Economics – Unit 2 Revision Circular Flow of Income (avin#s
/aes
Im!orts
Consumer Goo*s an* (ervices E!en*iture Rent3 4a#es3 Interest3 ,rofit
Producer
Factors of ,ro*uction
Government s!en*in#
E!orts
Investment
Main Government Objectives 1) ow un unem!lo !lo"me "ment 2) Econ Econom omic ic #ro #rowt$ wt$ %) ow& ow&st stab able le infl inflat atio ionn ') (table (table balanc balancee of !a"me !a"ments nts
ational Income Measure* b" G+,- G+, is a measure of out!utG+, *efinition. /$e final value of all #oo*s an* services !ro*uce* wit$in t$e #eo#ra!$ic boun*aries boun*aries of a countr" !er "earOutput (O) = Income (Y) = Expenditure (E)
ivin# (tan*ar*s G+, is use* to measure t$e livin# stan*ar*s of a !o!ulation/$ere are man" reasons w$" G+, is a #oo* measure of livin# stan*ar*s. 1) 0 $i#$er $i#$er income income an* t$eref t$erefore ore a $i#$er $i#$er G+,) G+,) woul* woul* mean consu consumers mers can can bu" more more #oo*s #oo*s an* services so t$eir livin# stan*ar*s will rise-
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2) 0 rise in G+, also means a rise in out!ut so more #oo*s an* services will be consume* lea*in# to increase* livin# stan*ar*s%) /$e *ata is eas" to collect an* so t$is will allow !oorer countries to use t$is measure') G+, is a common unit as al values are in 5) an* so G+, values are eas" to com!are between countries6owever3 it is not a !erfect measure of livin# stan*ar*s because. 1) If G+, remaine* constant but t$e !o!ulation increase*3 G+, !er ca!ita woul* fall – G+, *oes not measure t$is2) /$ere are uneven *istributions of wealt$ w$ic$ G+, fails to ta7e into account%) G+, *oes not ta7e $a!!iness into account') Inflation is not ta7en into account8) 6i**en economies are not inclu*e* in t$e G+, value-
6uman +evelo!ment In*e 6+I) /$e 6+I is an alternative measure of livin# stan*ar*s- /$e 6+I measures a*ult literac"3 G+, an* life e!ectanc" an* a countr" is #iven a score out of 1- /$e #reater t$e 6+I value3 t$e $i#$er t$e livin# stan*ar*s in t$e countr"- /$e score of one countr" is t$en ran7e* a#ainst t$e scores from ot$er countries 0*vanta#es of 6+I. •
/$e *ata is eas" an* c$ea! to collect-
•
/$e G+, ran7 of a countr" minus its 6+I ran7 #ives a ran7in# of life e!ectanc" an* a*ult literac" a ran7 of $ealt$ an* e*ucation)-
•
/$e *ata collecte* is reliable-
+isa*vanta#es of 6+I. •
o measure of !overt"-
•
+oes not ta7e uneven wealt$ *istributions into account-
•
Utilit" $a!!iness) is not ta7en into account-
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/$e Economic C"cle /ren*
G+,
3
1) (lum!. G+, at its lowest- Growt$ is a!!roimatel" <- Unem!lo"ment is $i#$- ow inflation an*
4
0ctual
investment- More e!orts t$an im!orts *ue to wea7 currenc")3 causin# livin# stan*ar*s to fall-
2
2) Recover"&#rowt$. Risin# G+,3 em!lo"ment an* 1
inflation- 9alance of !a"ments is neutral e!orts =
/ime
im!orts)-
%) 9oom. G+, at its $i#$est- 6i#$ inflation an* t$erefore $i#$ interest rates)3 em!lo"ment an* investment- e#ative balance of !a"ments3 cause* b" $i#$ livin# stan*ar*s') Recession. 0 recession occurs w$en t$ere are 2 :uarters of ne#ative G+, #rowt$- Inflation3 G+, an* investment fallin#- Unem!lo"ment risin#-
4$at causes t$e economic c"cle; •
+urin# a boom or a !erio* of #rowt$3 t$e rise in *eman* for #oo*s an* services causes inflation to rise see notes on inflation)- In or*er to *ecrease inflation an* meet one of t$e ' main macroeconomic objectives3 t$e central ban7 e-#- 9an7 of En#lan*) increase interest rates- /$is increases t$e incentive for consumers to save t$eir mone"3 causin# *eman* in t$e econom" to fall an* so G+, also falls-
•
0 rise in commo*it" !rices means t$at more mone" is s!ent !a"in# for necessit" #oo*s an* services e-#- electricit" bills rise)- 0s a result3 *is!osable incomes fall so less #oo*s an* services are bou#$t-
•
,rior to an election3 !arties t$at are in !ower increase t$eir s!en*in# in or*er to win votes an* remain in !ower3 causin# G+, to rise- 6owever3 t$is s!en*in# is not sustainable an* so after elections3 #overnment s!en*in# falls an* so G+, also falls-
•
4ars an* natural *isasters e-#- eart$:ua7es) also cause G+, to fall-
•
If confi*ence in an econom" is $i#$3 consumers will continue to s!en* an* so t$e consum!tion of #oo*s an* services will rise3 causin# G+, to rise- If confi*ence falls3 consumers will not be willin# to s!en* t$eir mone" an* so G+, will fall-
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Out!ut Ga! •
+efinition. /$e *ifference between tren* #rowt$ an* actual #rowt$-
•
If t$e out!ut #a! is ne#ative w$en tren* #rowt$ ecee*s actual #rowt$)3 G+, is fallin#-
•
If t$e out!ut #a! is !ositive w$en actual #rowt$ ecee*s tren* #rowt$)3 G+, is risin#-
Economic Growt$ +efinition. 0n increase in real G+, over timeEconomic #rowt$ is cause* b" an increase in t$e :uantit" an*&or :ualit" of t$e factors of !ro*uction•
0*vanta#es of economic #rowt$. Out!ut of #oo*s an* services rises so consum!tion also rises3 meanin# livin# stan*ar*s increase- Increase* !rovision of !ublic #oo*s e-#- e*ucation as ta revenues rise- 6i#$ interest rates are #oo* for savers- Econom" becomes more efficient an* com!etitive so Forei#n +irect Investment F+I) rises- Em!lo"ment also rises-
•
+isa*vanta#es of economic #rowt$. 6i#$ interest rates are ba* for consumers len*in# mone"- on> renewable resources are use* an* !ollution increases- ife e!ectanc" increases so increase* s!en*in# on t$e el*erl"-
Inflation +efinition. 0 #eneral increase in !rice levels over time-
Inflation rates are calculate* b" collectin# a ?bas7et? of a!!roimatel" @8< #oo*s an* services t$at are re#ularl" consume* b" t$e !ublic e-#- mil73 brea*3 !etrol)- Eac$ #oo* an* service in t$e ?bas7et? is wei#$te* suc$ t$at #oo*s an* services t$at ma7e u! a lar#er !ro!ortion of $ouse$ol* s!en*in# are wort$ more w$en calculatin# t$e inflation value- Once all of t$e #oo*s an* services are wei#$te*3 t$e value of all of t$e #oo*s an* services is com!are* wit$ t$e same value from !revious mont$s- /$e *ifference between t$e current an* eistin# value is e!resse* as a !ercenta#e of t$e eistin# value- /$is !ercenta#e is t$e current rate of inflation-
/$e 2 measures of inflation use* are R,I an* C,I- R,I inclu*es all of t$e #oo*s an* services t$at are in C,I3 but it also inclu*es mort#a#e !a"ments- /$e UA uses C,I as its measure of inflation- /$e 9an7 of En#lan* tar#et for inflation = 2-
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/$ere are 2 t"!es of inflation. 1) +eman*>!ull inflation. Occurs w$en *eman* for #oo*s an* services increases e-#- economic #rowt$ causes $ouse$ol* income to rise)- 0s a result3 *eman* ecee*s su!!l" an* so !rices rise *ue to ecess *eman*3 causin# *eman*>!ull inflation2) Cost>!us$ inflation. (u!!l" *eclines *ue to a rise in t$e costs of !ro*uction e-#- oil !rices rise)+eman* sta"s constant3 causin# *eman* to ecee* su!!l"- 0s a result3 !rices rise3 causin# cost>!us$ inflationInflation results in uncertaint" consumer an* business confi*ence falls) an* as a result investment falls- /$e fall in investment causes re*uce* #rowt$ in t$e lon# run-
Costs of Inflation •
($oe leat$er costs. ,eo!le are unaware of t$e new !rices of #oo*s an* services so t$e" $ave to s$o! aroun*- 0n o!!ortunit" cost is incurre* as time $as been waste* searc$in# for new !rices-
•
Menu costs. Inflation causes !rices to c$an#e an* so !rice lists e-#- menus $ave to be a*juste*(omeone must be em!lo"e* to c$an#e t$e !rices w$ic$ is an a**itional cost to a firm-
•
,s"c$olo#ical cost. Anowin# "ou coul* bu" t$e same #oo*s an* services for muc$ less in t$e !ast-
•
Re>*istributional costs. 4or7ers on fie* incomes suffer as t$e value of mone" is ero*e* t$erefore wor7ers on fie* incomes effectivel" ta7e a !a" cut e:ual to inflation- In or*er to !revent t$is3 wa#es can be lin7e* to inflation- /$e #overnment must also increase t$eir s!en*in# an* taation in line wit$ inflation-
Government ,olicies to re*uce inflation •
Dia *eman*>!ull inflation. Increase interest rate w$ic$ causes consum!tion an* investment to fallIncreasin# t$e interest rate also a!!reciates t$e currenc"3 causin# e!orts to fall3 resultin# in a fall of a##re#ate *eman* e!laine* later on)- Increase taes w$ic$ causes consum!tion to fall- +ecreases #overnment s!en*in#-
•
Dia cost>!us$ inflation. (ubsi*ise in*ustries causin# costs of !ro*uction for firms to fall- +ecrease ta on firms e-#- cor!oration ta)-
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+eflation +efinition. 0 #eneral *ecrease in !rice levels over timeMeasure* b" a fall in C,I-
/$ere are 2 t"!es of *eflation. 1) 9eni#n +eflation. ,rices fall because of an increase in !ro*uctivit"3 a*vancements in tec$nolo#" etc/$is means t$at more #oo*s an* services are !ro*uce* from t$e same amount of in!uts an* so !rices fall- /$e increase in out!ut causes consum!tion to rise an* so livin# stan*ar*s rise- 0s a result3 beni#n *eflation is OA2) Mali#n *eflation. ,rices fall *ue to a lac7 of *eman*- /$e lac7 of *eman* means t$ere is ecess su!!l" an* so !rices must fall to clear t$e mar7et- If *eman* falls3 businesses close3 causin# wor7ers to become unem!lo"e* w$ic$ causes even less *eman* t$ere is a ne#ative multi!lier effect)- Mali#n *eflation is 90+-
+es!ite t$ere bein# benefits from beni#n *eflation3 *eflation can be ver" *an#erous- If consumers see !rices are fallin#3 t$e" ma" wait till t$e !rice of a !ro*uct falls furt$er- /$is will t$en cause mali#n *eflation an* !rices will fall more- /$is can carr" on causin# a $u#e lac7 of *eman*-
Unem!lo"ment +efinition. 0 !erson w$o is wantin#3 willin# an* able to wor7 an* activel" see7in# wor73 but *oesn?t $ave a job-
Measurin# unem!lo"ment. •
,eo!le claimin# job see7er?s allowance. Unem!lo"ment can be *etermine* b" t$e number of claimants of t$is allowance- 6owever3 not ever"one w$o is unem!lo"e* claims- /$is is because some !eo!le *o not fit t$e criteria t$e" $ave too man" savin#s3 t$e" $aven?t been unem!lo"e* for lon# enou#$3 t$e" are less t$an 1 "ears of a#e etc) an* some !eo!le are not willin# to claim-
•
IO abour Force (urve". 0 surve" con*ucte* b" t$e International abour Or#anisation IO)- /$e IO con*uct an interview b" !$one of @<3<<< $ouse$ol*s- uestions are t$en as7e* about em!lo"ment status etc- /$e surve" is com!lete* b" !eo!le a#e* 1@ an* so is more accurate t$an t$e claimant count above)-
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/$ere are ' t"!es of unem!lo"ment. 1) Frictional. 4$en !eo!le are between jobs – t$e" $ave recentl" lost a job an* are searc$in# for a new one- /$is occurs wit$ man" s7ille* wor7ers as t$e" can affor* to be tem!oraril" off wor72) (easonal. Cause* b" seasonal s$ifts in t$e mar7et e-#- an ice cream man is unem!lo"e* in t$e winter%) C"clical. Unem!lo"ment t$at follows t$e economic c"cle- +urin# a boom3 *eman* for labour rises an* so unem!lo"ment falls- +urin# a slum!3 *eman* for labour falls an* so unem!lo"ment rises') (tructural. Cause* b" a mismatc$ of s7ills an* jobs between in*ustries- /$is is cause* b" com!etition from ot$er countries3 c$an#es in tec$nolo#" etc- In or*er to #et structurall" unem!lo"e* wor7ers bac7 into wor73 t$e" must be tau#$t new s7ills as t$eir eistin# tra*e is no lon#er in *eman*- /eac$in# !eo!le new s7ills is *ifficult as !eo!le are unwillin# to !a" for t$e re>trainin# an* so t$e #overnment $ave to !a" for it-
C"clical an* structural unem!lo"ment are t$e most im!ortant forms of unem!lo"ment frictional an* seasonal unem!lo"ment is a s$ort term !roblem3 w$ereas c"clical an* structural can be lon# term !roblems-
Effects of unem!lo"ment. Increase in crime3 less ta revenue for t$e #overnment so #overnment s!en*in# falls3 fall in G+, so fall in livin# stan*ar*s3 $i**en economies form3 increase* #overnment s!en*in# on Hob (ee7er?s 0llowance so cuts in ot$er areas e-#- $ealt$care)3 econom" not at its !ro*uctive !otential-
/$e abour Mar7et
Derived demand
is t$e increase* *eman* of one #oo* or service cause* b" t$e increase in *eman* of
anot$er #oo* or service- 0n eam!le of t$is is in t$e labour mar7et If t$e *eman* of a #oo* or service increases3 a firm must em!lo" more labour in or*er to !ro*uce t$e etra #oo* or service an* so t$e *eman* for labour rises-
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/$e *ia#ram s$ows t$e effects of c"clical unem!lo"ment
4a#e (
as a result of a recession- /$e fall in *eman* for #oo*s an* services causes a fall in *erive* *eman* from + to +1- 9efore t$e fall in *eman*3 em!lo"ment = E- /$e fall
4
in *eman* causes new em!lo"ment to e:ual E 1- 4a#es remain at 4 *ue to t$e ational Minimum 4a#e an* +
+1 E
E1
Em!lo"ment
tra*e union !ower- 0s a result3 t$ere is unem!lo"ment of E>E1)-
Unem!lo"ment Repacement ratio
is t$e !ercenta#e of "our current income t$at "ou coul* earn b" not wor7in#- /$e $i#$er
t$e ratio3 t$e lower t$e incentive to wor7-
,olicies to re*uce unem!lo"ment. •
/o *ecrease frictional unem!lo"ment. Increase t$e notice !erio*3 increase t$e number of job centres-
•
/o *ecrease structural unem!lo"ment. (ubsi*ise firms as firms can t$en affor* to ta7e on new wor7ers as t$eir costs of !ro*uction $ave fallen)3 re*uce taes e-#- ational Insurance contribution)3 increase !rovision of trainin# sc$emes suc$ as t$e
!e" Dea-
•
/o *ecrease c"clical unem!lo"ment. Re*uce D0/-
•
Ot$er measures. Re*uce benefits receive* b" t$e unem!lo"e* an* #ive t$e mone" to !eo!le in low !ai* wor73 *ecrease ational Minimum 4a#e-
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/$e *ia#ram s$ows t$e effects of a ational Minimum 4a#e
4a#e
M4) on unem!lo"ment- 9efore a M4 was im!ose*3
(
t$ere woul* be no unem!lo"ment as t$e mar7et woul* clear w$ere +=(- 6owever t$e M4 $as now cause*
M4
unem!lo"ment of E>E1)- 0s a result3 a M4 can cause !roblems *es!ite tr"in# to !rotect t$e interests of t$e labour force+ E1
E
Em!lo"ment
9alance of ,a"ments +efinition. 0 recor* of UA economic activities wit$ ot$er countries One com!onent of t$e balance of !a"ments is t$e
C#RRE!$ %CCO#!$-
/$e current account measures t$e
*ifference between t$e value of #oo*s an* services leavin# an econom" e!orts) an* t$e value of t$e #oo*s an* services enterin# an econom" im!orts)- If an econom" im!orts more t$an it e!orts3 it is sai* to $ave a current account
DE&ICI$-
If an econom" e!orts more t$an it im!orts3 it is sai* to $ave a current account
'#RP#'-
+isa*vanta#es of $avin# a current account *eficit. •
0 current account *eficit causes G+, to fall as t$ere is more mone" leavin# t$e econom" t$an t$ere is enterin# t$e econom"- 6owever3 t$e *eficit will onl" be a small fraction of t$e mone" t$at is in t$e circular flow of income-
0*vanta#es of $avin# a current account *eficit. •
0n econom" is consumin# more #oo*s an* services t$an it coul* $ave !ro*uce* *omesticall" so $i#$er livin# stan*ar*s-
•
0 *eficit im!lies t$at an econom" is e!eriencin# economic #rowt$-
0*vanta#es of $avin# a current account sur!lus. •
0n increase in t$e number of e!orts means t$at jobs will be create* to meet forei#n *eman*s-
•
Mone" injections into t$e circular flow of incomes creates economic activit"-
•
/$e sur!lus will cause a rise in G+, an* so ta revenues will rise- /$is will cause #overnment s!en*in# to rise3 lea*in# to an increase* !rovision of !ublic services suc$ as e*ucation-
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+isa*vanta#es of a current account sur!lus. •
•
0n increase in G+, causes *eman*>!ull inflation ero*in# t$e value of mone"ivin# stan*ar*s are less t$an t$eir !otential as *omesticall" !ro*uce* #oo*s an* services are bein# consume* abroa*-
•
on>renewable resources use*-
0 current account sur!lus causes G+, to rise as more mone" is enterin# t$e econom" an* t$e circular flow of income) t$an t$ere is leavin# t$e econom"-
Ec$an#e Rates +efinition. /$e value of one currenc" in terms of anot$erCurrencies are tra*e* on t$e FORE Forei#n Ec$an#e) mar7et- Ec$an#e rates are *etermine* b" su!!l" an* *eman*-
If a currenc" a!!reciates3 t$e value of t$e currenc" increases relative to anot$er currenc"- For eam!le3 if J1 = 51-8<3 it will $ave a!!reciate* if J1 = 51-@< in t$e future- 0 currenc" can a!!reciate t$rou#$ an increase in *eman* for t$e currenc" e-#- an 0merican firm converts *ollars into sterlin# in or*er to !urc$ase a #oo* from t$e UA) or t$rou#$ a *ecrease in su!!l" of t$e currenc"- If a currenc" a!!reciates3 e!orts fall as forei#n countries $ave to s!en* more mone" to bu" t$e same #oo* or service- Im!orts rise as more #oo*s an* services can be bou#$t from abroa* for t$e same value of t$e currenc" e-#- J1 bu"s more #oo*s from abroa* t$an before)- 0s a result3 currenc" a!!reciation worsens t$e current account !osition of an econom"-
If a currenc" *e!reciates3 t$e value of t$e currenc" falls relative to anot$er currenc"- For eam!le3 if J1 = 51-8<3 it will $ave *e!reciate* if J1 = 51-'< in t$e future- 0 currenc" can a!!reciate t$rou#$ a *ecrease in *eman* for t$e currenc" e-#- forei#n countries no lon#er to bu" #oo*s an* services ma*e in t$e UA) or t$rou#$ an increase in su!!l" of t$e currenc" e-#- UA consumers bu" forei#n !ro*ucts so !ut J onto t$e FORE mar7et in or*er to bu" anot$er currenc")- If a currenc" *e!reciates3 e!orts rise as forei#n countries $ave to s!en* less mone" to bu" t$e same #oo* or service- Im!orts fall as less #oo*s an* services can be bou#$t from abroa* for t$e same value of t$e currenc" e-#- J1 bu"s less #oo*s from abroa* t$an before)- 0s a result3 currenc" *e!reciation im!roves t$e current account !osition of an econom"-
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Interest rates can be use* to alter ec$an#e rates a $i#$ interest rate causes a lar#e amount of financial investment as mone" will be save* in UA ban7 accounts)3 so t$e *eman* for a currenc" increases an* it a!!reciates- 0 low interest rate will *e!reciate a currenc"-
0##re#ate +eman*
AD =
C
+
Consumption
I Investment
+
G
+
Government Spending
(x – m) Exports - Imports
Consumption
Mar#inal ,ro!ensit" to Consume M,C). /$e !ercenta#e of a**itional income t$at will be s!ent- /$e !oorer t$e in*ivi*ual3 t$e $i#$er t$e M,C it is $i#$l" li7el" t$at t$e last unit of mone" t$e" $ave will be s!ent)- M,C is a value between < an* 1-
Mar#inal ,ro!ensit" to (ave M,(). /$e !ercenta#e of a**itional income t$at will be save*- /$e ric$er t$e in*ivi*ual3 t$e $i#$er t$e M,( it is $i#$l" li7el" t$at t$e last unit of mone" t$e" $ave will be save*)- M,( is a value between < an* 1-
Factors affectin# consum!tion. •
Income. Follows t$e economic c"cle- 6i#$ em!lo"ment = $i#$ income = $i#$ consum!tion-
•
Interest rates. 6i#$ interest rate = lar#e incentive to save = lower consum!tion- ow interest rate = lar#e incentive to borrow = $i#$er consum!tion-
•
Inflation. /$is ero*es t$e value of mone" so $i#$ inflation = lower s!en*in# = lower consum!tion-
•
E!ectations. If !eo!le e!ect $i#$ inflation3 t$e" will save mone" in t$e !revious !erio*s so consum!tion will fall-
•
4ealt$. 6ouse !rices are a major influence on wealt$- +escribe* below un*er ?/$e 4ealt$ Effect?-
/$e 4ealt$ Effect. Kour consum!tion is lin7e* to "our wealt$- /$e wealt$ier "ou are3 t$e more mone" "ou are willin# to s!en*- 6ouse !rices are a major influence on wealt$3 so a rise in $ouse !rices will cause "our M,C to rise-
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,olicies to increase consum!tion. •
+ecrease interest rate
•
+ecrease taes e-#- D0/ an* income ta-
•
,rovi*e stea*" economic #rowt$ an* inflation over time- /$is will #ive consumers !ositive e!ectations of t$e future an* so t$e" will continue s!en*in#-
•
Ma7e loans available for $ouse *e!osits- /$is will cause t$e *eman* for $ouses to rise3 meanin# $ouse !rices will rise an* consum!tion will rise b" t$e wealt$ effect)-
Investment
+efinition. 0n a**ition to t$e ca!ital stoc7/$ere are two t"!es of investment. fie* ca!ital mac$iner"3 buil*in#s etc) an* $uman ca!ital s7ills3 trainin# for wor7ers etc)Investment contributes a small amount to a##re#ate su!!l" an* is a crucial *eterminant of a##re#ate su!!l"/$e econom" #rows fast w$en t$ere is investment as t$e su!!l">si*e can #row fasterInvestment is t$e most volatile com!onent of a##re#ate *eman*-
/$e Mar#inal Efficienc" of Ca!ital. Interest Rate3 r /$is states t$at an" investment b" a firm must ecee* its o!!ortunit" cost of t$e interest rate- (o if t$e interest rate is $i#$3 t$ere woul* be a
r1
*ecrease in investment b" firms as t$e" are li7el" to save t$at mone" instea* an* ta7e t$e interest
r2
as t$ere will be a $i#$er return b" savin# + I1
com!are* to t$e return obtaine* from investin#-
I2 ,lanne* Investment3 I
/$e 0ccelerator /$eor". /$is states t$at investment is relate* to t$e out!ut of an econom"- (o if t$e econom" #rows3 firms will invest in $uman an* fie* ca!ital in or*er to e!an*- If $i#$er *eman* is e!ecte*3 firms ma" invest before t$e economic #rowt$ $a!!ens e-#- b" investin# in a recession-
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Ca!ital Goo*s
/$is *ia#ram s$ows t$at investment in t$e s$ort runfor eam!le !oint 0 or 9) allows "ou to !ro*uce more consumer an* ca!ital #oo*s in t$e lon# run-
C 0
0 certain amount of investment is alwa"s nee*e* to
9
maintain G+, as !eo!le leave t$e labour mar7et so $uman ca!ital *ecreases) an* mac$iner"3 buil*in#s etc Consumer Goo*s
wear our fie* ca!ital *ecreases)-
overnment 'pendin*
+efinition. 0n" s!en*in# b" central #overnment an*&or local councilsGovernments fun* t$eir s!en*in# t$rou#$ taation 0*vanta#es of #overnment s!en*in#. •
Ever" member of t$e !o!ulation $as a certain stan*ar* of livin#-
•
Increase* !rovision of !ublic an* merit #oo*s-
•
Maimises utilit" if income is re>*istribute*-
+isa*vanta#es of #overnment s!en*in#. •
/aation means !eo!le $ave less *is!osable income so t$eir consum!tion *ecreases-
•
Government is non>!rofit an* so inefficient wit$ its resource allocation-
Exports and Imports
+efinition. /$e current account on t$e balance of !a"ments recor*s t$e flow of tra*e between t$e $ome econom" an* t$e rest of t$e worl*/$e value of t$e current account relies $eavil" on t$e ec$an#e rate- /$e UA currentl" $as a current account *eficitIf an econom" $as a current account sur!lus3 it is e!ortin# more t$an it is im!ortin# an* so its net forei#n assets increaseIf an econom" $as a current account *eficit3 it is im!ortin# more t$an it is e!ortin# an* so its net forei#n assets *ecrease-
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0##re#ate (u!!l" 0ll #oo*s an* services are ma*e from *ifferent combinations of t$e four factors of !ro*uction. lan*3 labour3 ca!ital an* enter!riseIn t$e s$ort run3 at least one factor is fie* in availabilit"In t$e lon# run3 all factors of !ro*uction are variable-
,rice evels
/$is *ia#ram s$ows t$e s$ort run a##re#ate su!!l" (R0() curve of an econom"- /$e factors of
(R0(
!ro*uction can be ma*e to wor7 $ar*er in or*er to ,1
increase out!ut suc$ as a movement from to 1)
,
e-#- b" !a"in# wor7ers overtime- 6owever3 t$is causes inflation an increase in !rice levels suc$ as a movement from , to , 1)
1
ational Out!ut
Cassica a+our ,ar-et
/$is *ia#ram e!lains t$e effects on t$e labour mar7et of a fall
4a#es
in a##re#ate *eman* usin# a classical economics a!!roac$ in (
t$e s$ort run- /$e fall in 0+ will cause a fall in *erive* *eman* s$own b" t$e s$ift from + to + 1)- ,eo!le w$o lose
4
t$eir jobs *ue to t$e fall in *erive* *eman* will *ecrease t$eir
41
wa#e rate to 4 1 in or*er to become em!lo"e* a#ain- ,eo!le +
not willin# to wor7 at t$e wa#e rate 4 1 will leave t$e labour mar7et- ,eo!le w$o 7e!t t$eir jobs ori#inall" will also lower
E
E1
+1 t$eir wa#e rate to 4 1 as t$is is t$e new wa#e t$at !eo!le are Em!lo"ment willin# to wor7 for- /$is !rocess ta7es a s$ort amount of time an* followin# t$ese c$an#es3 t$ere is no unem!lo"ment an* t$e mar7et clears-
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,rice evel
/$is *ia#ram s$ows t$e effects on out!ut in t$e lon# run R0(
R0(1
w$en wa#es c$an#e- It s$ows t$at out!ut remains constant e-#- at K) even w$en !rice levels w$ic$ are
,
*irectl" affecte* b" wa#es) c$an#e e-#- from , to , 1)/$is is because in t$e lon# run3 !eo!le remain in t$e
,1
labour mar7et an* so t$ere is no unem!lo"ment- 0lt$ou#$ wa#es are cut3 ever"one in t$e econom" still $as t$e same !urc$asin# !ower as !rice levels will also fallK
K1
ational Out!ut
/$e R0( curve will s$ift e-#- from R0( to R0( 1) if t$e :ualit" or :uantit" of t$e factors of !ro*uction increase e-#- new tec$nolo#"3 more labour t$rou#$ immi#ration) etc-
.e/nesian a+our ,ar-et
/$is *ia#ram e!lains t$e effects on t$e labour mar7et
4a#es
of a fall in a##re#ate *eman* usin# a 7e"nesian
(
economics a!!roac$ in t$e s$ort run- 4$en *erive* *eman* falls3 !eo!le become unem!lo"e* as t$e" *o
41
not *ro! t$eir wa#e e!ectations- Ae"nes *escribe* wa#es as bein# Lstic7" *ownwar*s as t$e" woul* not +
E2
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E1
+1 Em!lo"ment
fall enou#$ to clear t$e mar7et- In t$e *ia#ram to t$e left3 a fall in *erive* *eman* from + to + 1 causes em!lo"ment to fall from E 1 to E2-
,rice evel R0(
/$is *ia#ram s$ows t$e effect on out!ut of a c$an#e in wa#es w$en wa#es an* t$erefore !rice levels) fall3 out!ut also falls- /$ere are % *ifferent scenarios in t$is *ia#ram. 0t !oint 13 out!ut can increase wit$out !rice levels an* t$erefore wa#es) risin# t$ere are
1
2 K
% K1
$i#$ levels of unem!lo"mentK2
ational Out!ut 0t !oint 23 t$e amount of unem!lo"e* labour is be#innin# to run out an* so as out!ut rises an*
firms loo7 to ta7e on more wor7ers3 t$e" *eman* $i#$er wa#es3 causin# !rice levels to rise- 0t !oint %3 t$e econom" is at full em!lo"ment it is as its !ro*uctive !otential)- Out!ut is at its maimum an* wa#e inflation is ver" $i#$ meanin# !rice levels are also $i#$)-
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