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No one here does economics?
- Thread starter Louise29
- Start date
I find economics easy, to me its mostly common sense that you have to apply to situations. The only thing i hate is the supply and demand diagrams xD
what im going to revise from is the study guide made FOR the big black book of moynihan by moynihan. It has pretty much everything even PPQ nad model answers
what im going to revise from is the study guide made FOR the big black book of moynihan by moynihan. It has pretty much everything even PPQ nad model answers
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can u plzz send me a link of the ebook for this study guide please!!
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umair1161 I don't mean to be mean or anything.... But don't you think it is a "little" too late to be looking into books and study guides when exam is in less than 5 days?
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I do too!
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the thing is that.... i just cant do past papers for eco....i just cant.....whenever i do it....i have my teacher criticizing me and therefore....i'll just stick to the books and try my best!
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Past papers do help a LOT, and if it does help, teacher's criticizing doesn't matter.It's your paper man , just try your best.
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Past papers do help a LOT, and if it does help, teacher's criticizing doesn't matter.It's your paper man , just try your best.
alright....i shall try... :/
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Is there any predicted topics?
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same here
but notes needed
but notes needed
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i go through the notes given by the school.....
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inflation
job net advantages
trade barriers
tax and subsidy to industries
demand and supply
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they are like 3 books
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wait i have got
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do u know how to insert a file?
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Why is the government involved in the economy
Some abbreviations used:
X = exports
M = imports
B of P = balance of payments
GDP = gross domestic product
INTRODUCTION
1. Why does the government become involved in the economy?
Since John Maynard Keynes’ work, published in the 1930s, we know how we can intervene to reduce unemployment etc., – we have a good theoretical model that helps us to understand how the economy works.
Increasingly since World War Two (1939-45) it is seen as a task of the government to intervene and work more actively to improve things in general. Interventionism is now expected.
The natural working of the economy can sometimes give undesirable or unacceptable results, such as mass unemployment or inflation.
Because what is happening, or government fears is about to happen, is not wanted. For example, inflation is felt to be too high or there is a fear that it will increase; or balance of payments is worsening.
Note: since the time of Prime Minister Margaret Thatcher (UK) and President Ronald Reagan (US), in the late 1970s and the 1980s, efforts have been made to reduce the amount of government intervention. However, it sometimes seems rather difficult to reduce the share of government in the gross domestic product. The use of freer markets has definitely increased – but the government share of GDP seems to have increased too.
2. At the micro level: the government wishes to make the market mechanism work better.
What main areas of the micro-economy does the government look at or tackle?
Monopoly elements or market dominance. Externalities.
Public goods. Public goods. Merit goods.
De-merit goods. Information failures. Factor immobility.
Undesirable income and wealth distribution.
That is, the government looks at all the major elements that we are studying!
3. At the macro level : the government wishes to modify some important areas.
What does the government look at or tackle at the macro level?
Inflation (usually they prefer a low figure, e.g. below 3% ). Unemployment (they usually prefer it to be low, e.g., below 4%).
Economic growth (they usually prefer it to be reasonably high, e.g., above 2.5%).
Balance of payment (they usually prefer a balance of exports and imports, or perhaps a small export surplus).
The value of the currency which means the price of the pound in international markets (politicians usually prefer it to be high, although a lower figure means that industry benefits as our export goods will be cheaper and so easier to sell abroad).
Allocation of resources (they usually prefer a market solution but it can be whatever the government feels it wants).
Distribution of income (the Labour Party usually prefers a narrow distribution; the Conservative Party perhaps wider? But New Labour seems to accept that a wider distribution of income is quite acceptable).
Standard of living (they usually prefer high).
Taking care of the environment (a relatively new area of concern).
Unwanted fluctuations in any of the above, e.g., if any are felt to be undesirable at the level they are at, the government may step in and try to alter and improve them.
How can government try to manage the economy?
There are two main ways: fiscal policy and monetary policy.
Fiscal policy = taxation largely, plus some subsidies. This label also includes government spending these days; once it was separated out in text books as “direct action”, “government spending” or a similar phrase.
Monetary policy = changing the money supply or the rate of interest to alter the level of aggregate demand.
NOTE: Since 1997 this power was removed from government and given to the Monetary Policy Committee of the Bank of England. The government is represented on this and can strongly influence its decisions but not control it.
Both main ways of managing have certain implications attached:
Fiscal policy: tends to have strong resource allocation effects, for example if the government increases the tax on cigarettes, it hits smokers only; if it increase income tax, it ignores those on low incomes who do not pay this tax.
Fiscal changes are usually done in an annual budget in April – so a desired change can be slow to implement, as we may have to wait until April to announce it! Some changes to come might be leaked beforehand. In addition to the budget proper, the country may
have a mini-budget around October. Once a change is announced in the budget, the effect is virtually immediate.
Monetary policy: the government no longer can do this directly – despite its ability to influence the views of the Monetary Policy Committee.
The effects of monetary policy may be slow and it can take between 6 months and 18 months to get the full impact of interest rate changes.
What does government actually do?
1. It may try to increase aggregate demand: it might do this if it feels that unemployment is too high, and inflation is reasonably low; or the standard of living could safely be increased; or economic growth could be higher.
- To increase demand:
- Fiscal policy:
government could decrease some or all (unlikely!) taxes;
and/or spend more government money (the “G” in “C+I+G”
which is the domestic component of aggregate demand).
- Monetary policy: government could lower the rate of interest by persuading the Monetary Policy Committee to act.
2. Alternatively, it may try to reduce aggregate demand: it might do this if it feels that inflation is too high, the employment level is too high, or the balance of payment is poor (imports exceed exports), i.e., we are in the middle of a boom and the government wishes to moderate it.
3. Supply side: the government might try to push the aggregate supply curve out and to the right. This would reduce inflationary pressure.
The government cannot attain all its goals at the same time because
We are not yet smart enough to know how to do this! (And probably never will be.)
Some goals contradict others: to get more of one, we must have less of the other – there is a “trade off” between the two.
Mathematically, it is theoretically not possible to attain ten goals with only two policy instruments.
Examples of what we cannot get at the same time because of conflict
High growth with a good balance of payments (fast growth sucks in imports). Low inflation with low unemployment - but we are better at this than we once
were!
High growth with more equal income distribution. Economic growth naturally causes a widening of income distribution as those who are better, luckier, more intelligent, stronger, better connected, happen to be in the right place at the right time….. pull ahead of the pack. The government may choose to step in to try to equalise it more (New Labour has so far chosen not to do so). It is possible that a wider income distribution actually assists the
attainment of higher economic growth (which is part of the supply side view).
In other words, the goals interact. The pursuit of one goal can harm (or sometimes assist)
the attainment of a different goal. We live in a complex world!
Much of the rest of unit 3 is simply explaining the details of the above. What each item
is; how we define individual items; what the government does with them and how it does this; what diagrams we can draw to illustrate the workings of the economy and then use
them to analyse what is currently happening or what might be done if some other equilibrium position is desired.
Some abbreviations used:
X = exports
M = imports
B of P = balance of payments
GDP = gross domestic product
INTRODUCTION
1. Why does the government become involved in the economy?
Since John Maynard Keynes’ work, published in the 1930s, we know how we can intervene to reduce unemployment etc., – we have a good theoretical model that helps us to understand how the economy works.
Increasingly since World War Two (1939-45) it is seen as a task of the government to intervene and work more actively to improve things in general. Interventionism is now expected.
The natural working of the economy can sometimes give undesirable or unacceptable results, such as mass unemployment or inflation.
Because what is happening, or government fears is about to happen, is not wanted. For example, inflation is felt to be too high or there is a fear that it will increase; or balance of payments is worsening.
Note: since the time of Prime Minister Margaret Thatcher (UK) and President Ronald Reagan (US), in the late 1970s and the 1980s, efforts have been made to reduce the amount of government intervention. However, it sometimes seems rather difficult to reduce the share of government in the gross domestic product. The use of freer markets has definitely increased – but the government share of GDP seems to have increased too.
2. At the micro level: the government wishes to make the market mechanism work better.
What main areas of the micro-economy does the government look at or tackle?
Monopoly elements or market dominance. Externalities.
Public goods. Public goods. Merit goods.
De-merit goods. Information failures. Factor immobility.
Undesirable income and wealth distribution.
That is, the government looks at all the major elements that we are studying!
3. At the macro level : the government wishes to modify some important areas.
What does the government look at or tackle at the macro level?
Inflation (usually they prefer a low figure, e.g. below 3% ). Unemployment (they usually prefer it to be low, e.g., below 4%).
Economic growth (they usually prefer it to be reasonably high, e.g., above 2.5%).
Balance of payment (they usually prefer a balance of exports and imports, or perhaps a small export surplus).
The value of the currency which means the price of the pound in international markets (politicians usually prefer it to be high, although a lower figure means that industry benefits as our export goods will be cheaper and so easier to sell abroad).
Allocation of resources (they usually prefer a market solution but it can be whatever the government feels it wants).
Distribution of income (the Labour Party usually prefers a narrow distribution; the Conservative Party perhaps wider? But New Labour seems to accept that a wider distribution of income is quite acceptable).
Standard of living (they usually prefer high).
Taking care of the environment (a relatively new area of concern).
Unwanted fluctuations in any of the above, e.g., if any are felt to be undesirable at the level they are at, the government may step in and try to alter and improve them.
How can government try to manage the economy?
There are two main ways: fiscal policy and monetary policy.
Fiscal policy = taxation largely, plus some subsidies. This label also includes government spending these days; once it was separated out in text books as “direct action”, “government spending” or a similar phrase.
Monetary policy = changing the money supply or the rate of interest to alter the level of aggregate demand.
NOTE: Since 1997 this power was removed from government and given to the Monetary Policy Committee of the Bank of England. The government is represented on this and can strongly influence its decisions but not control it.
Both main ways of managing have certain implications attached:
Fiscal policy: tends to have strong resource allocation effects, for example if the government increases the tax on cigarettes, it hits smokers only; if it increase income tax, it ignores those on low incomes who do not pay this tax.
Fiscal changes are usually done in an annual budget in April – so a desired change can be slow to implement, as we may have to wait until April to announce it! Some changes to come might be leaked beforehand. In addition to the budget proper, the country may
have a mini-budget around October. Once a change is announced in the budget, the effect is virtually immediate.
Monetary policy: the government no longer can do this directly – despite its ability to influence the views of the Monetary Policy Committee.
The effects of monetary policy may be slow and it can take between 6 months and 18 months to get the full impact of interest rate changes.
What does government actually do?
1. It may try to increase aggregate demand: it might do this if it feels that unemployment is too high, and inflation is reasonably low; or the standard of living could safely be increased; or economic growth could be higher.
- To increase demand:
- Fiscal policy:
government could decrease some or all (unlikely!) taxes;
and/or spend more government money (the “G” in “C+I+G”
which is the domestic component of aggregate demand).
- Monetary policy: government could lower the rate of interest by persuading the Monetary Policy Committee to act.
2. Alternatively, it may try to reduce aggregate demand: it might do this if it feels that inflation is too high, the employment level is too high, or the balance of payment is poor (imports exceed exports), i.e., we are in the middle of a boom and the government wishes to moderate it.
3. Supply side: the government might try to push the aggregate supply curve out and to the right. This would reduce inflationary pressure.
The government cannot attain all its goals at the same time because
We are not yet smart enough to know how to do this! (And probably never will be.)
Some goals contradict others: to get more of one, we must have less of the other – there is a “trade off” between the two.
Mathematically, it is theoretically not possible to attain ten goals with only two policy instruments.
Examples of what we cannot get at the same time because of conflict
High growth with a good balance of payments (fast growth sucks in imports). Low inflation with low unemployment - but we are better at this than we once
were!
High growth with more equal income distribution. Economic growth naturally causes a widening of income distribution as those who are better, luckier, more intelligent, stronger, better connected, happen to be in the right place at the right time….. pull ahead of the pack. The government may choose to step in to try to equalise it more (New Labour has so far chosen not to do so). It is possible that a wider income distribution actually assists the
attainment of higher economic growth (which is part of the supply side view).
In other words, the goals interact. The pursuit of one goal can harm (or sometimes assist)
the attainment of a different goal. We live in a complex world!
Much of the rest of unit 3 is simply explaining the details of the above. What each item
is; how we define individual items; what the government does with them and how it does this; what diagrams we can draw to illustrate the workings of the economy and then use
them to analyse what is currently happening or what might be done if some other equilibrium position is desired.
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Inflation
We need to understand how to measure things like the level of inflation, the level of unemployment, the balance of payments and the size of gross domestic product. Why?
If we are to see how well the economy is doing we need to be able to measure the degree of success.
If we want to know if government should intervene or not – and if so, whether it might wish to expand or to contract the economy.
And, in general terms, we need to understand how we measure so that we know exactly what we are talking about!
We need the information about measurement methods for use when answering exam questions.
Finally, we need to understand how we measure to make sense of the actual models we use later.
THE RETAIL PRICE INDEX
Inflation is an important economic goal and it matters to a lot of people. For such reasons, we have to know how much prices are changing or have already changed, which means that we have to take measurements in some way.
It is clearly impossible to go to each shop in the country and price each item once a month! So we have devised an index to simplify the task. We take a “basket” of goods and services, typical of what people buy, and price these goods and services at a base date. Then we look to see what has happened to the prices of the individual things in the basket since then and tot them up. The government has done this since 1947.
Details: over 600 goods and services go in the basket; once a month we take over
120,000 samples of prices of these 600+ items. This is a bit tricky: the supermarkets, corner shops, 24/7 stores and so forth all have different prices and in addition some areas like London are dearer than others.
Then the statisticians “weight” the items – e.g. housing and transport are more important than salt in people’s budgets, so the important things are weighted more heavily than the unimportant ones. If the price of salt rises by twenty percent it really will not affect us much! But if bus or train fares went up by that percentage it surely would….
If the average rise of all the items, after weighting, is found to have been 0.5% over the month, the government tells us that; it usually also tell us what annual rate of inflation this would represent and how it compares with the same month of the previous year.
At June 2004, the Retail Price Index was up 1.6 per cent over the previous twelve months.
The “RPIX” (which stands for the Retail Price Index Excluding Mortgage Interest Repayments – quite a mouthful!) is a separate measure, which excludes mortgage interest repayments. This is the one that the Monetary Policy Committee focuses on for its policy target, and aims for a rate of 2.5%.
Limitations of the RPI
Not everyone is average, and consumes that exact basket of goods and services, so the RPI does not exactly fit all (but it is close for most!). Pensioners and millionaires obviously have different spending patterns and neither will fit exactly. Pensioners have their own index calculated.
Many goods are “intermediate goods”, e.g., machines to make machines, so these are excluded because they are not “retail”. The underlaying rate of inflation,
which includes the changing prices of everything, can be different from that reported in the RPI.
The basket gets out of date:
o As people change their consumption habits (e.g., there is more foreign travel now than in the 1960s – but rather less after the September 11 New York terrorist bombing).
o New goods and services come onto the market (e.g., DVD players) that were not in the old baskets – so we have to update the basket periodically. This is done each Spring.
o But after we make such a change, strictly we cannot compare the new
price index with the earlier ones, because it covers slightly different goods and services, or we might have altered the weightings used. We still make the comparisons however!
The index does not reflect any quality improvements and these steadily occur.
It is better to think of the RPI as an “estimate” rather than a hard accurate figure. The RPI does not measure the standard of living. It excludes things that have an
important impact on this, such as changes in tax; changes in leisure time; changes
in the physical space available for enjoyment; and changes in the quality of goods and services.
Uses of the Retail Price Index
Unions look at it and may base their wage claims on it.
The government looks at it, to decide if there is a need to intervene and manage the economy (our main interest!).
Journalists look at it, to write articles explaining to people what is happening and their comments and advice might be considered by the government.
Economists look at it, to help them understand what happening and of course to advise others.
Investors look at it, to help decide whether to invest, when to invest, and where to invest.
It is used in international comparisons to evaluate the performance of the UK and compare it with other countries.
It is used to calculate the price rise allowed for some privatised industries that are tightly controlled. These were once state-owned public utilities such as the gas and electricity supply companies. The energy sector is controlled by Ofgem.
The RPI is often used loosely as a measure of inflation – although it only reflects retail prices and indeed not all of those.
What is inflation?
Inflation means persistently rising prices; the term is not normally used by economists (although it may be by the person in the street) for a one-off price rise, for instance if the government increases the level of VAT.
What can cause inflation?
Demand pull = demand exceeds supply at prevailing prices.
Cost push = a shortage of raw materials causes their price to rise; these force up the costs of our producers. Rising import prices can similarly push up our manufacturing costs, as can wage-push inflation.
Hybrid inflation = a mixture of the first two. Either starts the process off, then the other jumps in; they may then alternate in an on-going process.
Government policy can do it, forcing us up the Philips Curve (more later); or the government might increase spending before elections to put more people into work and gain support (this is really a special form of demand pull).
We will investigate the problem through our aggregate supply and demand model later.
Some Problems with inflation
Those on fixed incomes lose out (pensioners, students…). This also changes income distribution.
Those on sticky incomes lose (often public service workers, as it is not easy to increase their wages).
If inflation is too high, it puts entrepreneurs and business people off, so they will not invest as much. Less investment now means slower growth in future.
Benefits of inflation
Moderate inflation can encourage entrepreneurs and business to take risks and invest, leading to a higher growth rate and less unemployment.
We are used to inflation and seem to feel comfortable with it. We are not sure what to do if we face deflation (generally falling prices), e.g., Japan has been stuck in recession since 1990 and also deflating in the last few years. There are signs in 2004 that this may be ending.
Problems with low price rises or even deflation
Low rates of inflation = the situation we are in now (2004).
It may turn into a long-run recession with the danger that we could get stuck, like
Japan.
If this happens, we get low rates of growth, high unemployment and possibly the development of international protectionism and “beggar my neighbour” policies.
When the economy is growing slowly it makes it harder for the government to introduce changes; with fast growth, everything is buoyant, government revenue is up and they can do a lot.
When it is harder for the government to make changes it may mean that downturns in the economy are likely to be more severe and long lasting.
The ability to use monetary policy gets weaker when prices are not increasing much – it is harder to stimulate the economy by reducing interest rates.
Benefits of low price rises
Consumers gain, as goods and services rise little in price.
Fixed income (and sticky income) people gain; groups such as pensioners and students are helped.
A low rate of inflation encourages investment, as people can make a paper profit easily.
Risks are reduced if everyone knows what prices to expect.
We need to understand how to measure things like the level of inflation, the level of unemployment, the balance of payments and the size of gross domestic product. Why?
If we are to see how well the economy is doing we need to be able to measure the degree of success.
If we want to know if government should intervene or not – and if so, whether it might wish to expand or to contract the economy.
And, in general terms, we need to understand how we measure so that we know exactly what we are talking about!
We need the information about measurement methods for use when answering exam questions.
Finally, we need to understand how we measure to make sense of the actual models we use later.
THE RETAIL PRICE INDEX
Inflation is an important economic goal and it matters to a lot of people. For such reasons, we have to know how much prices are changing or have already changed, which means that we have to take measurements in some way.
It is clearly impossible to go to each shop in the country and price each item once a month! So we have devised an index to simplify the task. We take a “basket” of goods and services, typical of what people buy, and price these goods and services at a base date. Then we look to see what has happened to the prices of the individual things in the basket since then and tot them up. The government has done this since 1947.
Details: over 600 goods and services go in the basket; once a month we take over
120,000 samples of prices of these 600+ items. This is a bit tricky: the supermarkets, corner shops, 24/7 stores and so forth all have different prices and in addition some areas like London are dearer than others.
Then the statisticians “weight” the items – e.g. housing and transport are more important than salt in people’s budgets, so the important things are weighted more heavily than the unimportant ones. If the price of salt rises by twenty percent it really will not affect us much! But if bus or train fares went up by that percentage it surely would….
If the average rise of all the items, after weighting, is found to have been 0.5% over the month, the government tells us that; it usually also tell us what annual rate of inflation this would represent and how it compares with the same month of the previous year.
At June 2004, the Retail Price Index was up 1.6 per cent over the previous twelve months.
The “RPIX” (which stands for the Retail Price Index Excluding Mortgage Interest Repayments – quite a mouthful!) is a separate measure, which excludes mortgage interest repayments. This is the one that the Monetary Policy Committee focuses on for its policy target, and aims for a rate of 2.5%.
Limitations of the RPI
Not everyone is average, and consumes that exact basket of goods and services, so the RPI does not exactly fit all (but it is close for most!). Pensioners and millionaires obviously have different spending patterns and neither will fit exactly. Pensioners have their own index calculated.
Many goods are “intermediate goods”, e.g., machines to make machines, so these are excluded because they are not “retail”. The underlaying rate of inflation,
which includes the changing prices of everything, can be different from that reported in the RPI.
The basket gets out of date:
o As people change their consumption habits (e.g., there is more foreign travel now than in the 1960s – but rather less after the September 11 New York terrorist bombing).
o New goods and services come onto the market (e.g., DVD players) that were not in the old baskets – so we have to update the basket periodically. This is done each Spring.
o But after we make such a change, strictly we cannot compare the new
price index with the earlier ones, because it covers slightly different goods and services, or we might have altered the weightings used. We still make the comparisons however!
The index does not reflect any quality improvements and these steadily occur.
It is better to think of the RPI as an “estimate” rather than a hard accurate figure. The RPI does not measure the standard of living. It excludes things that have an
important impact on this, such as changes in tax; changes in leisure time; changes
in the physical space available for enjoyment; and changes in the quality of goods and services.
Uses of the Retail Price Index
Unions look at it and may base their wage claims on it.
The government looks at it, to decide if there is a need to intervene and manage the economy (our main interest!).
Journalists look at it, to write articles explaining to people what is happening and their comments and advice might be considered by the government.
Economists look at it, to help them understand what happening and of course to advise others.
Investors look at it, to help decide whether to invest, when to invest, and where to invest.
It is used in international comparisons to evaluate the performance of the UK and compare it with other countries.
It is used to calculate the price rise allowed for some privatised industries that are tightly controlled. These were once state-owned public utilities such as the gas and electricity supply companies. The energy sector is controlled by Ofgem.
The RPI is often used loosely as a measure of inflation – although it only reflects retail prices and indeed not all of those.
What is inflation?
Inflation means persistently rising prices; the term is not normally used by economists (although it may be by the person in the street) for a one-off price rise, for instance if the government increases the level of VAT.
What can cause inflation?
Demand pull = demand exceeds supply at prevailing prices.
Cost push = a shortage of raw materials causes their price to rise; these force up the costs of our producers. Rising import prices can similarly push up our manufacturing costs, as can wage-push inflation.
Hybrid inflation = a mixture of the first two. Either starts the process off, then the other jumps in; they may then alternate in an on-going process.
Government policy can do it, forcing us up the Philips Curve (more later); or the government might increase spending before elections to put more people into work and gain support (this is really a special form of demand pull).
We will investigate the problem through our aggregate supply and demand model later.
Some Problems with inflation
Those on fixed incomes lose out (pensioners, students…). This also changes income distribution.
Those on sticky incomes lose (often public service workers, as it is not easy to increase their wages).
If inflation is too high, it puts entrepreneurs and business people off, so they will not invest as much. Less investment now means slower growth in future.
Benefits of inflation
Moderate inflation can encourage entrepreneurs and business to take risks and invest, leading to a higher growth rate and less unemployment.
We are used to inflation and seem to feel comfortable with it. We are not sure what to do if we face deflation (generally falling prices), e.g., Japan has been stuck in recession since 1990 and also deflating in the last few years. There are signs in 2004 that this may be ending.
Problems with low price rises or even deflation
Low rates of inflation = the situation we are in now (2004).
It may turn into a long-run recession with the danger that we could get stuck, like
Japan.
If this happens, we get low rates of growth, high unemployment and possibly the development of international protectionism and “beggar my neighbour” policies.
When the economy is growing slowly it makes it harder for the government to introduce changes; with fast growth, everything is buoyant, government revenue is up and they can do a lot.
When it is harder for the government to make changes it may mean that downturns in the economy are likely to be more severe and long lasting.
The ability to use monetary policy gets weaker when prices are not increasing much – it is harder to stimulate the economy by reducing interest rates.
Benefits of low price rises
Consumers gain, as goods and services rise little in price.
Fixed income (and sticky income) people gain; groups such as pensioners and students are helped.
A low rate of inflation encourages investment, as people can make a paper profit easily.
Risks are reduced if everyone knows what prices to expect.
- Messages
- 27
- Reaction score
- 3
- Points
- 3
thats all i have in my computer!!!
so hows it?
so hows it?