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Economics Questions on National Income, Aggregate Demand and Business Cycles.

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Introduction

F101ECO – Assignment 2 Calum Stringer 0600532 Q1A When determining National incomes there are three methods: There is the expenditure method: This is when all the spending in the economy is totaled up using this formula: C + I + G + X - M. This represents Gross Domestic Product (GDP) at market prices, it includes: 1. C = Consumption. 2. I = Investment this includes: Unplanned increases in inventories or stocks and planned investment in capital. 3. G = Government spending on services and goods. 4. X = Exports that the economy receives. 5. M = Imports this must be deducted because of the spending on services and goods from external economies. The income method takes into consideration the sources of income in the economy. Transfer payments (unemployment, welfare benefits and pensions) are not included: no service or good is created for income. Income includes: 1. Salaries and wages. 2. Self-employed income. 3. Profits that have been split into dividends with undistributed or remunerations retained. 4. Rent that includes costs of any raw materials, any intermediate inputs and attributed rent on owner-occupied housing. 5. Interest. The output method which adds up the value added by a business’s production: 1. The value of the business’s output less the value of inputs 2. Instead this method totals the output of final services and goods. When analysing where the services performed by construction workers appear in the national income accounts we need to look at how these method are connected to each other. For example if £50 worth of services or goods have been produced, output method, then this must generate £50 worth of income, income method, for various dynamics of production will lead to £50 worth of outlay, the expenditure method. From looking into the methods of measuring the national income I feel that Services provided by Construction workers falls into the secondary sector of the National Product approach. ...read more.

Middle

Disequilibrium Keynesian Ceilings and Floors The theory is often combined with the idea that there are natural upper and lower limits to levels of production and income. Inventory Cycle Theory Inventories refer to stocks of unsold goods or material inputs to make those goods. This theory is similar to the multiplier?accelerator model except that it focuses on investment in these inventories. Random Events and Lags The inventory cycle theory rests on the existence of time lags in economic decision making. Policy Induced Cycles Attempts by government to operate a counter-cyclical stabilisation policy may misfire and generate a cycle which is more volatile than the normal business cycle. Again this is because of lags in decision making. Exogenously Determined Cycles Cycles in the domestic economic activity of a country may be generated by policy changes or by changes in economic behaviour elsewhere in the world economy. Q2A Money creation by a government can be created through the banking system or by printing more money, by printing more money it is spent within the economy then the real value of money that is in the economy will fall. This is known as inflation. When governments print money to fund a war, then hyper-inflation can occur. In the current period a unit of money will be worth considerably less in the future by creating money by this method for an economy it is not seen to be a good way. Quantitative easing monetary policy is unconventional but used by central banks in order to stimulate the economy once conventional monetary policy becomes ineffective. This is where a central bank will buy monetary assets to introduce a pre-determined amount of money into an economy. The standard policy of selling or buying government bonds in order to maintain interest rates within a target level. A central bank will implement quantitative easing by obtaining financial assets from private sector businesses and banks with newly created money. ...read more.

Conclusion

In capital abundant countries, cost of capital is low, while in labour abundant countries, manpower is available at a low cost 3. Hence, a country can trade in factors which are found in abundance 4. India exports software professionals to US of A due to cheap labour availability 5. Australia and Canada have abundance land and hence concentrate on agriculture Product Life Cycle Theory 1. Introduction 2. Growth 3. Maturity 4. Decline Advantages 1. Faster growth: Economies that have operate internationally tend to develop at a much quicker pace than those operating locally 2. Access to cheaper inputs: Operating internationally may enable the firm to source raw materials or labour at lower prices 3. Increased quality and efficiency: Exposure to foreign competition will encourage increased efficiency. Doing business in the international market allows improvement to the quality of their product in order to gain a competitive advantage. 4. New market opportunities: International business presents new market opportunities. These new markets provide more opportunities for expansion, growth, and income. A bigger market means more customers, increased revenue, a larger profit margin, and allows the business to realize economies of scale. 5. Diversification: As the economy diversifies its market, it becomes less vulnerable to changes in local demand. Disadvantages 1. Increased costs: There are increased operating expenses including the establishment of facilities abroad, the hiring of additional staff, traveling of personnel, specialised transport networks, information and communication technology. 2. Foreign regulations and standards: The firm may need to conform to new standards. This may require changes such as in the production process, inputs and packaging, incurring additional costs. 3. Delays in payments: International trade may cause delays in payments, adversely affecting the firm's cash flow. 4. Complex organisational structure: International business usually requires changes to an operating structure. Training/retraining of management may be necessary to facilitate restructuring. 5. Countries cannot live in isolation. They have to mutually share their prosperity, technical know-how and undertake trade in order to sell their surplus products. The world economy is inter-dependent. Economic progress of a nation would depend upon its ties with other countries. ...read more.

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