macro unit 2 6ec02 revision notes 2011

8/9/2019 Macro Unit 2 6EC02 Revision Notes 2011

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MACRO Unit 2 The UK Economy

The performance of the economy can have a major impact upon people slives. It will infuence the type o jobs people hae an! the "oo!s an!se#ices aailable to them$ an! whethe# they can a%o#! to buythem&

The "oe#nment has ' mac#o(economic objecties)

1) low unemployment2) low an! stable infation3) sustainable Economic "#owth4) balance o payments e*uilib#ium

A numbe# o +ey in!icato#s can be use! to illust#ate the success o

an economy)

1) the leel o output$ an! Economic "#owth2) the infation #ate3) leel an! #ate o unemployment4) the ,alance o -ayments

. the economy is "#owin" it can no#mally be ju!"e! as successul&

.n a!!ition the "oe#nment will also consi!e#)

a mo#e e*ual the !ist#ibution o income

p#otection o the eni#onment / sustainability o "#owth

The Circular Flow of Income and Injections &Leakages

.n the simple$ close! economy$ it is assume! that househol!s ownall acto#s o p#o!uction$ which they then sell to 0#ms o# 0nancial

#ewa#!s& .t is these #ewa#!s which enable househol!s to ca##y outthei# !ay to !ay pu#chases&

Unit 2 The UK Econom y 6EC02 1 St Pauls School 2011


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1owee# the simple ci#cula# fow$ as !epicte! in i"u#e 3$ is toosimplistic to be o any #eal use& .n the open economy the#e a#e 4injections into the ci#cula# fow&

.nestment by 0#ms 5.67oe#nment spen!in" 576E8po#ts 596

Each #ep#esents an autonomous a!!ition to the ci#cula# fow income&:ea+a"es on the othe# han! #ep#esent with!#awals #om the ci#cula#fow an! a#e)

;ain"s 5;6Ta8es 5T6.mpo#ts 5M6

T- T#anse# -ayments a#e payments #eceie! o# no co##espon!in"leel o output$ such as unemployment benefit or Job Seeker s Allowance.

o# an economy to be in e*uilib#ium$ injections must e*ual lea+a"es&. injections a#e "#eate#$ then the economy will oe#heat an!infation may #esult& 1owee#$ i the lea+a"es a#e "#eate# thaninjections$ then the economy will sh#in+ in si


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whe#e o# ee#ythin" that is ea#ne!Unit 2 The UK Econom y 6EC02 2 St Pauls School 2011


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5income6$ the#e must be an output p#o!uce!$ an! e*ually somethin"must be spent 5e8pen!itu#e6& The "oe#nment measu#es all th#eemoney fows$ "oo!s / se#ices$ e8pen!itu#e an! income an! theyshoul! be i!entity be e*ual&

The p#ee##e! measu#e is the e8pen!itu#e metho! which ta+esspen!in" by consume# 5C6$ "oe#nment spen!in" 576$ spen!in" by0#ms 5.6 an! the net t#a!e the UK ente#s into 59(M6&

The Expenditure Method) C @ . @ 7 @ 59 ( M6

o# this metho! to be accu#ate the alue o subsi!ies must be a!!e!an! ta8es on "oo!s !e!ucted. This converts the product s value frommarket prices to factorcost&

Con#erting from Nominal to eal

>ominal 7=- is 7=- measu#e! in te#ms o money alues$ an! so isinfuence! by the leel o infation& This can "ie a mislea!in"imp#ession o a country s pe#o#mance& . infation is #unnin" at 2B$then at the en! o a yea#$ 7=- will hae #isen by 2B$ this willsu""est that output has #emaine! the same but the alue o theoutput has #isen as p#ices #ise& Thus to oe#come such calculation!iculties 7=- 0"u#es a#e #etu#ne! to a base yea# to #emoe thea%ects o infation& This is +nown as cone#tin" to #eal 7=-&

Real 7=- is >ominal 7=- 8 p#ice in!e8 in base yea#&

>ominal 7=- D?' 8100

120F Real 7=- F D34m

.t is oten su""este! that as a measu#e o the stan!a#! o liin"$7=- pe# capita has its wea+nesses& This is un!oubte!ly t#ueGhowee#$ whilst many c#iticisms e8ist$ an! the#e a#e also alte#natiemeasu#es$ 7=- pe# capita is still the most wi!ely use! measu#e oeconomic pe#o#mance&

"oncerns e#ist as to what is meant by $$tandard of Li#ing%. It is

subjective& and the#eo#e can only mean !i%e#ent thin"s to !i%e#entpeople& Thus a pu#ely moneta#y measu#e such as 7=- will not !ealwith the issue o ;tan!a#! o :iin" as comp#ehensiely as manyeconomists woul! li+e&

Other areas that ma% e considered'

Hhen !ealin" with stan!a#! o liin"$ it is wo#th consi!e#in" some othe acto#s outline!&

5?6 ,i#th Rates& 5I6

>o& o !octo#s& pe#

hea!&

526 Mo#tality Rates& 536=ist#ibution o.ncome&

546 :ie E8pectancy& 56 Climate&5'6 B o -opulation in 5J6 -olitical #ee!om&


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A"#ic&

5K6 :ite#acy Rates& 5?6B of 7=- spent onMilita#y&

Unit 2 The UK Econom y 6EC02 3 St Pau

ls School 2011


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"(M)N*E+ELO,MENTIN*E-

1=. is an in!e8 which measu#es national socio(economic!eelopment !eelope! by the Unite! >ations& Up until 2J$ it was

base! on measu#es o lie e8pectancy$ e!ucational attainment an!was a!juste! o# #eal pe# capita income&

The 1=. combine! th#ee basic !imensions)

:ie e8pectancy at bi#th$ as an in!e8 o populationhealth an! lon"eity Knowle!"e an! e!ucation$ asmeasu#e! by the a!ult lite#acy #ate 5with two(thi#!swei"htin"6 an! the combine! p#ima#y$ secon!a#y$ an!te#tia#y "#oss en#ollment #atio 5with one(thi#!

wei"htin"6& ;tan!a#! o liin"$ as measu#e! by thenatu#al lo"a#ithm o "#oss !omestic p#o!uct 57=-6 pe#capita at pu#chasin" powe# pa#ity 5---6 in Unite! ;tates!olla#s&

.n 2?$ the measu#es o +nowle!"e an! liin" stan!a#!s we#echan"e! so that now 1=. is !e0ne! as)

Access to +nowle!"e) mean %ears of schooling ande./ected %ears ofschooling

;tan!a#! o liin") measu#e! by GNI /er ca/ita5--- U; L6Life e./ectanc% at irth 5as an in!e86

1owee# 1=. is not pe#ect as a measu#e o !eelopment)

)d#antages *isad#antages,#oa!e# measu#e than 7>. o#7=-& .t "ies no in!ication o income

!ist#ibution$ o# by #e"ion o#"en!e#&

The !ata is compile! #e"ula#ly bythe U>

The#e may be p#oblems o !ataaccu#acy$

an! is #elatiely easy to const#uct$as the especially with some !eelopin"th#ee elements can be easilyoun! on

count#ies that will hae anincentie to

thei# own an! e8istin!epen!ently$ an!

paint a #osie# pictu#e o thei#citi


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count#y becomes&

ocuse! on "oe#nment policiesan! so

:imite! in its inclusion o onlyth#ee

it is a "oo! ta#"et o#"oe#nments to

*uality o lie in!icato#s whenothe#

aim towa#!s$ an! is obtainable&measu#es li+e access to cleanwate#omitte!&



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ECONOMICGO!T"

. a country s output is rising& this suggests that a country s citi'ens are e#periencinghi"he# liin" stan!a#!s& The most common in!icato# oeconomic "#owth is a #ise in #eal 7=-&

)ctual and ,otential Growth

An inc#ease in the p#o!uctie capacity o an economy inc#eases thepotential "#owth$ whilst an inc#ease in output #esults in an actualinc#ease in output& A shit in the -- illust#ates an inc#ease inp#o!uctie potential&

1owee# a moement in the actual amount o output #om A to ,illust#ates an inc#ease in economic "#owth& The#e is howee# stillpotential to inc#ease actual output #om , to the boun!a#y o --2

by employin" p#eiously unemploye! sou#ces&

,roduction and ,roducti#it%

A country s output can increase either b ecause "#eate# #esou#ces a#eemploye! o#because of a rise in productive potential. (owever an increasedoesn t necessarily #esult in an inc#ease in output$ this will !epen!upon whethe# this inc#ease in p#o!uctie capacity is matche! by aninc#ease in actual output o# a "#eat leel o employment&

Out/ut ga/s

Growth ao#e the trend growth rate$ whe#e A= "#ows aste#than :RA;$ lea!s to a /ositi#e out/ut ga/ an! !eman!(pullinfation$ as well as cost(push infation



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Growth elow the trend growth rate$ whe#e A= an! so actual"#owth is below )*AS and the economy s potential growth rate. Thisleads to a negati#e out/ut ga/ an! so unemployment an!!ownwa#! p#essu#e on p#ices&

G*, Measurement ,rolems

1. 0lack Econom%) This e8ists because when the output o some"oo!s an!se#ices is !elibe#ately not !ecla#e!& This can be o# 2#easons$ to aoi! ta8$ o# e#ample +cash in hand deals with plumbersetc. In addition some people may not !ecla#e economic actiity i thatactiity is ille"al$ o# e8ample !#u" !eale#s will not !ecla#e thei#income&

As people will spen! any income they mi"ht #eceie in thisun!ecla#e! way$ a "ap will ten! to e8ist between the 0nal 0"u#eso# the e8pen!itu#e metho! an! income metho! o calculatin"7=-& The "ap that e8ists will "ie an in!ication as to the si


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ignores factors such as thedistribution o income, the sizeo the inormal economy, the nature o public spending, suchas on health or education, the size o negative externalities &political reedom.



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Increased Ta. e#enue) 7#eate# economic "#owth coul!#esult in hi"he# ta8 #eenue allowin" the "oe#nment toinc#ease spen!in" on health$ e!ucation o# whatee# else isseen to be a p#io#ity&

"igher Em/lo%ment) Economic "#owth can #esult in "#eate#!eman! an!the#eo#e "#eate# employment&

Increased in#estment as con0!ence imp#oes$ o# !ue to theaccele#ato#$ o# hi"he# p#o0ts o# 0#ms& This means theeconomy will hae mo#e capital pe# wo#+e# an! so hi"he#p#o!uctiity an! mo#e utu#e "#owth&

osts

In3ation) .nc#eases in !eman!$ without a #ise in supply canc#eate !eman!(pull infation 5see A=2 an! A=4 on :RA;?$causin" a #ise in ae#a"e p#ices6$ o# alte#natiely i wa"ep#essu#es pe#sist cost(push infation may occu#&

Non1enewale resources' The use o non(#enewable#esou#ces top#o!uce "oo!s an! se#ices o# use in the cu##ent

time pe#io! means that these a#e unaailable in the utu#ean! so "#owth may not be sustainable&

En#ironmental Costs) As the economy "#ows$ an! outputinc#eases$ manuactu#in" 0#ms may inc#ease pollution$#esultin" in a !ecline in the o"hassu""este! that Economic 7#owth can c#eate competitiep#essu#es between amilies t#yin" to out!o each othe#mate#ially& This can #esult in$ suici!e$ st#ess an! !ep#ession&

!ustainable Economic "ro#th

7oe#nments a#e +een to encou#a"e sustainable economic "#owth#athe# than #api! economic "#owth which #esults #om the #api!!epletion o sca#ce #esou#ces& ;ustainability in pa#t implies the nee!o# #ecyclin" o natu#al #esou#ces such as aluminium$ pape# an!


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"lass$ whilst encou#a"in" the use o #enewable sou#ces o ene#"y o#powe#&



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INFL)TION

.nfation can be !e0ne! as a sustaine! #ise in the a"#ee! "ene#alp#ice leel&

A low an! stea!y infation #ate allows business to maintaincon0!ence in the economy. A high level of inflation& in e#cess of acountry s main trading partners can c#eate p#oblems in competitieness#esultin" in a !ecline in t#a!e&

The main measu#e o infation in the UK is calculate! th#ou"h theuse o the Retail -#ice .n!e8 5R-.6& This is a measu#e o chan"es inthe p#ices o consume# "oo!s bou"ht in the UK&

Calculating the ,I

The R-. is a wei"hte! p#ice in!e8$ so not only must p#ice a#iationsbe obtaine!$ but also wei"hts must be att#ibute! to a#ious "oo!san! se#ices&

.n o#!e# to establish app#op#iate wei"hts the Oce o# >ational

;tatistics 5O>;6 uses the E8pen!itu#e an! oo! su#ey to establishwhat items people buy in what *uantities& App#o8imately 3amilies a#e as+e! to +eep a #eco#! o what they spen! oe# a 2wee+ pe#io!$ an! to "ie !etails o othe# majo# spen!in" such as thetelephone bill&

E8p#esse! as a #action the wei"hts a#e !#aw #om the ino#mation"athe#e! by the O>;&

The O>; will then #eco#! how much the p#ice o some I "oo!san! se#ices hae chan"e! by& This is !ue in a a#iety o locationsth#ou"hout the count#y& .n total app#o8imately ?$ p#ice*uotations a#e collecte! #om ? a#eas a#oun! the UK each month&

inally the pe#centa"e chan"e in p#ice o# each item is multiplie! byits wei"ht&


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Other measures of in3ation

,I -) This measu#e is the R-. minus mo#t"a"e inte#est payments&The#e a#e 2a#"uments o# e8clu!in" mo#t"a"e inte#est&

1. o# compa#ison pu#poses a numbe# o othe# count#ies !o notinclu!e it

2. Mo#t"a"e inte#est payments a#e infuence! by chan"es ininte#est #ates$ so a #ise in inte#est #ates !esi"ne! to #e!uceinfation may hae opposite e%ect o #aisin" it&

The ,an+ o En"lan! ta#"et is 2&B P ?B 5was 2&B P ?B until =ec246 usin" the C-. measu#e o infation&

,I 4) This measu#es the R-. minus mo#t"a"e inte#est payment an!also both in!i#ect an! local autho#ity ta8es& This shows theun!e#lyin" #ate o infation un!isto#te! by chan"es in ta8 o# inte#est#ates&

C,I) This measu#e e8clu!es a numbe# o items that a#e inclu!e! inR-.$ mainly #elate! to housin"& These inclu!e! council ta8 an! a#an"e o owne#(occupie# housin" costs such as mo#t"a"e inte#estpayments$ house !ep#eciation$ buil!in"s insurance& estate agents andconveyancing fees.

The C-. coe#s all househol!s$ while the R-. e8clu!es the top 'B oincome ea#ne#s& The C-. also inclu!es unie#sity accommo!ation andforeign students university tuition ees&

Measurement ,rolems

1. Changes in 5ualit%) Measu#es o p#ice chan"e !o not ta+e intoaccount chan"es in *uality& o# e8ample a compute# is lesse8pensie now in compa#ison to ? yea#s a"o$ but is also a "#eat!eal mo#e powe#ul an! bette# in *uality&

2. $/ecial O6ers, the retail price inde# doesn t make special account forout ofseason !iscounts o# special o%e#s& This may act to #e!ucethe #ate o infation&

3. Changes in e./enditure) althou"h the wei"hts a#e #eiewe!each yea#$ eenthis mi"ht not be enou"h& ;pen!in" patte#ns canchan"e mo#e *uic+ly as new p#o!ucts become aailable&

4. =ue to the limite! numbe# 5I36 o househol!s su#eye!$ the#eis /otentialfor sam/ling error7


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Unit 2 The UK Econom y 6EC02 St Pau ls School 2011


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Causes ofIn3ation

The#e

a#etwomaincausesoinfation)

Cost1/ushin3ation(Th

isiswhencostsop#o!uctio

ninc#ease5o

#e8

ample!uetoh

i"hwa"e!eman!so#awea+en

in"e8chan"e

#atewh

ich

ma+esimpo

#te!#awmate#ialsmo#e

e8pensie6

$an!


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a#ethenpa

sse!ontoconsume#sinth

eo#mohi"he#p#ices&.n

the!ia"#am5#i"ht6$this

isshownbyashittothele

tintheA;cu

#e$w

hichseesp#ic

es#iseto-

2

&

*emand1/ull

in3ation (Thisoccu#swhenA=inc#eases5!ueto

"#eate#consumption$inestment$"oe#nmentspen!in" o#

nete8po#ts6$pushin"a"ainst thelimitsimpose! bythe A;cu#eat ullemployment& .nthe!ia"#am5let6$as A=

shits#omA= to

A=?$thep#ice


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lee l #isesto -2&

C

onse8uenc

esofIn3ation

)ntici/ate

dandunanti

ci/ate

din3ati

on

Anticipate!infationiswhenthe

#iseinthe"ene#alp#iceleel istheone$o#

close totheonee8pecte!& .0#mswo#+e#s

$consume#san!"oe#nmentscanco##

ectlyanticipatethe

infation#at

e$thentheycanta+emeasu#estoaoi!theha#mule%ects&1owee#$

anticipate!infationcanb#in"wit

h itanumbe#op#oblems&Asa#esultobein"cau

"htunawa#es peoplewill be

unsu#ewhat toe8pectaboututu#einfation&This can#esult ina all inconsumption&iscal!#a"mayalsooccu#$o#e8amplewith noa!justment o#ta8th#eshol

!s$hi"he#minimalpay will!#a"incomesintohi"he#ta8ban!san!

the#eo#ewo#+e#s!isposableincomewillactuallyall&

,o##owe

#s ten!to "ainan!len!e#sto lose$whilststate


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pensions#ise

withthe#ateop#icechan"e$theyten!toallbehin!wa"es

$which#isea

ste#thanp#ices&

Cos

tsof)ntici/atedIn3ation

MenuCosts(-#icesbecomeouto!ate

an!nee!tobe

up!ate!Gthecostso!oin"soa#emenucosts&Thiswoul!inclu!ethecosts

o#ep#intin"catalo

"uesNm

enus$up!atin"en!in"machin

esetc&

Unit2TheUK

Econom y6E

C02

10

St PaulsSchool2011


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$hoe Leather Costs ( As infation inc#eases$ theoppo#tunity cost o hol!in" cash inc#eases& -eople will hol!mo#e money in inte#est(bea#in" accounts$ an! mo#e t#ips tothe ban+ will become necessa#y&

Costs of (nantici/ated In3ation

Confusion of Market Mechanism ( Consume# soe#ei"nty#elies onp#o!uce#s #espon!in" to chan"es in p#ices& .nfationmeans that p#o!uce#s may beliee that !eman! o# thei#"oo! has #isen 5an! hence inc#ease p#o!uction6 when$ inact$ only the "ene#al p#ice leel has inc#ease!& As a #esult$sca#ce #esou#ces may not be allocate! in the most ecientway&

(ncertaint% ( .nfation c#eates unce#tainty$ pa#ticula#lyamon"st the business community an! when infationfuctuates$ 0#ms cannot p#e!ict costs an! #eenues an! maybe !ete##e! #om inestment p#ojects&

edistriutional Costs ( .ncome is !ist#ibute!$ away #omthose on 08e! incomes an! those in a wea+ ba#"ainin"position 5e&"& pensione#s6$ to those who can use thei#

economic powe# to "ain la#"e inc#eases in income&u#the#mo#e$ bo##owe#s bene0t as the #eal alue o !ebt ise#o!e!G sae#s lose out&

International Costs ( E8po#ts lose thei# competitieness$whilst impo#tsbecome #elatiely cheape#& The t#a!e positionwill the#eo#e !ete#io#ate$ unless the e8chan"e #ate!ete#io#ates to compensate$ othe# count#ies hae hi"he#infation$ o# e8po#ts !o not sell on the basis o p#ice alone&

)ccelerating In3ation

. o# e8ample infation was #isin" at a aste# #ate each yea#$ i&e& Bin yea# ?$ ?2B in yea# 2 an! ?B in yea# 4 people woul! natu#allye8pect p#ices to continue to #ise& As a #esult they will !eman! hi"he#wa"es$ an! 0#ms may #aise p#ices to coe# e8pecte! hi"he# costs$an! consume#s may b#in" o#wa#! consumption beo#e p#ices #ise&All o this will cont#ibute to inc#easin" infation&


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Unit 2 The UK Econom y 6EC02 11 St Pau ls School 2011


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EM,LO4MENT )N*(NEM,LO4MENT

Unemployment will #esult in output bein" less than potential output$ta8 #eenue will be #e!uce! an! "#eate# state bene0ts will hae tobe pai!& The unemploye! may e8pe#ience inc#ease! inci!ence o

!io#ce$ an! mental b#ea+!own in a!!ition to allin" behin! int#ainin"$ so ma+in" it ha#!e# to "et employment in the utu#e&

Measures of unem/lo%ment

.n the UK the#e a#e two main measu#es o unemployment& Theclaimant count$ an! the labou# o#ce su#ey&

The claimant count is the numbe# o people claimin" the jobssee+e#s allowance& .t is easy an! cheap to collect$ howee# it hasbeen c#iticise! o# a numbe# o #easons& .t mi"ht actually oe#statethe numbe# o people unemploye!& o# e8ample some o thosecollectin" bene0t may not be actiely see+in" wo#+& .n a!!itionthe#e a#e "#oups o people who hae p#o!uctie potential$ whowoul! li+e to wo#+ but a#e e8clu!e! #om the calculations& o#e8ample those oe# I$ an! those un!e# ?$ in a!!ition to those on"oe#nment t#ainin" schemes&

The alte#natie metho! a!opte! in ?JJ is the :abou# o#ce ;u#ey&This is base! on the .nte#national :abou# o#"anisations !e0nition ounemploymentG this inclu!es all people o a wo#+in" a"e who a#ewithout wo#+ !u#in" a speci0e! pe#io! an! aailable to wo#+ in the

ne8t two wee+s$ hain" sou"ht wo#+ in the p#eious ou# wee+s&Typically the .:ON:; measu#e o unemployment is "#eate# than theclaimant count measu#e$ as it inclu!es a "#eate# numbe# o theunemploye!$ as illust#ate! below&

This metho! is base! on a su#ey o si8ty thousan! househol!s 5? people6$ as+in" whethe# they hae a job$ an! what steps theyhae ta+en to see+ employment& As a #esult o this metho! bein"base! on all inte#national stan!a#!s$ compa#isons with othe#


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count#ies a#e easie#&Unit 2 The UK Econom y 6EC02 12 St Pauls School 2011


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Measurement ,rolems

1. . the Claimant count is use!$ ee#ytime "oe#nment chan"es theeli"ibility o# claims$ the unemployment 0"u#es will chan"e e&"&as occu##e! when males oe# the a"e o I we#e e8clu!e!&

2. . the :abou# o#ce ;u#ey is use!$ the sample *uestione! maynot be t#uly #ep#esentatie&

3. Hhichee# measu#e is use! it can be !icult to assess whethe#those inclu!e! in the unemployment 0"u#es a#e "enuinelyunemploye!&

Conse8uences of (nem/lo%ment

To the $ndividual

:oss o ea#nin"s means a lowe# stan!a#! o liin"&

An unemploye! pe#son loses wo#+ s+ills$ thus !ec#easin"thei# chances o becomin" employe! a"ain&

The unemploye! ten! to eel useless an! not a pa#t osociety& This can lea! to p#oblems such as !ep#ession$ wo#sehealth$ lowe# lie e8pectancy&

To the Economy

The#e is lost ta8 #eenue to the "oe#nment but mo#espen!in" on bene0ts& This coul! lea! to a bu!"et !e0cit&

The#e can be a ne"atie multiplie# e%ect an! so lowe#!eman! o# local "oo!s an! se#ices$ housin" etc&

:oss o national output Q this coul! lea! to a ne"atie output"ap o# i people lose s+ills o# leae labou# ma#+et thenhyste#esisS coul! occu# an!:RA; shit inwa#!s&

A#eas o hi"h unemployment ten! to su%e# #om inc#ease!c#ime$ iolence an! an!alism&


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0)L)NCE OF,)4MENT$

The ,alance o -ayments is a #eco#! o all moneta#y paymentsbetween one count#y an! the #est o the wo#l! oe# a pe#io! o time&The ,alance o -ayments is ma!e o

3 sections)

1) The Cu##ent Account2) The Capital Account3) The inancial Account

.n a!!ition to these the#e is also the .nte#national .nestmentposition$ which shows the leel o e8te#nal assets an! liabilities atthe en! o the calen!a# yea#&

Current )ccount

The cu##ent account is ma!e up o ' main pa#ts&

1) Trade in Goods) This coe#s the e8po#t an! impo#t o "oo!san! se#ices&

2) Trade in $er#ices) This coe#s the e8po#t an! impo#t ose#ices such as shippin"$ 0nancial se#ices$ insu#ance an!tou#ism&

3) Income 3ows) income #om inestments is the main

component ( inte#est$ p#o0ts an! !ii!en!s 5.-=6 #omoe#seas assets such as ban+ !eposits$ UK owne! companiesoe#seas$ sha#es *uote! on o#ei"n stoc+ ma#+ets but hel! byUK #esi!ents 5less .-= ea#ne! in the UK by o#ei"n hel!assets6&


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4) Current transfers) These inclu!e cent#al "oe#nment t#anse#s$inclu!in" for e#ample the - s net contribution to the /uropean -nionand aid which



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is p#oi!e! to !eelopin" count#ies$ an! net #emittances #ommi"#ants an! immi"#ants& .n this cate"o#y$ no "oo!s o# se#iceis bein" e8chan"e!$ just a fow o money&

The Ca/ital )ccount

This is a mino# pa#t o the ,alance o -ayments$ an! inclu!es"oe#nment inestment "#ants$ an! the pu#chase o# sale o non(p#o!uce!$ non 0nancial assets such as patents$ t#a!ema#+s an! lan!o# o#ei"n embassies&

The Financial )ccount

This was p#eiously +nown as the capital account$ an! #ee#s to thefows o money ente#in" an! leain" the count#y& This can ta+e a

numbe# o o#ms$ inclu!in" the pu#chase an! sale o companies an!o#ei"n e8chan"e&

Net errors and omissions

o#me#ly +nown as the balancin" item$ this 0"u#e is inclu!e! toensu#e that the cu##ent account$ plus the capital account plus the0nancial account e*uals


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4. ,oor non /rice com/etiti#eness o UK "oo!s in te#ms o*uality$!esi"n$ #eliability$ !elie#y times$ ate# sales se#icemay mean the taste o# UK "oo!s is low&

1owee#$ the cu##ent !e0cit is not such a p#oblem i)

it is only sho#t te#m an! is cause! by hi"h #ates o economic"#owth which shoul! subsi!e

i it can be easily 0nance!$ pe#haps by inestment infows onthe 0nancial account

the !e0cit is cause! by the impo#t o #aw mate#ials an!

capital e*uipment which will be use! to p#o!uce 0nal "oo!so# e8po#t o# helps to #aise p#o!uctiity

,olicies to remo#e the Current )ccount de2cit

Althou"h the#e a#e see#al policy options$ inclu!in" #e!ucin" A= an!consumption an! so impo#t spen!in"$ o# !ealuatin" the e8chan"e#ate o# bein" p#otectionist$ the /olic% fa#oured % the (


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numbe# o p#oblems with 0#ms t#a!in" ab#oa! 0n!in" it !icultto plan ahea!$ pa#ticula#ly as they will not +now how much theya#e to #eceie o# owe in te#ms o thei# !omestic cu##ency&



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2. T#a!e Q unce#tainty about the amount to be pai! may mean thatt#a!e will be #e!uce!$ cheape# impo#ts may be sou"ht&

3. -#o!uctie potential Q p#o!uctie potential may !ecline as a

#esult o 0#ms "oin" out o business when the e8chan"e #ate ishi"h$ as they 0n! it ha#! to e8po#t "oo!s& .nestment may alsoall as the chances o a!!itional output bein" sol! !eclines&

CONFLICT$ INM)COECONOMIC,OLIC4

7oe#nments will 0n! it ha#! to achiee all ou# mac#o(economicobjecties at once& o# e8ample a "oe#nment may wish to #e!uceunemployment by #aisin" a""#e"ate !eman!& This will hae the!esi#e! e%ect$ but also encou#a"e 0#ms to e8pan! output$

accele#atin" economic "#owth& This may howee# #esult in !eman!(pull infation& The inc#ease in "#owth may #esult in an inc#ease in the!eman! o# "oo!s #om ab#oa! an! #aise impo#ts causin" a !e0cit&

o# the "oe#nment to #e!uce infationa#y p#essu#e an! co##ect any!e0cit that e8ists on the cu##ent account a "oe#nment mi"ht!eci!e to #e!uce a""#e"ate !eman!& This policy o infatin" theeconomy$ ollowe! by !efation is #ee##e! to as the stop("o cycle&

7oe#nments oten !eci!e that sac#i0cin" one policy objectie is ap#ice wo#th payin" to satisy the othe#s& o# e8ample i

unemployment is hi"h$ then a #ise in A= will act to #e!uceunemployment$ but #esult in #aise! p#ices& The t#a!e(o% betweenunemployment an! infation e8ists&



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)GGEG)TE*EM)N*

A""#e"ate !eman! can be !e0ne! as the total !eman! o "oo!san! se#ices in an economy& .t consists o ' components$ an! isusually e8p#esse! as)

A= F C @ . @ 7 @ 59(M6

whe#e C Fconsume#spen!in"

. Finestmente8pen!itu#e

7 F"oe#nmentspen!in"

59(M6 F The net e8pen!itu#e on e8po#ts an! impo#ts

The A= cu#e !epicte! in i"u#e 2$ shows the leel o output o# Real7=- at a "ien p#ice leel&

The A= cu#e is !ownwa#! slopin" o# 4 main #easons)

1. E8po#ts o "oo!s an! se#ices a#e li+ely to be hi"he# when thep#ice leel is low as they a#e mo#e inte#nationally competitie&.mpo#ts$ on the othe# han! a#e li+ely to appea# mo#e e8pensie$!omestic !eman! may the#eo#e t#anse# into !omesticallyp#o!uce! "oo!s a!!in" to the inc#ease in A=&

2. If the average price level were to fall& then people s purchasing power withtheir !isposable income woul! inc#ease$ allowin" them to #aisethei# spen!in" an! so a!!in" to A=&

3. !eople s e#pectations also play a part in the shape of the A curve. If pricesare low people will ten! to e8pect p#ices to #ise in the utu#e$ an! so


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b#in" o#wa#! thei# spen!in"& This will act to #aise A=& On the othe#han!$ i p#ices a#e hi"h$ an! e8pecte! to all$ people will !elayspen!in" an! so !eman! will be low&



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*eterminants of Consumer $/ending

Consume# spen!in" is the most si"ni0cant component o A""#e"ate=eman!& A +ey !ete#minant o this spen!in" is the leel o

!isposable income$ in othe# wo#!s income ate# the a!!ition o statebene0ts an! !e!uction o !i#ect&

The ma#"inal p#opensity to consume 5M-C6 is the amount o newincome that is spent on consumption&

At low leels o income any inc#ease in income is ta+en up enti#elyon inc#ease! consumption$ the M-C is ? pe# cent& ;o i a amily ise#y poo#$ an! it #eceies some a!!itional money$ this will be spenton oo!$ clothin" an! othe# essential items& As liin" stan!a#!s an!income #ises the M-C will all$ yet #emain hi"h$ #efectin" the ability

to sae$ so the M-C may be B& As incomes inc#ease$ the e#y #icha#e unconce#ne! by inc#eases in thei# income$ as they a#e al#ea!yspen!in" to meet thei# nee!s& Most o the new income #eceie! isthe#eo#e sae!&

Ultimately as !epicte! in 0"u#e 4 Q as income #ises so !oesconsumption$ een i it is at a slowe# #ate$ thus the M-C stea!ily!eclines&

whe#e a F Autonomous consumption Q spen!in" whichoccu#s at

income 0nance! by bo##owin"$ usin" sain"s o# state bene0ton basic oo!$ clothin" an! shelte#

Other factors a6ecting consum/tion

. the "oe#nment inc#eases ol! a"e pensions an! inc#eases ta8th#eshol!s o# low income ea#ne#s$ whilst inc#easin" ta8es o# thehi"hest income ea#ne#s$ total !isposable income may #emain thesame& 1owee# consume# spen!in" will inc#ease$ as will a""#e"ate


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!eman!& This will #esult in a #i"htwa#!s shit o A=&



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1i"he# inte#est #ates will #e!uce consume# spen!in"$ an! #e*ui#ethose with a mo#t"a"e to ma+e hi"he# monthly #epayments$the#eo#e consume# spen!in" alls$ as !oes a""#e"ate !eman!$which #esults in a letwa#!s shit o the A= cu#e&

*eterminants of In#estment E./enditure

.nestment by the p#iate secto#$ a#ies ine#sely with the #ate ointe#est$ i&e& the cost o bo##owin" money& . inte#est #ates #ise$businesses 0n! that ewe# p#ojects yiel! a sucient #ate o #etu#no# the inestment to be p#o0table& This concept is #ee##e! to oe#the Ma#"inal Eciency o Capital 5MEC6& . #ates o inte#est #ise an!inestment alls$ the A= cu#e will shit to the let&

The accele#ato# p#inciple also infuences the leel o inestment& .t iselt that will #eact to inc#eases in !eman! an! national income byinc#easin" thei# !eman! o# capital "oo!s to meet this "#owth& The

#esult o this inc#ease in . is a shit in the A= cu#e to the #i"ht&

Accele#ato#) . F a 5t(t(?6

. F .nestment by 0#ms

a F Capital0output #atio

tF .ncome in cu##ent time pe#io!

t(?F .ncome in p#eious time pe#io!

Investment is therefore a function of +a & where the capital (output #atio#ep#esentsthe amount o capital i&e& machine#y #e*ui#e! to meet aleel o output& o# e8ample shoul! D4 be #e*ui#e! to #aise outputby D? pe# yea# then the capital(output #atio is e*ual to 4&


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The#eo#e . F a 5t(t(?6

o#. F4

5D?AAm (DEAm6

ie

. F

4 5D2m6

the#eo#e . F DIm

Anothe# acto# which has an impact on inestment is the #ole oe8pectations in the future. eynes referred to this as +Animal Spirits & withfirms often basing investment plans on all so#ts o e8te#nal acto#s whichmay a%ect business well bein"&

*eterminants of Go#ernment $/ending

7oe#nment spen!in" is pa#ticula#ly sensitie to a chan"e ineconomic policy on the pa#t o "oe#nment in o#!e# that manyachiee thei# pa#ticula# mac#o(economic objecties& On the othe#han! it is impo#tant to #emembe# that the patte#n o ta8ation an!e8pen!itu#e may be manipulate! in line with political belies an!aspi#ations&

*eterminants of e./enditure on E./orts andIm/orts

1ne of the key determinants of a country s trade position& is the value of itscu##ency$ its e8chan"e #ate& o# e8ample i apanese impo#te#s a#epu#chasin" ;cottish whis+y they will be o%e#in" en o# the "oo!s$whilst the ;cots will see+ payment in D& The #elatie st#en"th o theen will !ete#mine how much whis+y the apanese will !eman!$ an!the#eo#e the amount the ;cots can e8po#t&

.nte#est #ate chan"es can hae an infuence on the e8chan"e #ate$ a#ise in the UK #ate o inte#est will #esult in 1ot Money fowin" in$ 51otMoney is money that is hi"hly li*ui!$ see+in" out the hi"hest #ateso #etu#n anywhe#e in the wo#l!6 an! the#eo#e an inc#ease in the

!eman! o# D$ thus #aisin" the alue o the D an! the e8chan"e #ate&This #ise in the alue o the D means that it is easie# 5an! cheape#6to impo#t "oo!s an! mo#e e8pensie to e8po#t "oo!s an! se#ices$hence it is li+ely ou# ,alance o T#a!e will !ete#io#ate&

,eyon! this the othe# main !ete#minant o impo#ts is the leel ooe#all !eman! in the economy& The UK has a #elatiely hi"hMa#"inal -#opensity to .mpo#t 5M-M6 the#eo#e as the leel o incomein the economy #ises$ the !eman! o# impo#ts #ises&


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e%ect& .n a!!ition$ thei# use is li+ely to impin"e on othe# "oe#nmentpolicies because they may inole "#eate# "oe#nment e8pen!itu#e$inte#e#e with othe# social objecties$ inole o#e"oin" ta8 #eenue$o#



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#e*ui#e the #e!uction o inte#est #ates$ when othe# objecties #e*ui#ethe opposite& The#eo#e supply si!e policies a#e !icult to int#o!uce$unce#tain in thei# impact an! may ta+e a lon" time to hae animpact&

Long1un )ggregate $u//l%

%eynesian

The Keynesian :on"(Run A""#e"ate ;upply cu#e contains two mainelements$ an a#ea which #ep#esents unemploye! #esou#ces an! theeconomy ope#atin" below ull capacity 5#e"ion A(, in i"u#e I6 thesecon! element co##espon!s to the economy ope#atin" close to o#at ull capacity& Hith little o# no unemploye! #esou#ces 5#e"ion ,(C ini"u#e I6&

The economy ope#ates at e*uilib#ium$ whe#e a""#e"ate !eman!inte#sects with a""#e"ate supply& .t is clea# at A=$ the economy isnot ope#atin" at ull capacity$ a shit to the #i"ht in the A= cu#e willcause output to #ise$ but with unemploye! #esou#ces still ine8istence p#ices #emain stable& .t is only when the economy #eachesull employment an! the A= cu#e continues to shit to the #i"ht thatp#ices will #ise -?to -22& as a result of the economy s inability to increasesupply at fastenou"h a #ate to meet the #ise in !eman!& At this point$the only way to e8pan! the economy without e8pe#iencin" infationis to employ supply si!e policies an! shit the A; cu#e to the #i"ht$:RA;?to :RA;2&

lassical

The classical lon"(#un a""#e"ate supply cu#e is e#tical$ as a #esulto the belie that the economy always ope#ates at ull employment&


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Any unemployment which e8ists is olunta#y unemployment$ inothe# wo#!s the ma#+et let to itsel woul! be able to



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clea# this unemployment$ howee# wo#+e#s who #emainunemploye!$ acco#!in" to this theo#y$ !o not wish to ta+e theaailable jobs at the p#eailin" wa"e #ate&

Classical economists a#"ue that any e8pansion in A=$ such as A=?toA=2will only #esult in p#ice #ises 5infation6 #om -?to -2& The#eo#e i!eman! mana"ement policies employe! to shit the A= cu#e a#e tobe successully utilise! they must be accompanie! by supply si!epolicies$ which will shit the :RA; to the #i"ht$ :RA;?to :RA;2&

The accepte! #elationship between output an! employment is that$as output inc#eases$ employment inc#eases& 1owee#$ in the lon"(#un i a""#e"ate supply inc#eases$ as a #esult o an imp#oement intechnolo"y o# a bette# e!ucate! wo#+o#ce$ output may inc#easewithout an inc#ease in employment&

T"EM(LTI,LIE EFFECT

Chan"es in A= o# A; may actually hae a la#"e# total e%ect on 7=-than the pa#ticula# ta8 #e!uction o# e8pen!itu#e that set it o%& Thisis +nown as the multiplie# e%ect& The multiplie# can be !e0ne! asthe acto# by which an inc#ease in one o the acto#s o a""#e"ate!eman! is multiplie! by to calculate the total #ise in nationalincome& The multiplie#$ in a close! economy can be calculate!th#ou"h the o#mula

1

o#

1

1 MPC MPS

Hhe#e M-C is the ma#"inal p#opensity to consume$ an! the M-; isthe ma#"inal p#opensity to sae& .n a close! economy the M-C an!M-; must always total ?&


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The#eo#e i the M-C F & then the multiplie# can be calculate! as&



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1o#

1F

1 F

1 MPC 1 0!8 0!2

The#eo#e a #ise in A= o D2m will #esult in a total #ise in nationalincome o D?m& .n the mo#e #ealistic open economy themultiplie# o#mula ollows the same p#inciple but inclu!es bothlea+a"es an! injections&

1

o#

1

"1 MPJ # "1 MPCMPI MPG MPX #

o#

1

o#

1

MPL

"MPS MPT MPM #

. o# e8ample the "oe#nment we#e to inc#ease e8pen!itu#e onhealth an! e!ucation$ this will not only mean that the sala#ies onu#ses an! teache#s inc#ease but also the#e is an inc#ease ine8pen!itu#e on school buil!in"s$ compute#s$ hospitals an! scanne#s&This inc#ease in e8pen!itu#e is #ee##e! to as the 0#st #oun! e%ect&1owee# with thei# inc#ease! sala#ies$ teache#s an! nu#ses willinc#ease thei# spen!in" on clothin"$ cinemas an! #estau#ants& Thisinc#ease in !eman! #esults in a secon! #oun! e%ect$ which is a!!e!to by the buil!e#s o the schools$ hospitals$ computes an! scanne#s&u#the#mo#e$ the owne#s o the clothin" manuactu#e#s$ cinemasan! #estau#ants see thei# income #ise an! thei# pu#chasin" powe#inc#ease$ this is the thi#! #oun! e%ect&

These successie #oun!s o e8pen!itu#e ca##y on an! woul! seem tohae the potential to ca##y on o#ee#$ howee# thei# impact!iminishes with each #oun! because o the lea+a"es inhe#ent in thesystem&

1owee# the multiplie# wo#+s$ its impact must be ta+en into accountby policyma+e#s when inesti"atin" the impact on the economy o achan"e in A=&



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M)COECONOMIC,OLIC4IN$T(MENT$

Fiscal ,olic%

iscal policy #ee#s to the manipulation o ta8ation an! "oe#nmentspen!in" to achiee mac#oeconomic objecties& .t is use! by"oe#nments to infuence the leel o A= in the economy an! it canalso a%ect a""#e"ate supply th#ou"h chan"in" incenties acin"0#ms an! in!ii!uals&

A boom in the economy will #aise employment$ but at the sametime$ because o inc#ease! incomes an! e8pen!itu#es$ the"oe#nment automatically #eceies mo#e #eenue #om income ta8$e8cise !uty an! AT& .n a!!ition$ "oe#nment spen!in" on socialsecu#ity o# the unemployment alls&

On the income si!e the +ey a#eas that may be manipulate! a#eincome ta8$ AT$ e8cise !uties an! national insu#ance cont#ibutions&An inc#ease in almost all types o "oe#nment e8pen!itu#e will haean impact on a""#e"ate !eman!$ but othe# inc#eases may hae a"#eate# impact on a""#e"ate supply&

To boost a""#e"ate !eman! the "oe#nment has two main options$eithe# cuttin" ta8es o# inc#easin" e8pen!itu#e& Consume#s will hae"#eate# !isposable incomes than beo#e$ an! as a #esult consume#e8pen!itu#e #ises an! a""#e"ate !eman! is booste!& =isposableincomes #isin" will #esult in a hi"h p#opo#tion bein" !epen!ent upon

the ma#"inal p#opensity to consume& . on the othe# han!$"oe#nment we#e to cut e8cise !uties$ the p#ice o pet#ol$ oninelastic "oo!s will all& As a #esult consume#s will hae mo#e moneyto spen! on othe# "oo!s an! se#ices$ #aisin" consume# spen!in"an! a""#e"ate !eman!&

Monetar% ,olic%

Moneta#y -olicy is the manipulation o inte#est #ates$ the moneysupply an! e#change rates to achieve government s macro (economicobjecties& Theimpo#tance o moneta#y policy oe# the last 2 yea#s

has #isen$ as successie "oe#nments hae sou"ht to combatinfation&

All th#ee moneta#y a#iables 5money supply$ inte#est #ates an!e8chan"e #ates6 a#e inte#(#elate! an! u#the#mo#e hae an impacton a""#e"ate !eman!&

. the "oe#nment we#e to p#int money$ o# e8ample$ to 0nance aninc#ease in spen!in"$ the money supply woul! inc#ease& The #ate iinte#est woul! all an! as a conse*uence A= woul! shit to the #i"ht&The impact o too much money bein" p#inte!$ an! not enou"h

"oo!s to meet this inc#ease in !eman! is infation& 1owee#$ as the#ate o inte#est alls$ the e8chan"e #ate will !ep#eciate as hot moneyfows out o the economy& E8po#ts will become mo#e competitiean! #ise$ an! impo#ts mo#e e8pensie$ with withe# !elaye! allin" o#i they a#e inelastic the p#ice o the impo#ts #isin"& Eithe# way theimpact o this chan"e will place a!!e! p#essu#e on a""#e"ate


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!eman!&



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This same se#ies o eents woul! apply i the "oe#nment we#e tolowe# the inte#est #ate$ o# sell D on the o#ei"n e8chan"e ma#+et an!!ep#eciate the D&

$u//l% $ide ,olicies

A wi!e(#an"e o supply si!e policies a#e potentially aailable$ thesepolicies a#e much mo#e ocusse! in thei# objecties$ althou"h theycan be e8pensie to int#o!uce an! hae limite! an! #elatielyunce#tain lon"(#un e%ects on the economy& The aim o "oe#nmentwhen usin" supply si!e policies is to #emoe ma#+et impe#ectionan! #est#ictie p#actices so that the economy can ope#ate in a mo#eecient manne#&

,ro#iding incenti#es to work

The "ui!in" p#inciple he#e has been to encou#a"e mo#e people tojoin the labou# o#ce an! b#in" about an inc#ease in output& The:abou# "oe#nment has int#o!uce! the wo#+in" amilies ta8 c#e!it tosupplement wo#+in" amilies income an! inc#ease the numbe#pa#ticipatin" in the labou# ma#+et&

,y #e!ucin" income ta8$ the "oe#nment can also #aise theincentie o# in!ii!uals to p#oi!e thei# labou#& :a%e# su""este!that in!ii!uals woul! be willin" to o%e# mo#e hou#s o labou# ita8es ell$ whilst enablin" the "oe#nment to ta+e in mo#e #eenue$

as illust#ate! in i"u#e ?&

Education and Training

Many people who a#e unemploye! lac+ the s+ills necessa#y to obtaina job$ pa#ticula#ly those ?I yea# ol!s leain" school with ew i any

*uali0cations o# those who hae unemploye! o# some time& Thep#oision o t#ainin" oppo#tunities will #e!uce s+ill sho#ta"es in theeconomy$ ma+in" the wo#+o#ce mo#e e%ectie& Recent yea#s haeseen many schemes !esi"ne! to p#omote e!ucational oppo#tunitieso# the youn"$ th#ou"h T#ainin" an! Employment A"encies$ the >ew=eal$ an! outh T#ainin" ;cheme&


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Trade (nion eform

,y #est#ictin" the supply o wo#+e#s$ t#a!e unions see+ to inc#easewa"es o# thei# membe#s$ but at the cost o unemployment& .t isa#"ue! that the e8istence o t#a!e unions see+s only to inc#ease

costs$ #e!uce eciency an! inte#national competitieness& =u#in"the last 2 yea#s the#e has been a succession o employment acts!esi"ne! to #e!uce the impact o t#a!e unions& This has seen thenumbe# o !ays lost th#ou"h st#i+e action all !#amatically #om thewate#she! e#a o the late ?J3s&

,ri#atisation and *eregulation

Un!e# p#iate owne#ship$ companies a#e mo#e ecient$ mo#ecompetitie an! elt to be less o a !#ain on the public pu#se& .n thepe#io! since ?J3J p#iatisation has been e8tensie an! inclu!in"

some hi"h p#o0le p#o"#ammes o !enationalisation$ such as ,T$,7as$ an! the #ailways& Th#ou"h p#iatisation the#e has been a"#eate# moement towa#! p#iate in!ii!uals ownin" sha#es$ a!!in"to the incentie o# these 0#ms to imp#oe thei# eciency$ an!maintain "#owin" p#o0ts&

=e#e"ulation$ the #emoal o ba##ie#s to ente# an in!ust#y$ has alsota+en place$ c#eatin" a "#eate# competitie eni#onment$ o# in!ee!has cont#actin" out o actiities no#mally un!e#ta+en by the p#iatesecto#$ such as hospital an! school cleanin" an! cate#in"&

)//lication of the )*=)$ model

The policies employe! to infuence A= an! A; !o not ope#atein!epen!ently& . the "oe#nment t#ies to boost a""#e"ate !eman!in the economy by lowe#in" ta8es$ this will #aise consumption an!the !eman! o# money$ with the #esult that inte#est #ates must #ise&The #ise in inte#est #ates will #esult in a all in A= as both inestmentan! consumption a#e hit by the #ise in inte#est #ates& ;o a policy!esi"ne! to #aise A= can hae the opposite e%ect$ o# at the e#yleast see its positie impact miti"ate! by the e%ects o othe#a#iables& The inte#est #ate #ise will also hae an impact on the

e8chan"e #ate$ causin" e8po#ts to all an! impo#ts to #ise&

u#the#mo#e i the "oe#nment we#e to attempt to infuence A= byinc#easin" spen!in" th#ou"h bo##owin" this may also cause inte#est#ates to #ise& ,y bo##owin" the "oe#nment is ente#in" the moneyma#+et$ an! #e!ucin" the aailable un!s o# p#iate 0#ms to bo##ow$which means that 0#ms must compete to bo##ow o# inestmentp#ojects$ causin" the p#ice$ i&e& the #ate o inte#est to #ise& This is#ee##e! to as c#ow!in" out$ an! is a conce#n o many moneta#isteconomists when a!isin" "oe#nment not to inc#ease the publicsecto# net cash #e*ui#ement 5-;>CR) 7oe#nment bo##owin"6&

The application o any policies to infuence A= o# A;$ such as 0scal$moneta#y o# supply si!e policies inoles a time la"& ;ome policieswill un!oubte!ly hae a mo#e imme!iate e%ect$ such as chan"es inuel !uties an! AT$ while chan"es to "oe#nment spen!in" o# !i#ectta8es$ ta+e much lon"e# to hae an e%ect on the


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mac#o(economy& The ,an+ o En"lan! estimates it can ta+e between? months an! 2 yea#s to witness the impact o a chan"e in inte#est#ates&

;upply si!e policies ten! to be a lon"(te#m measu#e an! can be!icult to p#e!ict the outcome o successully$ as they #e*ui#est#uctu#al chan"es to be ma!e to inc#ease a""#e"ate supply in theeconomy&

Table ?$ below p#oi!es a summa#y o the policies a "oe#nmentmi"ht a!opt to achiee thei# mac#o(economic objecties&

Ojecti#e $ ,olicies L ,olicies ,rolems

educe ?& cut !i#ect an! ?&E!ucation an!

?& ;ho#t #un the#ise

(nem/lo%ment7 in!i#ect ta8 t#ainin" o# in A= may cause

2& #aise 7otspen!in" st#uctu#ally infation

Aim to shit) 4& cutthe#ate o unemploye! 2& >ot all the

A= to #i"ht an! inte#est 2& Re!uce social unemploye! canA; to #i"ht secu#ity payments #ealistically be

#et#aine!

educe In3ation ?&Raise !i#ect an!

?& Remoe#est#ictie ?& App#eciation o

in!i#ect ta8 p#acticesE8chan"e #ate Fall in

Aim to shit)2& Cut 7otspen!in"

2&-#iatisation e8po#ts

A= to let an! 4&Raise

the#ate o

2& Re!uce!!eman! in

A; to #i"ht inte#esteconomy Funemploymenti&e& The

-hillips cu#e#elationship

educe0alanceof ?&Raise !i#ectta8ation

-#omoteinte#national

Unemployment in;R

,a%ment de2citcuttin" = o#M

competitieness

2&Cut #ate ointe#est)

Aim ;R) ;hit A= to letto 4&

=ep#eciatecu##ency

cut = o# M$ but ;hitAR an! #aise 9to #i"ht in the :R as 9#ise;hit the A; to #i"ht


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,olicies to reduce unem/lo%ment

iscal an! moneta#y policies can be applie! in the sho#t(#un toinc#ease a""#e"ate !eman! an! so #e!uce unemployment& 1owee#this can #esult in a #ise in p#ices$ ie& infation& This t#a!e(o% is

#ee##e! to as the ,hilli/s Cur#e$ an! su""ests that it is i#tuallyimpossible to hae both low unemployment an! infation$ an!ce#tainly this is the case i supply si!e policies a#e not use!&

Unit 2 The UK Econom y 6EC02 2 St Pau lsSchool 2011


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. inte#est #ates a#e cut to #e!uce the unemployment$ consumption$inestment an! e8po#ts will #ise$ #aisin" a""#e"ate !eman! an!puttin" p#essu#e on p#icesG uellin" infation in the !omesticeconomy& .n the lon"(#un this p#oblem with infation can beoe#come th#ou"h the use o supply si!e policies&

,olicies to control in3ation

.n #ecent yea#s the "oe#nment has ha! as its p#inciple economicobjectie the aim o law an! stable infation& To cont#ol infation"oe#nments hae moe! away #om the use o 0scal policy to usin"moneta#y policy$ th#ou"h #e"ula# chan"es in inte#est #ates& This tas+has been in the hands of the 3ank of /ngland s 4onetary !olicyCommittee$ since the ,an+ was "ien in!epen!ence an! a ta#"et o2&B in ?JJ3&

,olicies to /romote Economic Growth

Most "oe#nments see+ to p#omote economic "#owth as a means toimp#oe liin" stan!a#!s& ,y inc#easin" the *uantity an! *uality oacto#s o p#o!uction the economic "#owth can be achiee! th#ou"han e8pansion o the --& This inc#ease in *uality an! *uantity can beachiee! th#ou"h the employment o supply si!e policies$ such ase!ucation an! t#ainin" !esi"ne! to imp#oe p#o!uctiity pe# wo#+e#&

,olicies to a6ect the 0alance of ,a%ments

The UK has e8pe#ience! a ,alance o -ayments !e0cit in most o thelast 2 yea#s& 1owee#$ the impo#tance o this as a "oe#nmentobjectie in #ecent yea#s has !ecline!$ in pa#t because the !e0cit#emains a e#y small p#opo#tion o 7=- an! also its "#owth iscontinuin" to be mana"e!&

.n theo#y the best way to cont#ol a balance o payments !e0cit is toapply 0scal an! moneta#y policies to !ep#ess the economy bycuttin" A=$ an! so cut impo#ts& .n the lon"(#un supply si!e policiesconcent#atin" on an imp#oement o competitieness coul! #esult inan inc#ease in e8po#ts& This is a lon" p#ocess$ which may coinci!e


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with othe# count#ies see+in" to inc#ease thei# competitieness&


macro unit 2 6ec02 revision notes 2011

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