- unemployment is a waste of a scrace factor of production
- full employment is good because
- it leads to an increased standard of living and positive attitudes.
- govts get greater income through increased tax and decreased benefits etc.
- full employment can be achieved by increasing AD or by shifting the LRAS curve to the right through supply-side policies. In the current UK economy, the problem is that people do not have the right skills to do the job and so govts. need to invest in education rather than increase AD to create jobs.
- labour productivity is expressed as a % of output per man hour. increased productivity usually results from increased investment in both human and physical capital, allowing the same amount of workers to produce more in a given time.
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- economic growth is believed to increase the populations' standard of living, by increasing the output of g/s, increasing GDP per head.
- Over time, the productive capacity of an economy tends to increase. As well as AS, AD tends to increase as well. If the growth of AD and AS is equal, there tends to be upwards pressure on the price level and so no inflationary pressures.
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- The UK has an inflation target of 2.0% CPI
- inflation can effect pensioners on fixed incomes and workers in a weak bargaining position quite heavily.
- Inflation distorts behaviour by economic agents:
- consumers initially increase purchasing to beat inflation, which only adds further to it.
- continuing inflation leads to fears of job loss and increased saving so a fall in AD and a possible recession.
- workers try to anticipate inflation by demanding higher wages that increases inflation (leftwards shift in SRAS)
- firms may increase prices in order to cover increased wages and costs leading to further inf.
- unemployment may increase as imports will increase due to domestic g/s being relatively dearer. Also demand for UK exports will fall.
- the balance of payments is likely to deteriorate if UK inflates more than its trading partners
- it is important to have a small amoun of inflation as a zero level of inflation would not consider improvements in g/s over time and would mean that in real terms, prices would be falling. Falling prices do not provide an incentive for improvements in products.
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The balance of payments
- this can be put into 3 groups:
- balance - value of imports = value of exports
- deficit - expenditure on imports > income from exports
- surplus - expenditure on imports < income from exports
- a deficit, as the UK is currently in, indicates a policy conflict: the aim of increasing employment and econ growth in short term may clash with achieveing a surplus.
- a deficit can arise from:
- long term decline in the capacity of the manufacturing industry as firms outsource to countries with cheaper labour or move their firms to those countries and the UK is no longer a supplier of these g/s e.g. cars. The country is then forced to import from those countries.
- High income elasticity of demand for imports: over 50% of earning spent on imports in UK
- interest rates are overly high compared to UK trading partners, increasing the value of the £, making our exports dearer so less competitive abroad and imports are cheaper.
- a small deficit is okay but as it grows, overseas investor no longer wish to hold money in the UK and foreign banks and other lenders refuse to lend money - credit crunch.
- to overcome this, the govt has to cut domestic spending to reduce demand for imports - this would cause a policy conflict as it would lead to reduced econ. growth and rising unemployment.
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