Can increase the economy's ability to produce goods through supply-side policies and initiatives., Investment in capital goods, Research and Development, Innovation, Skills, Education, Training, Competition, Lower income tax, Population Growth
When actual goes above trend, there is a positive output gap. When it goes below there is a negative output gap
Recession when actual output is decreasing, recovery when increasing but still under trend, boom when increasing and above trend.
Positive output gap = Falling unemployment, Rising inflation
Negative output gap = Rising unemployment, falling inflation
Households - Expenciture and Factors of production - Firms
Firms - Incomes and Goods & services - Households
Savings out, investment in
Equations -, Withdrawals (W) = Savings (S) + Government Takes (T) + Imports (M), Injections (J) = Investment (I) + Government spending (G) + Exports (X)
Fiscal Policy - effects TAXES and GOV SPENDING
Monetary Policy - effects INTEREST RATES
Domestic economy, use GDP. Domestic and overseas assets, use GNP
NOMINAL sometimes known as 'money terms'
Long term growth can only occur if productive capacity increases, Use supply side policies and initiatives. (Increase the quantity and quality of the economy's factors of production)
Short term growth - Percentage change in REAL GDP.
Long term growth pushes a PPF out, whereas short term growth is illustrated by a movement from inside the PPF to the boundary of the PPF.
Governemnt controls AD through demand-side policies such as fiscal and monetary., Change in price level, MOVEMENT ALONG LRAS curve, Change in C+I+G+(X-M) leads to a SHIFT in LRAS curve
Governemnt and firms control AS through supply side policies and initiatives, Shift in AD means movement along SRAS. If AD moves out, positive output gap + inflation. If AD moves in, negative output gap + deflation
Unemployment RATE is the percantage of the working age population unemployed
LEVEL of unemployment is the total number of people of working age unemployed
Cured with demand-side policies
Cured by offering training in new skills and education so that a new industry can be learnt by the worker. (This is a supply-side policy)
Unemployment figures for a certain time period are usually seasonally adjusted
Demand will not be equal to supply, caused by minimum wages or union pressure
1. A fair distribution of income can not be achieved
2. Redistributes away from savers and towards borrowers as savers are less inclined to save as their money is becoming worth less.
3. Makes that country less competitive as prices are higher.
4. Creates uncertainty so businesses become less confident.
Fiscal policy tightened to reduce governemnt spending and increase taxation
Monetary policy tightened to increase interest rates
One cause would be a fall in AD so a high level of spare capacity.
Deflation can be bad due to:, 1. Nominal income drops, debt payments remain constant, 2. Consumers defer their purchases leading to a deflationary spiral., 3. Firms unwilling to hold stocks as they lose value.
Current account measures trade in goos and services.
Capital account measures activity in borrowing and lending.
Net investment inflows refers to interest, profits and dividends received from assets abroad. Net transfers refers to things such as foreign aid and payments to institutions such as the IMF, World Bank, EU and NATO
AD grows, incomes rise. This means we can spend more freely on imports of goods and services from abroad. Not only from households, but from firms for raw materials, etc.
Weakness of the supply side, low productivity, less competitive.
Rate of inflation could be persistently high leading to a high price of exports.
Success of the countries international investments.
SPICED: Strong Pound, Imports Cheap, Exports Dear
WPIDEC: Weak Pound, Imports Dear, Exports Cheap
A currency is stronger, or has appreciated, if you can 'buy' more of another currency for less of your own currency.
Pound depreciates., Price of UK exports falls, Quantity of UK exports rises, Price of UK imports rises, Quantity of UK imports falls
Currency DEPRECIATES: Growth and inflation rise, Unemployment falls. CURRENT ACCOUNT IMPROVES