economics
GOVERNMENT POLICY
Government as a producer:
Essential goods and services
Merit goods
Public goods
Control monopolies
*Government as an employer:
Unemployment rate=(number of unemployed%labour force)x100
Full enployement: situation were most people have a job but there are enough people out of work to prevent wages from starting to rise at an increasing rate
people are happier, but at the same time there must be unemployed so wages don’trise a lot
Dealing with unemployment:
Temporary: publicise job vacancies
Seasonal: not necessarily a problem
Technological: provide educational and training opportunities focusing on new technical skills required for new jobs
Frictional: training in job areas where there are shortages of supply / reduce the period of search unemployment
Structural: encourage people and businesses to move into growth areas of the economy
Cyclical: lower business taxes to reduce costs and encourage employment of more labour
PRICE STABILITY
Inflation occurs when there is a general rise in the price of goods and services in the whole economy. Average prices are measured by the government using the Consumer Price Index
Problems with inflation: it may reduce the value of the sum that is eventually paid on credit. This makes business reluctant to supply goods on credit / Inflation will reduce the value of taxes received / When prices of domestic products rise, they become less competitive when compared to imports.
Government policy to create price stability:
1 Direct control of prices: set prices and impose limits on wage increases
-the price system no longer operates as an efficient system for signalling the preferences of consumers
-there may be conflict between the government and the business that want to raise prices, and trade unions would want increases in wages
2 The government could reduce its own spending and raise taxes
-lowers the demand for goods in the economy, leading to falls in prices
-taxpayer incomes fall. They have less to spend leading to a fall in demand and a fall in prices
3 Control the quantity of money available for spending (by central bank printing less money and raising the interest rate )
ECONOMIC GROWTH
Living standards grow if there is a growth in Gross Domestic Product (GDP). It measures the total value of goods produced in the economy in a given period. It is important for a country’s economy that the GDP per head of population is increasing (calculated dividing country GDP by the number of people).
Rising GDP means that incomes within a country are rising, the standard of living of people within a country is rising and the government is able to raise more in taxes and to use this money to meets its objectives.
Sustainable economic growth occurs when the growth is maintained over a period of time. There must be investment for future generations. It can be in roads, ports, railway lines, etc, to make economy more productive. It can also be social and welfare investment.
The trade cycle: cycle of growth and recession
Government policy tries to prevent recession and to stimulate growth. Growth can be encouraged by:
-making it easier for businesses to conduct business
-providing incentives in growing industries
-employing people in productive activities in the public sector
-encouraging investment by the private and public sector
Depression of demand +
Depression of supply +
Depression of prices +
Decreasing of employment = Recession
REDISTRIBUTION OF INCOME:
Poverty: someone is considered poor if their income falls below the poverty line (US$ 1.25)
Redistributing income: throughout government spending, through subsidies and through taxation.
Government spending: use the money to spend on goods and services that benefit the poor like roads to remote rural communities, public education and health systems.
Subsidies: government pays a sum of money to a consumer or a producer. The government could pay a subsidy to a producer so they can supply it to the market at a lower price.
Taxation: tax the rich and redistribute this income
BALANCE OF PAYMENTS:
Monetary transactions between a country and the rest of the world. The most important part is the Current Account Balance which compares a country’s exports with its imports.
Value of exports higher than value of imports=SURPLUS
This is good for s growing economy. It lets countries eat foreign currency to buy essential raw materials to develop the country.
In the short term it doesn’t matter if a country has surplus of deficit in the balance of payments. In the longer term, if you have few years of deficits you would want to turn this into surpluses to pay off the deficits.
Deficits may mean that a country is not competitive in the international market. To make sure that the economy remains competitive, this might involve:
-providing subsidies to industries
-protecting the domestic market agains foreign imports
-encouraging consumers to buy domestically produced products
Inflation: persistent rise in the general level of prices over a period of time. Average prices will rise
Causes of inflation:
Cost-push factors
-food costs: high food prices lead to higher costs for other busninesses
-raw material costs: they are the centre of modern economies, so as their prices rise, there is an affect on many other prices
-wage costs
-land costs
-exchange rate costs
Demand-pull inflation: when rising demand pushes up the price of goods. This happens when people have more to spend. Business compete for resources and this will lead to a rise in prices
CONSEQUENCES OF INFLATION:
Inflation results in a loss of value of units of currency. People lose confidence in money and businesses push up prices because they see money as being less valuable.
The reverse of inflation is DEFLATION, when prices start to fall. It discourages businesses, who may restrict supply for markets