Balance Of Payments: Exports minus Imports- a deficit means that there are more imports than exports. A surplus means that there are more exports than imports.
Balance Of Trade: Visible Exports minus Visible Imports
Visible: Exports or Imports that are tangible, that you can see and touch as they cross international boundaries (goods, not services)
Balanced Budget: where government receipts equal government spending in a financial year
Buffer Stock: an intervention system that aims to limit the fluctuation of prices within an economy.
Capital Spending: government spending to improve the productive capacity of a nation, including infrastructure, schools and hospitals.
Cost Push Inflation: an increase in the cost to produce a good or service results in an increase in the cost of sale and then a knock on effect of an increase in the general price level.
Credit Crunch: where borrowing becomes more expensive or unavailable.
Total Planned Expenditure in the economy (C+I+G+X-M)
Monday, 25 February 2013
Buffer Stocks
A Buffer Stock is an intervention system that aims to limit the fluctuations of the price of a commodity.
Governments may try and intervene in markets which suffer high volatility in the free market prices.
Agricultural and Commodity markets are notorious for having highly volatile prices due to the unpredictable weather, which they are relying upon to grow their goods and relatively inelastic supply and demand curves.
This unpredictability of prices also leads to an unpredictability in incomes for the workers.
LEDC's are particularly hit badly by this as the farmers etc. are already on low wages and sell their goods to foreign powers for very low prices. Thus, if there is a bad harvest, or terrible weather, then they could face extreme poverty and even starvation.
In a stable economy, the government will select an equilibrium price, with which the economy has performed at when things within the economy are good, e.g. inflation low, economic growth growing stably. They will then set a maximum and Minimum Price. This is useful, as it means that if the harvest is poor, then the farmers will still get paid a certain amount for their produce, but also if inflation is high within a country, the firm, and consumers will not have to pay much as a result of the maximum price.
Governments may try and intervene in markets which suffer high volatility in the free market prices.
Agricultural and Commodity markets are notorious for having highly volatile prices due to the unpredictable weather, which they are relying upon to grow their goods and relatively inelastic supply and demand curves.
This unpredictability of prices also leads to an unpredictability in incomes for the workers.
LEDC's are particularly hit badly by this as the farmers etc. are already on low wages and sell their goods to foreign powers for very low prices. Thus, if there is a bad harvest, or terrible weather, then they could face extreme poverty and even starvation.
In a stable economy, the government will select an equilibrium price, with which the economy has performed at when things within the economy are good, e.g. inflation low, economic growth growing stably. They will then set a maximum and Minimum Price. This is useful, as it means that if the harvest is poor, then the farmers will still get paid a certain amount for their produce, but also if inflation is high within a country, the firm, and consumers will not have to pay much as a result of the maximum price.
A Maximum Price is a price ceiling within a market that suppliers cannot exceed in an attempt to prevent the market price from rising above a certain level. To be effective, the maximum price has to be set below the free market price. An example of this is when there is a poor harvest in essential foodstuffs. The usual market response would be to jack up prices due to large amounts of demand but minimal amounts of supply, however, the maximum price means that the poorer or the consumers are not punished.
A minimum price is a price floor below which the normal market price cannot fall. To be effective, the minimum price has to be set below the normal equilibrium price. An example of this is the national Minimum wage, which was introduced into the UK in 1999. It is a price intervention embedded in the labour market to improve the pay and living conditions of the lower income members of society.
Monday, 18 February 2013
Types Of Market Failure
There are 6 key types of Market failures within an economy.
1) Externalities:
Positive Externalities are a good or service that is provided to the public that has positive effects upon the social lives of the people within it. An example of a positive externality is free medication provided to the public through the NHS or Pharmacies. These are positive introductions to the public, which are most of the time easily accessible to all people
Negative Externalities are when a good or service is provided to the public that has adverse effects upon their lives or the environment within which they live. An example of this is the burning of leaves on a bonfire. This may benefit one constituency with the removal of the waste, however, the fumes released may be harmful, or may be uncomfortable for those in the surrounding area.
2) lack of competition:
A lack of competition is very bad for a market of any kind. Competition keeps firms honest, and can have many benefits upon the consumer population. If a firm does not have any competition or has very scarce amounts of it, then this firm is said to have a monopoly. This means market dominance ostensibly. If a firm has a monopoly, then this will be very bad for the consumer. The reason why is that they can raise prices and know for a fact that demand will not go down, as there is no alternative good or service that the consumer could buy, so this will only benefit the firm further. It may also be bad for the consumer, as if a firm does have competition, then they will always be looking to improve their good or service, so that they can gain the more dominant position on the market, but if there is no competition, then a firm will not have to do this.
3) Asymmetric Knowledge:
Asymmetric knowledge occurs when a supplier, or a consumer has superior knowledge over the person whom they are doing business with. This is a market failure, as one of these individuals will be mis-sold, as they do not know as much as the selfish seller or buyer. An example of this is with private dentistry. Dentists often exploit their superior knowledge over their patient, by telling them that they need a certain procedure, that they most likely do not need. They do this as it brings in easy revenue, and the consumer is not an expert in that background so listens due to a trust that they have for the professional. Another example of this is if a consumer walks into an antiques shop, and sees a high value chair from hundreds of years ago, but is only selling for a few pounds, the consumer will exploit their knowledge over the unbeknown supplier, and buy the good for a price that is not in the slightest fair for the quality of the product.
4) Missing Markets:
Missing Markets are an example of a market failure. They occur in public goods or services, whereby the public will wait for someone to pay for that good or service to be installed or maintained, without putting any funding towards it. An example of this is lighthouses, or street lights. Anyone can use these goods, and do not have to pay for them. It is often the government who has to pay for these goods using funding allocated from the tax budget.
5) Merit & De-Merit goods:
A merit good is a good or service that provides a beneficial service to the public, that is usually free of charge. An example of a Merit good is free medication from the NHS, or street lighting from the government. These goods, however are often short in demand from the public. The reason for this is that due to a lack of information or education on the potential benefits it could have to the public, people do not utilise this resource.
A de-merit goos is a good or service that provides negative effects both for the consumer and the community that could have health repercussions as a result of using this product. An example of this is cigarettes, or illegal narcotics. These goods are harmful to the users, and to the public around, e.g. secondhand smoking. These goods, unlike merit goods remain in high demand. The reason for it is identical in the sense that many people are not given the right information in regards to the damage it could do to those around them, so are to this day still in high demand.
6) Underemployment:
In many professions, once the job has finished, or the firm shuts down, then many workers find it extremely difficult to find work. For example, in the 70's, when Margaret Thatcher shut down the mines and ship building yards, there were huge amounts of unemployment in the North of England. The reason fro this was that these workers were skilled in that specific line of work, and were not in the slightest qualified to try another line of work, or didn't want to do anything else. Another example is with army soldiers. These soldiers are specialised in combat situations, but are not suited to city jobs. As a result, when they return from their tours in other territories, they are unable to find work, as they do not have the necessary skills.
Geographical underemployment is another issue with the employment levels in an economy and is an example of a market failure. This happens for example, when someone in the North of England wants to move to London, so they try to sell thei rhouse, but the amount they will be able to sell their house for their is incredibluy disproportionate to what you can buy in the Northern parts. The more expensive lifestyle also means that this relocation is impossible. Thus the allocation of workers shows a market failure in giving unemployed people the opportunity to work.
1) Externalities:
Positive Externalities are a good or service that is provided to the public that has positive effects upon the social lives of the people within it. An example of a positive externality is free medication provided to the public through the NHS or Pharmacies. These are positive introductions to the public, which are most of the time easily accessible to all people
Negative Externalities are when a good or service is provided to the public that has adverse effects upon their lives or the environment within which they live. An example of this is the burning of leaves on a bonfire. This may benefit one constituency with the removal of the waste, however, the fumes released may be harmful, or may be uncomfortable for those in the surrounding area.
2) lack of competition:
A lack of competition is very bad for a market of any kind. Competition keeps firms honest, and can have many benefits upon the consumer population. If a firm does not have any competition or has very scarce amounts of it, then this firm is said to have a monopoly. This means market dominance ostensibly. If a firm has a monopoly, then this will be very bad for the consumer. The reason why is that they can raise prices and know for a fact that demand will not go down, as there is no alternative good or service that the consumer could buy, so this will only benefit the firm further. It may also be bad for the consumer, as if a firm does have competition, then they will always be looking to improve their good or service, so that they can gain the more dominant position on the market, but if there is no competition, then a firm will not have to do this.
3) Asymmetric Knowledge:
Asymmetric knowledge occurs when a supplier, or a consumer has superior knowledge over the person whom they are doing business with. This is a market failure, as one of these individuals will be mis-sold, as they do not know as much as the selfish seller or buyer. An example of this is with private dentistry. Dentists often exploit their superior knowledge over their patient, by telling them that they need a certain procedure, that they most likely do not need. They do this as it brings in easy revenue, and the consumer is not an expert in that background so listens due to a trust that they have for the professional. Another example of this is if a consumer walks into an antiques shop, and sees a high value chair from hundreds of years ago, but is only selling for a few pounds, the consumer will exploit their knowledge over the unbeknown supplier, and buy the good for a price that is not in the slightest fair for the quality of the product.
4) Missing Markets:
Missing Markets are an example of a market failure. They occur in public goods or services, whereby the public will wait for someone to pay for that good or service to be installed or maintained, without putting any funding towards it. An example of this is lighthouses, or street lights. Anyone can use these goods, and do not have to pay for them. It is often the government who has to pay for these goods using funding allocated from the tax budget.
5) Merit & De-Merit goods:
A merit good is a good or service that provides a beneficial service to the public, that is usually free of charge. An example of a Merit good is free medication from the NHS, or street lighting from the government. These goods, however are often short in demand from the public. The reason for this is that due to a lack of information or education on the potential benefits it could have to the public, people do not utilise this resource.
A de-merit goos is a good or service that provides negative effects both for the consumer and the community that could have health repercussions as a result of using this product. An example of this is cigarettes, or illegal narcotics. These goods are harmful to the users, and to the public around, e.g. secondhand smoking. These goods, unlike merit goods remain in high demand. The reason for it is identical in the sense that many people are not given the right information in regards to the damage it could do to those around them, so are to this day still in high demand.
6) Underemployment:
In many professions, once the job has finished, or the firm shuts down, then many workers find it extremely difficult to find work. For example, in the 70's, when Margaret Thatcher shut down the mines and ship building yards, there were huge amounts of unemployment in the North of England. The reason fro this was that these workers were skilled in that specific line of work, and were not in the slightest qualified to try another line of work, or didn't want to do anything else. Another example is with army soldiers. These soldiers are specialised in combat situations, but are not suited to city jobs. As a result, when they return from their tours in other territories, they are unable to find work, as they do not have the necessary skills.
Geographical underemployment is another issue with the employment levels in an economy and is an example of a market failure. This happens for example, when someone in the North of England wants to move to London, so they try to sell thei rhouse, but the amount they will be able to sell their house for their is incredibluy disproportionate to what you can buy in the Northern parts. The more expensive lifestyle also means that this relocation is impossible. Thus the allocation of workers shows a market failure in giving unemployed people the opportunity to work.
GOVERNMENT INTERVENTION AND MARKET FAILURE
Government intervention may seek to correct for the distortions created by market failure and to improve the efficiency in the way that markets operate
- Pollution taxes to correct for externalities
- Taxation of monopoly profits (the Windfall Tax)
- Regulation of oligopolies/cartel behaviour
- Direct provision of public goods (defence)
- Policies to introduce competition into markets (de-regulation)
- Price controls for the recently privatised utilities
Friday, 8 February 2013
The Balance Of Payment's Control
Why has service income grown in the UK?
-Requires higher levels of skill+ expertise.
-MEDC's well educated-technical etc.
Can A Service Based Economy Flourish?
-It requires the UK to stay ahead. We have to be better educated, more competitive etc.
-There is severe competition that exists in services, and we cannot control it.
Investment Income:
Earnings from investments made overseas - payments made to foreign investors, who have invested in the UK.
-Dividends paid on shares.
-Interest/ yield paid on trends.
-Profit on overseas investments.
-Net positive for the UK due to legacy of overseas investments and new ones.
Types of Investment:
-Investments listed on a stock exchange.
-London is arguably the worlds most important.
Direct Investment:
-Plant
-Machinery
-Factories and Offices
FDI in UK:
-BMW- Rover- Mini
-Nissan- Sunderland
Tatar- Landrover
Transfers:
Transfer of money between countries
-Private Transfers- money sent home.
Government Transfers:
Overseas AID.
-Payments sent to Non Government Organisation's.
-EU, IMF, UN, WTO.
-Payments to troops abroad.
-Embassy Staff.
Private Transfers- Money in and Out.
Government Transfers generally just leave UK.
The Overall Balance Of Payments:
-Current Account (net trade etc).
-Financial/ capital account.
-Financial account is very large and it may offset the trade balance. Therefore a bad balance of trade may not be a negative to AD.
FDI is an inflow today and an outflow over time. Therefore over time the income account will go negative.
What Changes The Balance Of The Current Account?
-Changes in the value of the currency.
-Driven by a change in relative interest rates.
-Relatively low UK rates= relatively weak £
-A weak pound= cheaper UK exports= increase in Exports.
= more expensive imports= decrease in imports.
e.g the RMB (Chinese Rem-Nimbi) is too weak (fixed exchange rate)= Chinese exports are very competitive.
Inflation:
A relatively high inflation rate makes a country uncompetitive over time.
Productivity:
Increases in Labour Productivity improve UK competitiveness.
Aggregate Demand:
-The relative position of countries in the economic cycle.
-A country in a boom will import.
-Trading Partners (EU= 50% of trade= therefore important)
Innovation:
-New products create new demand
-I-pod, I-phone, I-pad etc.
The Importance Of Competitiveness:
-If we become uncompetitive, UK firms export less, go bust, close. Therefore exports decrease = vicious circle.
-We need to be competitive.
Investment is spending for the purpose of capital production.
-Requires higher levels of skill+ expertise.
-MEDC's well educated-technical etc.
Can A Service Based Economy Flourish?
-It requires the UK to stay ahead. We have to be better educated, more competitive etc.
-There is severe competition that exists in services, and we cannot control it.
Investment Income:
Earnings from investments made overseas - payments made to foreign investors, who have invested in the UK.
-Dividends paid on shares.
-Interest/ yield paid on trends.
-Profit on overseas investments.
-Net positive for the UK due to legacy of overseas investments and new ones.
Types of Investment:
-Investments listed on a stock exchange.
-London is arguably the worlds most important.
Direct Investment:
-Plant
-Machinery
-Factories and Offices
FDI in UK:
-BMW- Rover- Mini
-Nissan- Sunderland
Tatar- Landrover
Transfers:
Transfer of money between countries
-Private Transfers- money sent home.
Government Transfers:
Overseas AID.
-Payments sent to Non Government Organisation's.
-EU, IMF, UN, WTO.
-Payments to troops abroad.
-Embassy Staff.
Private Transfers- Money in and Out.
Government Transfers generally just leave UK.
The Overall Balance Of Payments:
-Current Account (net trade etc).
-Financial/ capital account.
-Financial account is very large and it may offset the trade balance. Therefore a bad balance of trade may not be a negative to AD.
FDI is an inflow today and an outflow over time. Therefore over time the income account will go negative.
What Changes The Balance Of The Current Account?
-Changes in the value of the currency.
-Driven by a change in relative interest rates.
-Relatively low UK rates= relatively weak £
-A weak pound= cheaper UK exports= increase in Exports.
= more expensive imports= decrease in imports.
e.g the RMB (Chinese Rem-Nimbi) is too weak (fixed exchange rate)= Chinese exports are very competitive.
Inflation:
A relatively high inflation rate makes a country uncompetitive over time.
Productivity:
Increases in Labour Productivity improve UK competitiveness.
Aggregate Demand:
-The relative position of countries in the economic cycle.
-A country in a boom will import.
-Trading Partners (EU= 50% of trade= therefore important)
Innovation:
-New products create new demand
-I-pod, I-phone, I-pad etc.
The Importance Of Competitiveness:
-If we become uncompetitive, UK firms export less, go bust, close. Therefore exports decrease = vicious circle.
-We need to be competitive.
Investment is spending for the purpose of capital production.
Thursday, 7 February 2013
Visible Trade Control
Why Is Productivity So Important?
-Productivity= output per worker
-Higher level of productivity= greater efficiency= lower cost= greater profit= improved welfare.
-UK productivity relatively low in relation to the rest of the G7 countries
-Relatively low R&D in UK
-Slow to adopt new management practices= flexible working and incentives
Therefore, it is cheaper and more ad more efficient to import. If the UK was more productive, then it would have a greater balance of payments.
How Do We Improve The BOP:
-Specialisation of workers through education
-Incentivise Investment (tax breaks + subsidy for R&D/ entrepreneurship/ innovation).
-Exploit comparative advantage (less labour intensive/ higher skilled activity).
-develop infrastructure (HS1/2- road rail)
Why Is Balance Of Trade So Important:
-The effect on the macro-economy (negative to the circular flow and AD).
-It slows the multiplier and reduces trickle down.
-Employment in manufacturing is regional (unequal impact of north).
-Impact on social structure-opportunity.
Trade In Services:
City of London (Finance, Banking, Law, Consultancy and Insurance)
-Tourism (exports= foreigners coming to the UK)
-Transport (sea, air. Ticket on a UK ship= export
-Air Tickets (British airways vs Lufthansa)
Tuesday, 5 February 2013
Government Intervention In Markets
Reasons For Government Intervention In Markets:
In a free market, scarce resources are allocated through the price mechanism.
The main reasons for Policy Intervention are:
-To correct for instances of market failure
-To achieve a more equitable distribution of income and wealth
-To improve the performance of the UK economy both domestically and on the international front.
Forms Of Government Intervention:
Government legislation and regulation
-Parliament an pass laws such as non sale of alcohol and cigarettes to under 18's.
Direct Provision Of Goods And Services
-because of privatisation, the state sector is much smaller than it was before 1980
Financial Intervention:
-Indirect taxes can be used to raise the price of a demerit good, thus reducing the demand for the good.
-A subsidy to consumers, will lower the price of demerit goods such as allowances for students to further their education.
-Tax relief- the government may offer tax relief to help new businesses take off, and to encourage entrepeneurship.
-changes in taxes and/or welfare, can change how much a class is encouraged to go out and work.
Fat Tax:
The government is thinking of introducing a fat tax. This form of taxation is targeted at those whose diets rely heavily on fast food and foods that are zero in nutritional value. As a result of these bad foods, there are over 3,000 fatal heart attacks and strokes every year. This will make these foods more expensive to buy, and will hopefully turn those with less economic resources to healthier alternatives.
Government intervention to close the information gap:
-Compulsory labelling on cigarette packaging with health warnings with the intention of reducing levels of smokers.
-Improved nutritional information for foods to counter the risks of growing obesity.
-Anti speeding television campaign's to show people that their speeding can not only hurt them and their family, but will also hurt the people of that community and who they potentially could hit.
-Campaigns stating the danger's of addictions, and how they can overcome these addictions. Information is provided of clinics that specially help these people.
Pollution Permits:
Pollution permits are sold to firms by the government allowing them to pollute up to a certain level before their emissions become harmful to the planet.
Using an indirect tax to correct negative externalities
Using a Subsidy to correct positive externalities
Minimum prices are the opposite of maximum pricesPossibility of Government failure:Even with good intentions, a government will rarely correctly apply their policies.
Government market failure can often be caused by a governments selfishness, and self interest. A government may sacrifice the good of the people in the selfish attempt to get re-elected. A Prime example of one of these politicians is Tony Blair, who did manage to get his party re-elected, and caused huge social and economical problems to Britain in the process.
CAU-The common agricultural policy is a system within the EU, which is in place to protect the farming sector. Its intentions are:-The stabilisation of agricultural markets-the guarantee of regular supplies-an increase in agricultural productivity and efficiency-maintaining reasonable consumer prices-maintaining a reasonable standard of living for the farming community.
Law Of Unintended Consequences:-When the actions of consumers, producers and governments have effects that are unanticipated.
Inflation:-A persistent increase in the level of prices.
Maximum Prices are ceilings that a government can set within a market stating how much a firm can sell their good or service for. The government put this in place in the attempt to prevent the market prices as a whole from rising to a certain level
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