1. GOVERNMENT ECONOMIC POLICIES
The UK Economy (Macroeconomics)
TOPIC 4

2. DEMAND SIDE OF THE ECONOMY
This refers to aggregate demand.
This is C + I + G + (X - M)
Too little demand leads to cyclical unemployment and too much demand leads to inflation.
The government can change the level of demand by using:
Fiscal Policy
Monetary Policy
THESE ARE CALLED DEMAND – SIDE POLICIES

3. SUPPLY SIDE OF THE ECONOMY
This refers to the part of the economy that produces goods and services.
The performance of any economy is limited by its productive potential. This is affected by the quality and efficiency of the resources available.
Governments can influence the supply side by using SUPPLY SIDE POLICIES

4. DEMAND SIDE POLIICES (Fiscal and Monetary)
Topic 4
The UK Economy (Macroeconomics)

5. FISCAL POLICY
Fiscal policy is when the government changes the level of its spending or the level of taxation to influence the economy.
The policy aims to change the level of aggregate demand.

6. MACROECONOMIC OBJECTIVES AND FISCAL POLICY
UNEMPLOYMENT
High unemployment occurs because of insufficient demand in the economy. They could increase demand by:
Spending more itself. (G)
They could increase capital spending e.g. new hospitals or current spending e.g. employing more. This would be an injection.
Reducing taxation
Reducing corporation tax may increase investment from firms (I) or by reducing income tax will mean consumers will have more to spend (C)

7. MACROECONOMIC OBJECTIVES AND FISCAL POLICY
INFLATION
If there is inflation in the economy then there is too much aggregate demand, the government will try to cut demand by;
Cutting its own spending (G)
Increasing taxation to cut consumer spending (C) or investment by firms. (I)

8. PROBLEMS WITH FISCAL POLICY
CONFLICTING OBJECTIVES
A policy that wants to raise demand to increase employment and encourage economic growth could;
Worsen the balance of payments
Cause inflation
A policy used to reduce inflation could;
Cause unemployment
Lower economic growth

9. PROBLEMS WITH FISCAL POLICY
FORECASTING THE REQUIRED CHANGE IN DEMAND
The data used to make plans is not always reliable
It is difficult to predict the multiplier effect of increasing G or reducing T
Difficult to estimate when the policy will take effect
FINE TUNING
As fiscal policy is not a precise instrument. This is because either too little demand was injected so unemployment remained or too much was injected and inflation occurred.

10. MONETARY POLICY
Monetary policy is one that uses interest rates or controls the money supply as a means of achieving objectives.
Interest rates are set by the Monetary Policy Committee (MPC) of the Bank of England. They have to keep inflation within the government’s target.
They BoE are the:
Governments Bank
Bankers Bank

11. MONETARY POLICY AND GOVERNMENT OBJECTIVES
INFLATION
If a government wanted to reduce demand to control inflation then it would increase interest rates or reduce the money supply.
By increasing interest rates there would also be an increase in the exchange rate. This can reduce inflation in three ways:
Lowers the price of imported finished goods
Lowers the price of imported raw materials
Puts pressure on domestic firms to lower costs to remain competitive.

12. ECONOMIC GROWTH AND UNEMPLOYMENT
To boost demand in order to achieve economic growth they would lower interest rates.
This would encourage people to spend and borrow.
It will also lower the exchange rate making exports cheaper and therefore increase employment.

13. BALANCE OF PAYMENTS DEFICIT
An increase in the rate of interest will cut aggregate demand which includes the demand for imports.
This helps to improve the Balance of Payments as it means less imports coming into the country.

14. INTEREST RATES AND INFLATION
When interest rates are changed, demand can be affected in a number of ways.
Spending and savings
Increased interest rates makes savings more attractive and borrowing less attractive.
Cash-flow
rising interest rates will reduce consumers cash-flow, less to spend.
Exchange rates
Increased interest rates will increase the amount of foreigner investors.

15. Supply Side Policies
These are mainly microeconomic measures, which are designed to improve competition in PRODUCT MARKETS and improve working in LABOUR MARKETS.

16. PRODUCT MARKETS
The main reason for supply-side policies in this type of market is that increased competition will increase efficiency.
Policies include:
Privatisation
Deregulation
Commitment to Free Trade
Reduction in Corporation Tax
Strict control of inflation

17. LABOUR MARKETS
A labour market that is perfect can clear surpluses and shortages quickly. It is called a FLEXIBLE LABOUR MARKET
An imperfect or inflexible labour market finds it difficult to adjust.
Policies include:
Trade Union reforms – less power = less industrial action
Increased spending on education
Increased spending on training
Improved incentives to work. E.g. reducing income tax, making benefits less attractive.

18. ECONOMIC GROWTH
Topic 4
The UK Economy (Macroeconomics)

19. WHAT IS ECONOMIC GROWTH?
This is the rate of growth in a country’s potential output.
It is represented by a shift to the right of the country’s production possibility curve and the annual percentage change in GDP.

20. CAUSES OF ECONOMIC GROWTH
SUPPLY-SIDE POTENTIAL GROWTH
QUANTITY OF RESOURCES
Land – usually fixed in quantity but can increase in the long run. E.g. new oil field.
Labour –any increase in the number of people willing and able to work or the hours worked.
Capital – an increase in investment is usually the most important cause of economic growth.

21. CAUSES OF ECONOMIC GROWTH
PRODUCTIVITY OF RESOURCES
Moving resources from low-productivity industries to high- productivity ones. Depends on occupational and geographical mobility.
Improving the quality of resources – Land, Labour, Capital
Using resources in a more economically efficient way e.g. specialisation, economies of scale.

22. ACTUAL GROWTH Determine by two factors: The growth in potential output
The growth in aggregate demand.

23. GOVERNMENT POLICY LEFT WING RIGHT WING
Believe the government should intervene.
They want the government to invest in industries and supply subsidies.
Strong belief that the government should invest heavily in infrastructure.
Increase aggregate demand through fiscal and monetary policies.
Private sector and enterprise generate growth.
Government should only get involved to remove controls and regulations.
Reduce direct taxes on income and profits.
Strict control of inflation is necessary.

24. GROWTH Benefits Costs Standards of living improve
Increased productivity
Increased incomes
Higher Tax revenues – better public services
resources are diverted to making capital goods
Pollution
Depletions of non- renewable resources
Increased pressure on industrial and urban life e.g. stress and crime.

25. SOURCES OF GROWTH Demand Supply Low unemployment
Consumers have been able to increase borrowing
Interest rates have been low
Significant spending by the government.
Increase in female participation has increased the workforce
Increased flexibility of labour
Higher investment has added to the country’s productive capacity.

26. ENVIRONMENT POLICY
TOPIC 4
The UK Economy (Macroeconomics)

27. ENVIRONMENT PROBLEMS Global warming Air pollution Water pollution
Traffic congestion
Depletion of non-renewable energy resources
Landfill waste

28. MARKET BASED POLICIES
These aim to influence the producer or the consumer by the price they have to pay.
They hope to discourage producers or consumers by making them pay for the external cost they create.
Policies include:
Landfill Tax
Climate change levy
Road Pricing
Petrol Tax
VAT on domestic fuel

29. NON-MARKET POLICIES
These are designed to impose direct controls on polluters or involve the government in investing in areas.
Can include setting pollution standards and enforcing them.
Government investment has included:
Park and ride schemes
Improved sewage disposal
Research into renewable forms of energy
Providing recycling projects such as bottle banks.

30. OTHER FACTORS
Firms are becoming environmentally friendly because they have discovered:
Going green is good for business
Cutting down on waste, conserving energy and recycling can save money
Pressure groups can put customers off irresponsible firms.

31. MARKET FAILURE
TOPIC 4
The UK Economy (Macroeconomics)

32. WHAT IS MARKET FAILURE?
This happens when a market fails to supply the type or quantity of goods or services that consumers want.
This means there is economic inefficiency in that market.
Causes:
COMPETITION IS RESTRICTED
EXTERNAL COST AND BENEFITS ARE IGNORED
PUBLIC GOODS ARE NOT PROVIDED
MERIT GOODS NOT PROVIDED TO ALL WHO NEED THEM.

33. RESTRICTED COMPETITION
Competition is good in an economy. As it encourages firms to be more efficient. Restricted competition result in:
Poorer quality goods
Limited supplies
Inefficient use of resources
Higher prices.

34. RESTRICTIVE TRADE PRACTICES These can include:
Resale price maintenance.
Predatory pricing.
Distributing only to certain retailers.
Cartels.
All of which are ILLEGAL in the UK

35. GOVERNMENT POLICY
Their aim is to encourage competition. It is the responsibility of the OFFICE OF FAIR TRADING to investigate breaches of competition law.
EU COMPETITION LAW
Any merger or take over on a European scale can be investigated by the European Commission

36. MONOPOLY INVESTIGATIONS
Any firm with a market share of above 25% may be referred to the COMPETITION COMMISSION if it is felt that they are acting against the public interest.
MERGER INVESTIGATIONS
Any takeover or merger, which would mean a firm has more than 25% of a market or assets worth more than £30m will be looked at.
If it is against public interest then the merger will not be allowed to take place. E.g. Lloyds TSB and Abbey

37. WHAT IS THE PUBLIC INTEREST?
A monopoly or merge will be allowed if:
Competition is maintained.
The competitive strength of a UK firm is increased overseas
The development of new products is likely
Costs of production are reduced
Interests of consumers are improved e.g. more choice

38. EXTERNAL COSTS AND BENEFITS
PRIVATE COSTS
This is the costs that a firm has to pay and is taken into account when making decisions.
PRIVATE BENEFIT
This is the benefit the consumer expects to receive when buying a product.

39. COSTS
EXTERNAL COSTS
These are costs that are not paid by producers and not included in the price charge to consumers.
External costs can be things such as a firm polluting a river or a chip shop not taking into account the cost of tidying up the wrappers.
SOCIAL COSTS
Cost to society of all resources used as a result of production and consumption
Social Cost = Private Cost + External Cost

40. BENEFITS EXTERNAL BENEFIT
This is the benefit someone gets even if they have not paid for it.
E.g. someone who pays for medicine does not just benefit them but benefits those around them
SOCIAL BENEFIT
Social benefit = private benefit + external benefit

41. EXTERNAL COSTS AND MARKET FAILURE
If a producer does not consider the external costs of their products then production will exceed what it should ideally be.
Resources will be over-allocated to the production of that good.
If a firm creates external costs then the government can intervene and:
Impose direct controls on the industry. E.g. limit pub opening hours, or limit number of consumers by age.
Impose a tax which would be equal to the external cost. This would move the supply curve to the left, increasing price and quantity fall.

42. EXTERNAL BENEFITS AND MARKET FAILURE
If a producer does not consider an external benefit then output is lower than it should be.
Price would fall and consumers would demand more.
To encourage production the government could intervene and give a subsidy equal to the external benefit.

43. PUBLIC GOODS ARE NOT PROVIDED
All public goods have three characteristics:
A consumer can use it without reducing the amount available to others.
The producer (i.e. government) cannot exclude consumers from using it.
A consumer cannot choose to consume the product.
Public goods cannot be provided by a free market system because of the FREE RIDER PROBLEM.
Government need to provide them and pay for them through taxation.

44. MERIT GOODS ARE NOT PROVIDED
These are given to people who merit them, either free or at a reduced price.
They differ from public goods in that they are:
Rival – if you are using it someone else can’t.
Excludable – you can be excluded from using it
Rejectable – in most cases the consumer can decide not to use the service.
In a free market economy there would be wide differences in income and wealth so that people on low incomes could not afford certain desirable services.
In a mixed economy the government will intervene to provide things such as education and healthcare

45. INEQUALITIES OF INCOME AND WEALTH
TOPIC 4
The UK Economy (Macroeconomics)

46. INCOME It includes: UNEVEN DISTRIBUTION This is because of: Investment
Work
Social Benefits
UNEVEN DISTRIBUTION
This is because of:
Age and unemployment
Uneven distribution of skills and talents
Different education opportunities
Unequal ownership of wealth

47. The gap between rich and poor has widened since the 1980s because:
WIDENING OF THE GAP
The gap between rich and poor has widened since the 1980s because:
Few jobs in manufacturing but more in service industries, which tend to be part-time and low paid
Reduced bargaining power for workers
An ageing population
More regressive taxation

48. WEALTH
This is what people own. It refers to their assets e.g. house, bank account, shares
It is unevenly distributed by:
Savings
Inheritance

49. GOVERNMENT POLICIES Introduction of National Minimum Wage
Helping people into employment
Providing job training
More progressive taxation on income and wealth
Reducing tax and National Insurance for those on low incomes
Restructuring welfare payments
Providing more merit goods or increasing cut off points for free provision

50. CASE AGAINST INTERVENTION
More taxation will have to be paid – less incentive to work
Reduced incentives would lower National Income

51. REGIONAL POLICY
TOPIC 4
The UK Economy (Macroeconomics)

52. BACKGROUND
Differences in prosperity exist between different parts of the country.
Areas of industrial decline/ no new industry
North/South divide

53. INTERVENTION FOR AGAINST Labour is geographically immobile
Areas need new infrastructure to be made attractive
Training required for occupational immobile workforce
Wage rates will be less in poor areas therefore attracting investments
Prosperous regions become costly and congested – driving business away

54. Previous and Current Assistance
Regional Selective Assistance
Regional Enterprise Grants
Highlands & Islands Enterprise
Local Enterprise Companies
Locate in Scotland
European Regional Development Fund
New Assistance?
See notes (93-94)

55. THE SCOTTISH ECONOMY
TOPIC 4
The UK Economy (Macroeconomics)

56. OUTPUT
Increase in services and energy versus a decrease in manufacturing.
This can also be reflected in employment figures.
REGIONS
Lothians and Borders higher GDP – service sector
Grampian higher GDP – oil and gas revenues
Strathclyde and Tayside GDP has fallen – manufacturing sector

57. FOREIGN FIRMS
These firms are very important to Scotland, around 10% of manufacturing firms are foreign owned.
Proportion of Scots employed is higher than UK average.
Advantages for firms
Skilled labour
Inside EU
Good infrastructure
Govt incentives
External Economies of Scale

58. Firms with advanced skills
ADVANTAGES FOR SCOTLAND
DISADVANTAGES FOR SCOTLAND
Employment
Firms with advanced skills
Profitable companies
Boosts exports
R&D carried out in other countries
Squeeze on firms in times of recession
Potential for grants to stop