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Macroeconomic Policy Instruments
Demand Management Product Market
Demand management occurs when the government attempts - Privatisation, de regulation and contracting out
to influence the level and growth of AD hence the levels of - Trade liberalisation (removal of trade barriers)
national income, employment, rate of inflation, growth and - Promotion of new firms (tax breaks etc.)
the balance of payments position Labour Market
· Reflationary policies seek to increase AD and raise the level - Reduction in trade union power
of planned expenditure at or near the level of potential - Reduced unemployment benefits
GDP - Improvements in human capital
· Deflationary policies decrease AD in the event of aggregate - Reduced employment protection
demand running ahead of AS and posing inflationary risks - Reduced income tax
or leading to an unsustainable deficit on the balance of Capital Market
payments - De regulation of financial markets (city, stocks etc.)
- Reduced corporation tax (reducing costs)
Fiscal Policy
Fiscal policy involves the use of government spending, taxation Argument against supply side policies
and borrowing to influence both the pattern of economic - Increased inequality
activity and also the level and growth of aggregate demand, - Time lags (education)
output and employment. - Incentives of tax cuts may be overstated
· Automatic Stabilisers ­ Expenditure and taxation change - Ineffectiveness (If AD is low)
automatically (lower income earners earn less) - Adverse effects of deregulation (risk increase)
· Discretionary Fiscal Policy ­ Deliberate changes to tax and
expenditure The effects of Monetary and Fiscal Policy on the
economy
Monetary Policy There are some differences in the economic effects of monetary and
fiscal policy, on the composition of output, the effectiveness of the
· Monetary policy involves the use of interest rates to
two kinds of policy in meeting the government's macroeconomic
control the level and rate of growth of aggregate demand objectives, and also the time lags involved for fiscal and monetary
in the economy. policy changes to take effect. We will consider each of these in turn
· Government's inflation target - currently 2.0 per cent for
the consumer price index- by setting short-term interest Effects of Policy on the Composition of National Output
rates. Interest rate decisions are taken by the Monetary · Monetary policy is often seen as something of a blunt policy
Policy Committee (MPC) at their monthly meetings. instrument ­ affecting all sectors of the economy although in
· Also, they use Quantitative Easing to flood financial different ways and with a variable impact.
practices with money to increase lending. · In contrast, fiscal policy can be targeted to affect certain groups
(e.g. increases in means-tested benefits for low income
· Monetary policy also involves the effects of changes in the
households, reductions in the rate of corporation tax for small-
exchange rate ­ the external value of one currency against medium sized enterprises, investment allowances for businesses
another ­ on the wider economy in certain regions)
Supply-Side Policies Time Lags of Monetary and Fiscal Policies
· Supply-side economic policies are mainly micro-economic Monetary policy in the UK is flexible (interest rates can be changed
policies designed to improve the supply-side potential of each month) and emergency rate changes can be made in between
an economy, make markets and industries operate more meetings of the MPC, whereas changes in taxation take longer to
organize and implement. Because capital investment requires
efficiently and thereby contribute to a faster rate of growth
planning for the future, it may take some time before decreases in
of real national output. interest rates are translated into increased investment spending.
· But supply-side reform on its own is not enough to achieve Typically it takes six months ­ twelve months or more before the
growth. There must also be a high enough level of effects of changes in UK monetary policy are felt.
aggregate demand so that the productive capacity of an
economy is actually brought into play. The impact of increased government spending is felt as soon as the
spending takes place and cuts in direct and indirect taxation feed
through into the economy pretty quickly. However, considerable time
may pass between the decision to adopt a government spending
programme and its implementation. In recent years, the government
has undershot on its planned spending, partly because of problems in
attracting sufficient extra staff into key public services such as
transport, education and health.…read more

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Government Spending and Taxation
Ways to Finance Government Spending: Taxation: A means by which governments finance their
· Public Sector borrowing ­ The government will make expenditure by imposing charges on citizens and corporate
interest from the banks that are lending out money. The entities. Governments use taxation to encourage or discourage
amount the UK has to borrow when expenditure is more certain economic decisions.
than incomes from other countries, private banks, private
companies etc. are all paid with interest. Reasons for paying tax:
· Interest payments on loans ­ Rate of interest paid back · Wealth redistribution
when government extends a loan. · Can be used as a weapon against the consumption of
· Rent from public-owned land and buildings demerit goods and negative externalities
· Gross operating surpluses from executive agencies · Raises money from government expenditure
· Proceeds from the sale and transfer of government · Protection for environmental damage
owned industries ­ Selling off things to private companies. · Fiscal tool for controlling inflation and employment
Anything with British in it was once owned by the · Can be used to make imports more expensive
government e.g. British Airways etc.
· Money paid into the national lottery There are three different types of taxation that the
· Taxation ­ two different taxes: Direct and Indirect government can choose to use:
· Progressive Tax - This is a system by which tax is
The Size and Pattern of Government Spending proportional to income. This means that a person pays
· Political Priorities ­ Budget deficit/Education/Health Care more tax they more they earn.
· The size and age distribution of the population ­ If the · Regressive Tax - A regressive tax system takes a smaller
population is increasing they have to work out how much proportion of income in tax as incomes rises. It may be
to spend. Age ­ Old people need pensions, Young people considered unfair to people on low incomes because a
need student loans. much larger fraction of their income is taken as tax.
· Size of current GDP ­ Looks at growth. Can mean that · Proportional Tax - This is where the proportion of income
increased disposable incomes mean better living standards taken in tax is the same whatever the level of income.
· Redistribution of income ­ The extent at which "relative
poverty" is actually a problem Direct and Indirect Taxation
· Fiscal Policy ­ Need to decide whether to do an · Direct Tax: A tax levied directly on factor earnings and
expansionary or contractionary policy wealth. Paid by individuals on wages, rent, interest and
· Debt interest ­ Need to consider how much they are going profits in the form of income tax, council tax, inheritance
to need to pay back. Would depend on their credit rating tax capital gains tax and National Insurance. This tax is
levied on individuals and therefore the incidence cannot be
Analysis shifted and the tax burden in borne by those upon whom
· Opportunity Cost ­ If you spend anything it's at the the tax is levied.
expense of something else and it could have been spent on · Indirect Tax: A tax levied on expenditure on goods and
something else. services. The incidence of such a tax is usually shared.
· Education and Health Care ­ YES elastic ­ If income · Unit or specific tax: A tax levied on volume
increases you will get better education and health care. · Value Added Taxes: Tax levied on a percentage of the
· Multiplier Effect ­ If spending increases then AD should value or price of the good. Thus as the price of the good
shift to the right rises the amount paid in tax will rise proportionately.
· External Costs ­ If spending goes on correcting negative
externalities and market failure What are the effects of Tax?
· Government Failure ­ Some spending is just as a waste of · Tax increases can cause inflation:
time ­ Benefit trap o Wage price spiral
· Crowding out ­ If the public sector is spending more it will o Can lead to Stagflation
crowd out the private sector · Tax and marginal costs ­ If it is above marginal costs then
there is no incentive to make more
· External costs ­ Can control negative externalities
· Dependant on PED/PES:
o Depending on elasticity on if it will affect producer
or consumer
o Effect is not equal
o For inelastic goods
· Negative Multiplier effect ­ If you increase tax then
disposable income will decrease…read more

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Government Spending and Taxation
Ways to Finance Government Spending: Taxation: A means by which governments finance their
· Public Sector borrowing ­ The government will make expenditure by imposing charges on citizens and corporate
interest from the banks that are lending out money. The entities. Governments use taxation to encourage or discourage
amount the UK has to borrow when expenditure is more certain economic decisions.
than incomes from other countries, private banks, private
companies etc. are all paid with interest. Reasons for paying tax:
· Interest payments on loans ­ Rate of interest paid back · Wealth redistribution
when government extends a loan. · Can be used as a weapon against the consumption of
· Rent from public-owned land and buildings demerit goods and negative externalities
· Gross operating surpluses from executive agencies · Raises money from government expenditure
· Proceeds from the sale and transfer of government · Protection for environmental damage
owned industries ­ Selling off things to private companies. · Fiscal tool for controlling inflation and employment
Anything with British in it was once owned by the · Can be used to make imports more expensive
government e.g. British Airways etc.
· Money paid into the national lottery There are three different types of taxation that the
· Taxation ­ two different taxes: Direct and Indirect government can choose to use:
· Progressive Tax - This is a system by which tax is
The Size and Pattern of Government Spending proportional to income. This means that a person pays
· Political Priorities ­ Budget deficit/Education/Health Care more tax they more they earn.
· The size and age distribution of the population ­ If the · Regressive Tax - A regressive tax system takes a smaller
population is increasing they have to work out how much proportion of income in tax as incomes rises. It may be
to spend. Age ­ Old people need pensions, Young people considered unfair to people on low incomes because a
need student loans. much larger fraction of their income is taken as tax.
· Size of current GDP ­ Looks at growth. Can mean that · Proportional Tax - This is where the proportion of income
increased disposable incomes mean better living standards taken in tax is the same whatever the level of income.
· Redistribution of income ­ The extent at which "relative
poverty" is actually a problem Direct and Indirect Taxation
· Fiscal Policy ­ Need to decide whether to do an · Direct Tax: A tax levied directly on factor earnings and
expansionary or contractionary policy wealth. Paid by individuals on wages, rent, interest and
· Debt interest ­ Need to consider how much they are going profits in the form of income tax, council tax, inheritance
to need to pay back. Would depend on their credit rating tax capital gains tax and National Insurance. This tax is
levied on individuals and therefore the incidence cannot be
Analysis shifted and the tax burden in borne by those upon whom
· Opportunity Cost ­ If you spend anything it's at the the tax is levied.
expense of something else and it could have been spent on · Indirect Tax: A tax levied on expenditure on goods and
something else. services. The incidence of such a tax is usually shared.
· Education and Health Care ­ YES elastic ­ If income · Unit or specific tax: A tax levied on volume
increases you will get better education and health care. · Value Added Taxes: Tax levied on a percentage of the
· Multiplier Effect ­ If spending increases then AD should value or price of the good. Thus as the price of the good
shift to the right rises the amount paid in tax will rise proportionately.
· External Costs ­ If spending goes on correcting negative
externalities and market failure What are the effects of Tax?
· Government Failure ­ Some spending is just as a waste of · Tax increases can cause inflation:
time ­ Benefit trap o Wage price spiral
· Crowding out ­ If the public sector is spending more it will o Can lead to Stagflation
crowd out the private sector · Tax and marginal costs ­ If it is above marginal costs then
there is no incentive to make more
· External costs ­ Can control negative externalities
· Dependant on PED/PES:
o Depending on elasticity on if it will affect producer
or consumer
o Effect is not equal
o For inelastic goods
· Negative Multiplier effect ­ If you increase tax then
disposable income will decrease
· Crowding out private sector spending.…read more

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Globalisation
Globalisation: In the international economy it refers to Benefits of Globalisation
the process by which there is both an increasing world 1. Free Trade
market in goods and services and increasing integration Free trade is a way for countries to exchange goods
in world capital markets. and resources. This means countries can specialise in
producing goods where they have a comparative
Causes of Globalisation;
advantage (this means they can produce goods at a
· Improved transport, making global travel easier
lower opportunity cost).
· Improved Technology which makes it easier to
When countries specialise there will be several gains
communicate and share information around the
from trade:
world.
2. Lower prices for consumers
· Growth of multinational companies with a global
3. Greater choice of goods
presence
4. Bigger export markets for domestic manufacturers
· Growth of global trading blocs which have reduced
5. Economies of scale through being able to specialise in
national barriers. (e.g. EU)
certain goods
· Reduced Tariff barriers encouraging global trade
6. Greater competition
· Growth of global media
· Global Trade Cycle. Economic growth is global in
2. Labour Mobility
nature. This means countries are increasingly
Increased labour migration gives advantages to both
interconnected. (E.g. recession in one country affects
workers and recipient countries. If a country
global trade and will cause an economic downturn in
experiences high unemployment, there are increased
trading partners.)
opportunities to look for work elsewhere. This
Evaluation: process of labour migration also helps reduce
· It is hard to precisely define globalisation there are geographical inequality. This has been quite effective
different interpretations about what we actually in the EU, with many Eastern European workers
mean, therefore, there are differing factors that migrating west.
explain it. However;
· Improved technology is very influential in helping This issue is also quite controversial. Some are
globalisation without technology such as the internet concerned that free movement of labour can cause
and global communication. excess pressure on housing and social services in
· Increased free trade is important. However, there are some countries. Countries like the US have
various trade barriers still in existence and this has responded to this process by actively trying to
not stopped the growth of globalisation. Such as Non- prevent migrants from other countries.
Tariff Barriers.
Costs of Globalisation 3. Increased Economies of Scale.
1. Environmental Costs Production is increasingly specialised. Globalisation
One problem of globalisation is that it has increased enables goods to be produced in different parts of
the use of non-renewable resources. It has also the world. This greater specialisation enables lower
contributed to increased pollution and global average costs and lower prices for consumers.
warming. Firms can also outsource production to
where environmental standards are less strict. 4. Greater Competition
However, arguably the problem is not so much Domestic monopolies used to be protected by lack of
globalisation as a failure to set satisfactory competition. However, globalisation means that
environmental standards. firms face greater competition from foreign firms.
2. Labour Drain
Globalisation enables workers to move more freely, 5. Increased Investment
so some countries find it difficult to hold onto their Globalisation has also enabled increased levels of
best skilled workers investment. It has made it easier for countries to
3. Less Cultural Diversity attract short term and long term investment.
With globalisation there is arguably less cultural Investment by multinational companies can play a
diversity, however it is also led to more options for big role in improving the economies of developing…read more

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World Trade Organisation
WTO: The World Trade Organisation is a multi-lateral · Harmful Products - Under free trade, injurious and
organisation and is the only global international harmful products may be produced and traded. Trade
organisation dealing with the rules of trade between restrictions are necessary to check the import of such
nations. Their main goal is to promote free trade. products.
· Harmful to Less Developed Countries - Free trade is
The goal of the WTO is to help producers of goods and harmful for the less developed countries for the
services, exporters, and importers conduct their business, following reasons:
therefore allowing nations to experience the gains from o Competition under free trade is unfair and
specialisation and trade that the theory of comparative unhealthy. The less developed countries find it
advantage will arise. A WTO committee is assisted by a sub- difficult to compete with the economically
committee of LEDC's. They look at developing countries advanced countries.
special needs. Its responsibility's includes implementation o Under free trade, gains of trade are unequally
of the agreements, technical cooperation, and the distributed depending upon the level of
integration of LEDC's into the global trading system. development of different countries. The terms
of trade are favourable for the developed
Advantages of the WTO countries, and un-favourable for the poor
· The system helps promote peace countries.
· Disputes are handled constructively o Less developed countries generally experience
· Rules make life easier for all unfavourable balance of payments. The
· Free trade cuts the costs of living problem of un-favourable balance of payments
· It provides more choice of products and qualities cannot be solved under free trade policy.
· Trade raises incomes o The less developed countries cannot protect
· Trade stimulates economic growth their infant industries under the policy of free
· The basic principles make life more efficient trade.
· Governments are shielded from lobbying o Free trade may endanger economic and political
· The system encourages good government independence of the backward nations.
Disadvantages of the WTO Evaluation of the WTO
· Unrealistic Policy - Free trade policy is based on the · WTO rules allow for regional reductions in protectionism
assumption of laissez-faire or government non- ­ This has led to an increase in trading blocs ­ NAFTA ,EU
intervention. Its success also requires the pre-condition · Increased non-tariff barriers ­ You can't prove them so
of perfect competition. However, such conditions are they are difficult to stop
unrealistic and do not exist in the actual world. · Since WW2 there has been a reduction in tariffs ­ More
· Non-Cooperation of Countries - Free trade policy works general understanding, Asia opening up, Iron curtain
smoothly if all the countries cooperate with each other falling.
and follow this policy. If some countries decide to gain · WTO rules allows for `special exemptions' ­ If a country
more by imposing import restrictions, the system of free proves an economic emergency then they can put up
trade cannot work. tariffs.
· Economic Dependence - Free trade increases the · The role of TWO is very important during recessions ­
economic dependence on other countries for certain Stop too many countries using protectionism, promote
essential products such as food, raw materials, etc. Such free trade
dependence proves harmful particularly during wartime. · Some poorer countries are allowed to join with existing
· Political Slavery - Free trade leads to economic protectionism measures. ­ E.g. India joined with tariffs
dependence and economic dependence leads to political still in place.
slavery. For political freedom, economic independence is · Uses the system of `Most favoured nation' - Biased to
necessary. This requires abandonment of free trade. LEDC's
· Dumping - Free trade may lead to dumping where goods · Multilateral ­ There is no world government, relies on
are sold at very cheap rates and even below their cost of negotiations, can't be enforced
production in order to capture the foreign markets. · Many link WTO and Globalisation ­ Loss of culture…read more

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