capacity to regulate commerce. However, these mechanisms have posed a threat to national governments to certain extent when formulating its own policies and laws. The regulatory system in WTO is quite different from GATT. A new concept - Self Executing Enforcement is introduced, which is never been used in any International Law. Self executing enforcement granted WTO legal personality and the capacity to enforce decisions on signatory countries, even though they cannot reach a unanimous consent. Moreover, WTO is empowered to facilitate further rule-making that binds all members even in the absence of their explicit consent where only two thirds vote of the membership can bind all the members. However, if the country wants to stop
Examine two reasons why a government might wish to control increases in its expenditure
Examine two reasons why a government might wish to control increases in its expenditure Increases in government expenditure will shift the Aggregate Demand (the sum of all demand within an economy) outwards. This is called an expansionary fiscal policy (fiscal meaning relating to government spending), and may be implemented to stimulate an economy if it is in recession. Another type of fiscal policy is called contractionary fiscal policy, and is used to help control demand pull inflation. Demand-pull inflation is the increases in prices at a relatively higher rate than increases in income. This occurs when demand is greater than supply. A government may wish to control increases in its expenditure for a number of reasons, including controlling the extent of government intervention, letting market forces act and to prevent crowding out. The two reasons that I will examine are to keep the tax levels down and to control inflation. Taxes are placed in two categories. First there is direct tax, which is tax levied directly to a person or organization, for example income tax. The second category is indirect taxes, which are taxes placed on goods and services. In Australia, the main indirect tax is the Goods and Services Tax (GST). This is relevant to the governments expenditure plan because of the affect increases or decreases in expenditure will have on the budget, which is a
Discuss the economic effects of a reduction in unemployment
Discuss the economic effects of a reduction in unemployment (18) One of the main government policy objectives is high employment or most of the countries even aim for full employment, which is a term for unemployment at 3%. This is because government acknowledges that employment benefits individuals, government itself and in most cases the whole society, as it can cause a sustainable economic growth and raise people's material standard of living. However, every single country has some degree of unemployment, as it is impossible to avoid, so government uses different policies to reduce as much unemployment as possible. These policies are demand side policy, which is increasing the AD to reduce unemployment and supply side policy which means increasing the AS using different methods and with it increasing the need of the labour. Using these two policies the unemployment will be reduced and the effect of reducing the unemployment is usually beneficial rather than detrimental, but I will discuss both sides in this essay. The most apparent and significant effect of the reduction in unemployment is the gain in output, as more people who are willing and able to work are working and this means that the country will be using the resources more efficiently. This will lead to a higher production in goods and services and increasing the material living standards. We can present this
The Economic Effects Of The Wars In Afghanistan and Iraq
Using an example of your choice, what light can the ideas and analysis of an economist throw on a major current problem or issue of public concern? The invasion of Afghanistan in 2001 and Iraq in 2003 have and will be in the news day after day, with growing casualties demoralising many nations around the world. Another major problem, especially significant for both the United States of America and the United Kingdom, is the momentous financial costs that are being experienced by the governments, and it is this issue that I shall investigate. I will also try to show how defence can be accounted for as market failure. Defence is a public good, provided for by the government, not private markets. To understand what a public good is, I must first introduce two characteristics of a public good. Firstly, a public good is non-rivalrous. This means that even if someone consumes or utilises this product, the supply for others will not be diminished. This is very relevant when it comes to defence as it is there to defend the whole of the country. Secondly, another characteristic of a public good is that it is non-excludable. Non-excludability is when the people that don't want to or can't pay for a product cannot be excluded form it as they are already using the product and its benefits. In the example of defence, if a certain person didn't want to get the benefits from defence it
income distribution
Explain Why the Distribution of Income is Unequal in the UK. Income is a flow of earnings generated and received over a given time period. It can be gained from employment, pension funds or ownership of wealth. Between 1979 and 1990, the UK economy experienced a marked increase in income inequality. However, since 1997 when labour came into power, their social reforms such as tax credits and national minimum wage has narrowed that gap slightly. Although the gap still exists from a series of factors. A rise in earnings inequality can cause income inequality. This is due to a fall in demand for unskilled and semi-skilled labour and a rise in demand for skilled labour because of deindustrialisation, where resources have been shifted from secondary to the tertiary and quaternary sectors, so thus, skilled labour is needed. In the UK this happened as we lost our wage and price competitiveness to developing countries, causing structural unemployment in the secondary sector industry. Therefore the income gap widens as skilled labour productivity widens, and thus, so do wages. Over the years there has also been a rise in workless households where there is no income earner and are thus living off welfare benefits. Unemployment of unskilled and semi-skilled labour and generally being unemployable has caused this. Another reason is due to the benefit culture where the income into the
