The National and International Economy

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ECON 4: THE NATIONAL AND INTERNATIONAL ECONOMY
Economic growth is a long-term expansion of the productive potential of the economy.
Trend growth refers to the smooth path of long run national output
Actual growth is the percentage annual increase in national input: the rate of growth in actual
output.
Potential growth is the speed at which economy could grow. It is the percentage annual increase
in the economy's capacity to produce: the rate of growth in potential output. Two of the major
factors contributing to potential growth are:
-An increase in resources - natural resources, labour or capital
-An increase in the efficiency with which these resources are
used, through advances in technology, improved labour skills or improved organisation.
Economic growth means an increase in Real GDP. Economic growth means there is an increase
in national output and national income.
Economic growth is caused by two main factors:
-an increase in aggregate demand
-an increase in aggregate supply (productive capacity)
In the short term, economic growth is caused by an increase in aggregate demand (AD). If there is
spare capacity in the economy then an increase in AD will cause a higher level of real GDP.
AD= C + I + G + (X- M)
C= Consumer spending
I = Investment
G = Government spending
X = Exports
M = Imports
AD can increase for the following reasons:
Lower interest rates ­ Lower interest rates reduce the cost of borrowing and so encourages
spending and investment.
Increased wages. Higher real wages increase disposable income and encourages consumer
spending.
Increased government spending (G).
Fall in value of sterling which makes exports cheaper and increases quantity of exports(X).
Increased consumer confidence, which encourages spending (C).
Lower income tax which increases disposable income of consumers and increases consumer
spending (C).
Rising house prices, which create a positive wealth effect and encourages homeowners to
spend more.
Showing an increase in AD

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Long Term Economic Growth.
This requires an increase in the long run aggregate supply (productive capacity) as well as AD
LRAS or potential growth can increase for the following reasons:
1. Increased capital. e.g. investment in new factories or investment in infrastructure, such as
roads and telephones.
2. Increase in working population, e.g. through immigration, higher birth rate.
3. Increase in Labour productivity, through better education and training or improved
technology.
4. Discovering new raw materials.
5.…read more

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SUSTAINABLE ECONOMIC GROWTH is when the needs of today are met without risking the
ability to meet needs of future generations
DEMAND AND SUPPLY SIDE SHOCKS
A shock is an unexpected or unpredictable event that affects an economy e.g. natural disaster, the
weather, Wall Street Crash.…read more

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Useful in assessing the performance of different production sectors - Production units of a country
are broadly classified into primary, secondary and tertiary sectors. These sectors generate factor
incomes. The data on factor incomes generated by these sectors can be used to measure their
relative contributions to national income.
-Useful in measuring inequalities in the distribution of income - All individuals so not have the same
income. It means national income is unequally distributed among people.…read more

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A government wanting to achieve a lower equilibrium rate of unemployment might do the following:
Reform the system of welfare benefits to reduce the "poverty trap", reforming trade unions to
reduce their collective bargaining power and also reducing some of the barrier to labour mobility put
up by professional bodies and associations which have the effect of limiting the supply of labour into
an occupation, reducing income tax to improve the incentive to look for and accept paid work and
adopting a more relaxed approach…read more

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Short term fall in unemployment but at a cost of
higher inflation. Individuals bas wage negotiations on
expectations of higher inflation in the next period. If
higher wages are granted then firms costs rise-they
start to shed labour and unemployment returns to its
point on the LRPC.…read more

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But, if a country is in the Euro (e.g. Greece, Ireland and Spain) they can't devalue. Therefore, high
inflation can be very damaging as it leads to a decline in competitiveness.
Confusion and Uncertainty: When inflation is high people are uncertain what to spend their money
on. Also, when inflation is high firms may be less willing to invest because they are uncertain about
future profits and costs. This uncertainty and confusion can lead to lower rates of economic growth
over the long term.…read more

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Family Expenditure Survey does not include everybody. E.g pensioners are excluded. Pensioners
have different spending habits e.g. heating / bus travel account for a higher % of their expenditure.
Young people will benefit more from falling prices of mobile phones and electronic goods.
Therefore, the basket of goods may not be representative. Also, as it is updated once a year, it may
soon become outdated for changes in spending habits.
Changes in Quality of goods.…read more

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Fiscal policy involves the Government changing the levels of Taxation and Government spending in
order to influence Aggregate Demand (AD) and therefore the level of economic activity.
(AD is the total level of planned expenditure in an economy (AD = C+ I + G + X ­ M)
The purpose of fiscal policy:
Keep inflation low, (UK government has a target of 2%)
Stimulate economic growth in a period of a recession.…read more

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Time Lags. If the govt plans to increase spending this can take along time to filter into the
economy and it may be too late. Spending plans are only set once a year. There is also a
delay in implementing any changes to spending patterns.
5. Budget Deficit Expansionary fiscal policy (cutting taxes and increasing G) will cause an
increase in the budget deficit which has many adverse effects.…read more

Comments

B

Hey, do you mind me asking what grade you got for Economics?

LewisScott

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