What are the main characteristics of a free market economy and a centrally planned economy?
(a) What are the main characteristics of a free market economy and a centrally planned economy? Answers Market economy is about the exchanges between individuals are voluntary and that anyone engaging in such exchanges benefits from them, that means no government interrupts, all the decisions are made by individual firms. For free market economy, we can explain it in 3 expects. First, because households are the 'owners' of productive resources, firms have to pay them for their resources in the resource market, they can produce everything they want, the type and amount of products are determined by every individual firms, but they should produce the goods and service that other companies or household want, and can make the maximum profits, more profits, more motive for the producers. Second, in the resource market, households provide firms with the factors of production (land, labour and capital etc.) they demand in order to produce their output. But, these inputs are not free, so every firm face costs in acquiring them, so when they choose the products they produce, they must consider the cost of the products and production. Every producer is willing to reduce the cost and make the maximum profit. But, this will cause a problem in such situation, there will be some black-hearted producers that use the bad material in the production, like the dirty oil event in China,
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
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
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
Discuss whether the government or the private sector should provide health care in the UK
Discuss whether the government or the private sector should provide health care in the UK Health care in the UK is classed as a merit good because it provides more private benefits for consumers than they actually realise. Merit goods such as health care also have beneficial positive externalities for the economy in terms of increase output and for the UK population as a whole. The health care system will reduce the amount of ill people in the population, which creates a positive externality because people will be happier. There are many economic and social benefits of the health care service including an improved quality of life. There is now so?lid evidence that improvements in medical care will pay off in the long run in terms of healthier people and longer lives. Plus the life expectancy is set to rise in the UK if further improvements in health care are continued. An economic benefit of the health care system is that the NHS is the largest employer in the UK with over 1.3 million people employed in England alone. Health is said to be the biggest aspect of government expenditure, which is also beneficial to the economy as a whole. The government has to choose a specific part of the economy to invest in, so by investing in health care, the government has to decrease investment somewhere else. The opportunity cost of the government spending money on the health care
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
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
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)
What are the effects of inflation on an economy?
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)
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
