...Unit 3 Managing the economy Steve Margetts CONTENTS Aggregate Demand (AD) Aggregate Supply Equilibrium Between Aggregate Demand And Aggregate Supply Consumption And Savings Investment Government Spending Exports and Imports Objectives Of Government Macroeconomic Policy Inflation Unemployment Economic Growth Balance of Payments Conflicts Between Macro Economic Objectives Demand Management or Supply Side? 2 4 9 11 17 25 29 31 34 50 71 80 84 87 Page 1 Unit 3 Managing the economy Steve Margetts AGGREGATE DEMAND (AD) Aggregate demand (AD) is the total demand for goods and services produced in the economy over a period of time. DEFINING AGGREGATE DEMAND Aggregate planned expenditure for goods and services in the economy = C + I + G + (X-M) C Consumers' expenditure on goods and services: This includes demand for durables & non-durable goods. I Gross Domestic Fixed Capital Formation - i.e. investment spending by companies on capital goods. Investment also includes spending on working capital such as stocks of finished goods and work in progress. G General Government Final Consumption. i.e. Government spending on publicly provided goods and services including public and merit goods. Transfer payments in the form of social security benefits (pensions, jobseekers allowance etc.) are not included as they are not a payment to a factor of production for output produced. A substantial increase in government spending would be classified as an expansionary fiscal policy...
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...seventh-largest economy in the world, has the second-largest economy in the European Union, and is a major international trading power. A highly developed, diversified, market-based economy with extensive social welfare services provides most residents with a high standard of living. The UK joined the European Economic Community (now known as the EU) in January 1973 and it is a founder member of the World Trade Organization. The United Kingdom is one of the world’s leading advanced economies. And it is the second biggest exporter of services in the global economy and ranked eighth in global exports of goods. The United Kingdom is the world's fifth-largest trading nation, highly dependent on foreign trade. It must import almost all its copper, ferrous metals, lead, zinc, rubber, and raw cotton and about one-third of its food. The United Kingdom's exports manufactured items like telecommunications equipment, automobiles, automatic data processing equipment, medicinal and pharmaceutical products and aircraft. Its main trading partners are European Union countries, The United States, China and Japan. United Kingdom is also the European Union's only significant energy exporter. It is also one of the world's largest energy consumers, and most analysts predict a shift in U.K. status from net exporter to net importer of energy by 2020, possibly sooner. Oil production in the U.K. is leveling off. Therefore, UK should export the oil energy from foreign countries. The economy of the United...
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...work immediately – A large sample – but subject to sampling error – This is the government’s preferred measure – The basis for cross-country comparisons 1 26/10/2010 Unemployment in thein the UK Unemployment UK Economy Unemployed people aged 16-59 (women) / 64 (men), seasonally adjusted 13 12 11 10 9 8 7 6 5 4 3 2 1 0 90 Labour Force Survey Claimant Count 13 12 11 10 9 8 7 6 5 4 3 2 1 0 06 08 10 Source: Labour Force Statistics per cent of the labour force 92 94 96 98 00 02 04 Changes in the world of work 2 26/10/2010 Flows in the Labour Market Employed Labour force New hires Recalls R ll Job-losers Lay-offs Quits Unemployed Retiring Temporarily leaving l i Taking a job Out of the labour force Discouraged workers Re-entrants New entrants Types of Unemployment • Seasonal Unemployment – Regular seasonal changes in employment / labour demand – Unemployment data is usually given a seasonal adjustment to reflect this – Not a major concern for labour market economists – Affects certain industries more than others • Catering and leisure • Construction • Retailing • Tourism • Agriculture 3 26/10/2010 Types of Unemployment • Frictional Unemployment – Irreducible minimum unemployment in a dynamic economy – Often involves short spells of unemployment – Includes new and returning entrants into the labour market – Imperfect...
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...currencies and introduced the Euro as their sole currency. If Britain joins the Euro, it will likely be in 2003. The government has offered the British public a referendum on Britain's entry into it though some ministers have clouded the issue as to whether Britain's entry (or not) will be a political or an economic decision. Jack Straw, Home Secretary, has stated that a decision will almost certainly be a political one whereas the Chancellor, Gordon Brown, has stated that the 'Five Tests' will determine whether we join the Euro - i.e., any decision will be an economic one. The Euro’s record since its introduction has been poor as measured by its value against the pound and US Dollar, and the relative performance of the European and UK/USA economies. It has only been in the summer of 2002, that its value against the dollar has picked up. However, unemployment in Germany, once the economic power-base of Europe, is high. In July 2002, Germany had a symbolic 'no-shop day' by Germans to protest about the...
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...Four main target of governments: Low unemployment – lots of people in work Low and steady inflation – prices and wages fairly stable ← Steady and sustainable economic growth (%change in GDP) – the economy to grow a little bit each year A positive balance of payments – to export more than we import Two other possible: ← To reduce inequality in the country – to redistribute income and wealth in order to help the poor To protect the environment – to avoid pollution and congestion What is Monetary Policy? Monetary Policy involves changes in the base rate of interest to influence the rate of growth of aggregate demand, the money supply and ultimately price inflation. Monetarist economists believe that monetary policy is a more powerful weapon than fiscal policy in controlling inflation. Monetary policy also involves changes in the value of the exchange rate since fluctuations in the currency also impact on macroeconomic activity (incomes, output and prices) Changes in short term interest rates affect the spending and savings behaviour of households and businesses over time and therefore feed through the circular flow of income and spending. The transmission mechanism of monetary policy works with variable time lags depending on the interest elasticity of demand for different goods and services – e.g. the demand for interest-sensitive consumer goods and services bought on credit or the demand for capital investment from private sector businesses. Because...
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...effects. The chosen trends are structural unemployment, gender pay gap and skill shortage. The main causes of the first trend are increase demand for services and technological change, which have led us into a new era where highly skilled labour force is needed to operate more complex machineries and computer systems. The rapid technological change has caused structural unemployment, with workers willing to work but cannot because of their lack of required skills. The second trend, gender pay gap, illustrates how wide the pay gap between males and females is until today. The main causes of this current direction are the persisting stereotype of the male brad-winner, the feminisation of some particular industry and more importantly non-union collective agreement. The results of this general direction limit the potentials of the Australian national income and create a culture of discrimination. The third and last trend, skill shortage, is generated by cut in investment in skill development, difficulties in retaining the employees and variation of demand for labour. These phenomenons foster inefficiency and impossibility to produce at full employment of resources. TREND 1: STRUCTURAL UNEMPLOYMENT One of the major trends that can be noticed in the Australian labour market is the steady presence of structural unemployment. Most of the definitions found in the literature describes this phenomenon as strictly linked to technological change. The Essential Economics Encyclopedia...
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...Key term | Definition | Accelerator | A change in the level of investment in new capital goods is induced by a change in the rate of growth of national income or AD. | Actual output | Level or real output produced in the economy in a particular year, not to be confused with the trend level of output. The trend level of output is what the economy is capable of producing when working at full capacity. Actual output differs from the trend level of output when there are output gaps. | Aggregate demand (AD) | The total planned spending on real output produced within the economy. | Aggregate supply (AS) | The level of real national output that producers are prepared to supply at different average price levels. | Availability of credit | Funds available for households and firms to borrow. | Balance of payments (BOP) | A record of all the currency flows into and out of a country in a particular time period. | Balance of trade | The difference between the money value of a country’s imports and its exports. Balance of trade is the largest component of a country’s balance of payments on current account. | Balance of trade in goods | The part of the current account measuring payments for exports and imports of goods. The difference between the total value of exports and the total value of imports of goods is sometimes called the ‘balance of visible trade.’ | Balance of trade in services | Is part of the current account and is the difference between the payments for the exports...
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...IM Aggregate Demand Aggregate demand (AD) is the total demand for all goods and services produced in an economy in a given price level and time period. AD = C + G + I + (X – M) C means consumer expenditure. This makes up the majority of AD in most countries (about 65% of the total). I means investment in capital goods from firms, and this is the most volatile component of AD. This typically accounts for 15-20% of GDP, and the majority (75%) is from private sector businesses. G means government spending on state-provided goods and services. Transfer payments (state benefits) do not count because these payments are not producing an output – they are a transfer of money from one group to another. X means exports; M means imports. Exports are goods sold to overseas countries and imports are what the UK buys from foreign countries. (X – M) represents net exports. If this is positive, there is a trade surplus which adds to AD. Conversely, a negative net exports value means there is a trade deficit, which reduces AD. Consumer Expenditure Consumer expenditure is influenced by… The amount of real disposable income is the main influence on consumer expenditure. Households and economies with more disposable income tend to spend more in total than poorer ones. The proportion of income that is spent is called the average propensity to consume (APC). Wealth (the value of a stock of assets) affects C. Wealthier people tend to spend more. Wealth can be spent and can be used...
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...of these population changes for total output and average living standards in Japan, assuming that average labour productivity continues to grow? What if average labour productivity stagnates? Solution 1: Slowing population growth and an increased share of retired people both imply slower growth in the number of people employed. If average labour productivity (output per employed worker) continues to grow at earlier rates, total output will still grow more slowly than before, because of slower growth in the number of workers. If average labour productivity stagnates, then total output will grow very slowly or even decline. Living standards depend not on total output but on output divided by the total population. Slowing population growth reduces total output but also the number of people who share that output. So slower population growth in itself should not affect living standards. However, a reduced share of the population that is working, all else equal, will reduce output per person, lowering living standards. Slower productivity growth will only worsen this problem. 2. Is it possible for average living standards to rise during a period in which average labour productivity is falling? Discuss, using a numerical example for illustration. Solution 2: It’s possible, if the decline in average labour productivity (output per worker) is offset by an increased share of the population that is employed. For a simple example, suppose an economy has two people, one...
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...society. It is a change in social status relative to others' social location within a given society. The New Egalitarians are a group of sociologists and politicians who believe that social-class divisions are in decline and that policies to socially include deprived groups are working. Their critics consist mainly of the Traditionalists, Marxists and Neo Marxists. In this essay I aim to show how persuasive the New Egalitarian argument is. New Egalitarian sociologists such as Giddens and Diamond (2005) argue that social class is no longer an important source of inequality or identity in the contemporary UK. They suggest that the UK is a meritocratic society in that equality of opportunity is now the norm, i.e. all members of society are objectively and equally judged on their talent and ability. However, the Traditionalist view opposes this; they argue class divisions and conflict are still the key characteristics of British society today. They believe that Labour politicians have abandoned their commitment to equality and social justice for those exploited by the organisation of capitalism. They believe Labour politicians have betrayed its working-class roots because it has done nothing to redistribute wealth and income from rich to poor, or to address the fundamental flaws that they see as inherent in the capitalist system. Therefore, they argue that by implying effort is the key to success, as the New Egalitarians do, little is done to change existing structural arrangements that...
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...What is ‘unemployment’, and what are the main features of unemployment policy in the UK today? Unemployment is a difficult concept to define as work itself can take many forms. For example work can be paid, unpaid, domestic or outside of the home. Even though with difficulties of defining a complex topic such as unemployment, Grint (1998, p36) defines unemployment as a situation of “being out of work” but “available for work”. This shows that even though people are willing and able to work they are unable to find paid work. Unemployment is a very concerning economic and social issue affecting the UK today and historically. According to the office national statistics, UK unemployment has increased from 7000 to 2.56 million. This particularly consists of youth unemployment, such as graduates and youths aged 17 plus who now rate at 21.2% of the unemployment rate, and women whose unemployment has also increased (BBC, 2013). As Beveridge states the population of those unemployed were supported through the ‘cradle of the grave’ suggesting that the government was giving unending unemployment benefits regardless of whether the population were actively seeking work. Unemployment policy regarding the workfare gained foothold after WW2 with the emergence of the welfare state. Today this is still the main policy for supporting the unemployed population of Britain. Those out of work now need to show that they are actively seeking work and gaining work experience and skills to make them...
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...Economic growth is the increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Economic growth can be measured in nominal terms, which include inflation, or in real terms, which are adjusted for inflation. For comparing one country's economic growth to another, GDP or GNP per capita should be used as these take into account population differences between countries. The economic growth in Africa not only affects the country itself, but in our globalised economy, the change will affect as far as european countries. Firstly, the imports will be cheaper in the UK, this leads to a growth in the standard of living in the UK, as they can now buy more goods and at a cheaper price. The standard of living is the level of wealth, comfort, material goods and necessities available to a certain socioeconomic class in a certain geographic area. The standard of living includes factors such as income, quality and availability of employment, class disparity, poverty rate, quality and affordability of housing, hours of work required to purchase necessities and a lot more. Also Rwanda is developing tourism successfully, which means UK citizens now have another choice of destination for vacation. Another upside to the growing economy in Africa is that UK now has a bigger export market, this will benefit UK great as we rely on exporting our services and since Africa is now a developing countries, they will need our services more than ever...
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...UK manufacturing has been in relative decline since the 1960s. Manufacturing as a share of real GDP has fallen from 30% in 1970 to 12% in 2010. This essay answer looks at the reasons why, and how significant government policies are as a cause. Manufacturing plays a crucial role in the competitiveness of the UK economy. Despite this, for far too long government policy has neglected manufacturing. During this period of neglect British manufacturing firms have repositioned themselves away from price-based competition more towards forms of non-price based competitiveness. The recent re-shoring of manufacturing to the UK is the start of a much needed trend. The University of Birmingham is funding a two year research project entitled ‘Regeneration Economies: Transforming People, Places and Production’. This project is exploring new policy solutions that will support British manufacturing. There is a need to develop a much better understanding of regional and national economies. High value manufacturing firms no longer sell products, but many solutions combine manufactured products with embedded services. Thus, a manufacturing policy must be simultaneously a service policy. There is a need to encourage universities and colleges to provide courses that blend technical training with an understanding of services, this is where the government comes in, by making these changes to education The Regeneration Economies project is also exploring major developments in engineering that have the...
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...Introduction This report will examine the world economy in general these issues. In this way, people can learn basic information about the world economy. Also global economy can be seen as the economy of global society and national economies – as economies of local societies, making the global one. It can be evaluated in various kinds of ways. It is inseparable from the geography and ecology of Earth, and is therefore something of a misnomer, since, while definitions and representations of the "world economy" vary widely, they must at a minimum exclude any consideration of resources or value based outside of the Earth. This report would talk about several definition would used during the world economy. Finding 1. Free trade Free trade is the interchange of goods and services (but not of capital or labor) unhindered by high tariffs, nontariff barriers (such as quotas), and onerous or unilateral requirements or processes (businessdictionary, 2015). The North American Free Trade Agreement is an agreement signed by Canada, Mexico, and the United States, creating a trilateral rules-based trade bloc in North America. U.S. exports to Canada and Mexico support more than three million American jobs and U.S. trade with NAFTA partners has unlocked opportunity for millions of Americans by supporting Made-in-America jobs and exports(businessdictionary, 2015). As the U.S.’ two largest export markets, Canada and Mexico buy more Made-in-America goods and services than any...
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...‘Thanks to Mr Osborne, Britain now has the earliest, most aggressive programme to cut government borrowing in the G7, despite widespread fears about the strength of the UK and global recovery’ (Flanders, 2010). In this essay I will focus on Britain’s budget deficit, in particular the Emergency Budget, presenting various topics for debate in relation to different aspects of the budget. I will further expand into broader topics such as the recession as a whole, the previous Labour government, other countries situations and subsequent response and the theory behind the policies undertaken, whether driven by political or economic incentives for example. Throughout the essay I will attempt to present ideas in a balanced approach, clearly showing the difference between positive and normative statements. An economies growth rate fluctuates over a period of time, known as the economic cycle. It shows the changes over time in the macro economy such as a recession where growth falls below the trend growth rate: a negative output gap. Such events are cyclical and the general period of time between one boom and another is usually five to eight years (Peter Cramp, Informe). Gordon Brown was keen to avoid successive budget deficits to fund government spending for the expansion of the economy, when New Labour came to power in 1997. As Chancellor he used two fiscal rules to manage the government’s finances, the Golden Rule and the Sustainable Investment Rule...
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