© Economics Online 2012Economics Online 20121

© Economics Online 2012Economics Online 20122

© Economics Online 2012Economics Online 2012Globalisation 3

© Economics Online 2012Economics Online 2012Globalisation 4

© Economics Online 2012Economics Online 2012Globalisation 5

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 The costs of globalisation 7

© Economics Online 2012Economics Online 2012 The costs of globalisation 8

© Economics Online 2012Economics Online 2012De-globalisation 9

© Economics Online 2012Economics Online 2012 Inequality and development Kuznets Curve Inequality increases in the early stages of development Development Inequality 10

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Foreign direct investment (FDI) 12

© Economics Online 2012Economics Online 2012 Investment income 13

© Economics Online 2012Economics Online 2012 Inward investment 14

© Economics Online 2012Economics Online 2012 Who invests? The USA, France and the UK are the three most important international investors, and recipients of investment. 15

© Economics Online 2012Economics Online 2012 Share of EU inward investment Source – HSBC,

© Economics Online 2012Economics Online 2012Volatility RECESSION 17

© Economics Online 2012Economics Online 2012 Why is FDI volatile? 18

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Liberalisation and protectionism 20

© Economics Online 2012Economics Online

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© Economics Online 2012Economics Online m20m 7.5m5m 24

Vans Cars © Economics Online 2012Economics Online 2012 Using PPFs to show advantage 0 Country B Country A Twice as productive Only 50% more productive Absolute advantage Comparative advantage 25

Vans Cars © Economics Online 2012Economics Online 2012 Numerical example 0 Country B Country A

© Economics Online

Copper ore (tonnes) Tablet computers (m) © Economics Online 2012Economics Online 2012 Opportunity cost and PPF gradients Countries should specialise in producing goods for which they have the comparative advantage. Take the example of two countries that can produce either computers or copper ore. Production possibility frontiers illustrate their maximum outputs. 0 Mythica Atlantis What happens if both countries increase their output of copper ore by 10 m tonnes? 28

Copper ore (tonnes) Tablet computers (m) © Economics Online 2012Economics Online 2012 Opportunity cost and PPF gradients 0 Mythica Atlantis

© Economics Online 2012Economics Online

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© Economics Online 2012Economics Online 2012 Motives for protection 32

© Economics Online 2012Economics Online 2012 Motives for protection 33

© Economics Online 2012Economics Online 2012 Methods of protection 34

Price Quantity © Economics Online 2012Economics Online 2012 Domestic supply Imports Quotas Domestic supply Domestic Demand Q P Q1 P1 0 World supply Q2 QUOTA Domestic supply + quota Pq Domestic supply Q4 Imports (QUOTA) Domestic supply The effect of the quota is to shift the domestic supply curve to the right, by the amount of the quota 35 X to Y is the expanded domestic supply as a result of the price increase from P1 to Pq

© Economics Online 2012Economics Online 2012Tariffs 36

Price Quantity © Economics Online 2012Economics Online 2012 The Tariff diagram Domestic Supply Domestic Demand Q P World Supply Q1 P1 Q2 Consumer Surplus Producer Surplus World Supply + Tariff P2 Q3Q40 Tariff Revenue Imports Domestic supply 37

© Economics Online 2012Economics Online 2012 Costs and benefits of trading blocs 38

Price Quantity © Economics Online 2012Economics Online 2012 Trade creation Domestic Supply Domestic Demand Q P World Supply Q3 P2 Q2 World Supply + Tariff P1 Q1Q40 Imports Domestic supply World Supply 39

© Economics Online 2012Economics Online 2012 Costs and benefits of trading blocs 40

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Stages in economic integration Preferential trade area (PTA) Members eliminate tariffs on some goods Free trade area (FTA) Members eliminate tariffs on all goods Customs Union (CU) Members eliminate tariffs on all goods and services, and have a common external tariff to non-members Monetary Union (MU) Members share a single currency, central bank, and have a common monetary policy Full economic integration A common market, a single currency, central bank, and common monetary and fiscal policies Common market – a single market Members eliminate tariffs on all resources, allowing free movement of labour and capital, and common micro-economic policies 42

© Economics Online 2012Economics Online 2012 Regional trading blocs (RTBs) 43

© Economics Online 2012Economics Online 2012 Regional trading blocs (RTBs) 44

© Economics Online 2012Economics Online 2012 The European Union (EU) AustriaGermanyNorway BelgiumGreecePoland BulgariaIrelandPortugal CyprusItalyRomania Czech Republic LatviaSpain DenmarkLithuaniaSlovenia EstoniaLuxembourgSlovakia FinlandMaltaSweden FranceNetherlandsUK 45

© Economics Online 2012Economics Online 2012 The Common Agricultural Policy (CAP) 46

© Economics Online 2012Economics Online 2012 The Common Agricultural Policy (CAP) 47

© Economics Online 2012Economics Online 2012 The European monetary system 48

© Economics Online 2012Economics Online 2012 The case for the Euro 49

© Economics Online 2012Economics Online 2012 The case against the Euro 50

© Economics Online 2012Economics Online 2012 The case against the Euro

© Economics Online 2012Economics Online 2012 Tests for membership 52

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 The World Trade Organisation (WTO) 54

© Economics Online 2012Economics Online 2012 The World Trade Organisation (WTO) 55

© Economics Online 2012Economics Online 2012 The Doha Round 56

© Economics Online 2012Economics Online 2012 The Doha Round 57

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 UK competitiveness 59

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 UK export competitiveness 62

© Economics Online 2012Economics Online 2012 Labour productivity 63

© Economics Online 2012Economics Online 2012 The productivity gap 64

© Economics Online 2012Economics Online 2012 Factors causing the productivity gap 65

© Economics Online 2012Economics Online 2012 Factors affecting UK productivity 66

© Economics Online 2012Economics Online 2012 Flexible labour markets 67

© Economics Online 2012Economics Online 2012 Factors affecting labour market flexibility 68

© Economics Online 2012Economics Online 2012 Factors affecting labour market flexibility 69

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Investment levels

Interest rates Q © Economics Online 2012Economics Online 2012 Investment and interest rates 4% £25b 3% £50b Marginal Efficiency of Capital (MEC) 72

© Economics Online 2011 Policies to improve competitiveness POLICIES TO IMPROVE COMPETITIVENESS Improve productivity Improve infrastructure Improve education and skills Stabilise the macro economy Integrated transport links – e.g. Cross rail Subsidies to public transport Reduce congestion Integrated transport links – e.g. Cross rail Subsidies to public transport Reduce congestion Public investment in new technology Tax incentives for firms to invest Improve education and skills Promote flexible labour markets Measures to improve competition Public investment in new technology Tax incentives for firms to invest Improve education and skills Promote flexible labour markets Measures to improve competition Incentives to learn Subsidise university education Subside infant education – e.g. Sure Start Individual learning accounts Government schemes – e.g. Learn Direct website Incentives to learn Subsidise university education Subside infant education – e.g. Sure Start Individual learning accounts Government schemes – e.g. Learn Direct website Keep UK close to its trend rate of growth (2.5%) by: Monetary policy Fiscal policy To: Reduce inflation Stabilise the exchange rate Keep UK close to its trend rate of growth (2.5%) by: Monetary policy Fiscal policy To: Reduce inflation Stabilise the exchange rate 73

© Economics Online 2012Economics Online 2012 Policies to help improve competitiveness 74

© Economics Online 2012Economics Online 2012 Policies to help improve competitiveness 75

© Economics Online 2012Economics Online 2012 Policies to help improve competitiveness 76

© Economics Online 2012Economics Online 2012 Policies to help improve competitiveness 77

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 The importance of exchange rates 79

© Economics Online 2012Economics Online 2012 Measuring exchange rates 80

© Economics Online 2012Economics Online 2012 Exchange rate regimes 81

© Economics Online 2012Economics Online 2012 Under a floating system a currency can rise or fall due to changes in demand or supply of currencies on the foreign exchange market. When the UK imports it must supply pounds and buy euros When the UK imports it must supply pounds and buy euros When the UK exports other countries must buy pounds When the UK exports other countries must buy pounds The UK has stocks of £ The UK has stocks of £ France has stocks of Euro £ £ £ £ £ £ The value of the pound is determined in the foreign exchange market, and depends upon relative demand and supply £/ Supply of pounds (determined by imports ) Demand for pounds (determined by exports ) Foreign exchange market IMPORTS EXPORTS IMPORTS More EXPORTS shifts the demand for a currency to the right More IMPORTS shifts the supply of a currency to the right 82

© Economics Online 2011 Changes in exchange rates Q £ = $ D (derived from exports) £ Q S (derived from imports) £1 = $1.50 £1 = $1.60 The equilibrium exchange rate exists at the rate where demand and supply equate 83

© Economics Online 2011 Exchange rates and interest rates Q £ = $ D (derived from exports) £ Q S (derived from imports) £1 Q1 84

© Economics Online 2012Economics Online 2012 Fixed exchange rates 85

© Economics Online 2012Economics Online 2012 Fixed exchange rates 86

© Economics Online 2011 Managed regimes Time *% *% 87

© Economics Online 2012Economics Online 2012 Evaluation of regimes 88

© Economics Online 2012Economics Online 2012 Evaluation of regimes 89

© Economics Online 2012Economics Online 2012 Recent UK Exchange rates 90

© Economics Online 2012Economics Online 2012© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Balance of payments 92

© Economics Online 2012Economics Online 2012 Balance of payments 93

© Economics Online 2012Economics Online 2012 Current account (2010) The Current Account for 2010 showed that the UK had a deficit of £38b. The UKs major goods imports are: 1.Electrical machinery 2.Cars and transport equipment 3.Mechanical machinery 4.Clothing 5.Petrol Source – ONS 94

© Economics Online 2012Economics Online 2012 The capital and financial account 95

© Economics Online 2012Economics Online 2012 Official financing 96

© Economics Online 2012Economics Online 2012 When is a current account deficit a problem? 97

© Economics Online 2012Economics Online 2012 Economic growth and trade performance Above trend rate Worsening deficit 98

© Economics Online 2012Economics Online 2012© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Causes of current account deficits 100

© Economics Online 2012Economics Online 2012 Causes of current account deficits 101

© Economics Online 2012Economics Online 2012 Dealing with a current account deficit 102

© Economics Online 2012Economics Online 2012 Dealing with a current account deficit 103

Injections & Withdrawals Real Y Deflating domestic income Y At Y there is a deficit Y1 At Y1 the deficit is reduced BALANCE 104

© Economics Online 2012Economics Online 2012Devaluation 105

© Economics Online 2012Economics Online 2012Devaluation 106

© Economics Online 2012Economics Online 2012 Import and export elasticity Price QQ Demand for IMPORTS Demand for EXPORTS D P Q2 D Q P1 P Q1 QQ2 Devaluation raises import prices New import spending when demand for imports is elastic New import spending when demand for imports is inelastic New export revenue if demand for exports is elastic New export revenue if export demand is inelastic Import spending before the devaluation Inelastic Elastic Inelastic Export revenue before the devaluation Devaluation reduces export prices 107

© Economics Online 2012Economics Online 2012© Economics Online 2012Economics Online

The J Curve Time Balance of Payments (-) (+) DeficitDeficit SurplusSurplus 109

© Economics Online 2012Economics Online 2012 Direct controls 110

© Economics Online 2012Economics Online 2012 Supply-side policy 111

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Development and growth 113

© Economics Online 2012Economics Online 2012 Indicators of development 114

© Economics Online 2012Economics Online 2012 HDI for selected countries: Very high High Medium Low 115

© Economics Online 2012Economics Online 2012 Life expectancy 116

© Economics Online 2012Economics Online 2012 Literacy 117

© Economics Online 2012Economics Online 2012 GDP per capita 118

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Measure of economic welfare (MEW) 120

© Economics Online 2012Economics Online 2012 Purchasing power parity 121

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Types of growth theory 123

© Economics Online 2012Economics Online 2012 Linear stage theory Rostows linear stage theory One of the first growth theories was that proposed by American economic historian W. Rostow in the early 1960s. Rostow argued that economies must go through a number of developmental stages. He argued that these stages followed a logical sequence: Rostows stages are: Traditional society Dominated by agriculture and barter exchange Pre-take off Increased savings ratio Take off Positive growth rate Drive to maturity Ongoing movement towards development Mass consumption Citizens enjoy high and rising consumption per head. 124

© Economics Online 2012Economics Online 2012 The Harrod-Domar growth model 125

F actors I ncomes S pending G oods Households Firms © Economics Online 2012Economics Online 2012 Savings and capital-output ratios Savings Savings CapitalOutput Saving is income not spent on current consumption - it provides the flow of funds necessary for capital accumulation, which is needed for economic growth. The capital-output ratio (O/K) indicates how much capital is needed to create new output Capital IncomeIncome The savings ratio indicates the ratio of savings to national income Output savings ratio Capital (K)/output ratio £100£80£20 £4 £20 £40 £16 The higher the savings and capital output ratio, the greater the growth in output Income circulates from firms to households Some income is saved Saving allows capital accumulation MORE CAPITAL MEANS MORE OUTPUT AND HIGHER ECONOMIC GROWTH 126

© Economics Online 2012Economics Online 2012 Evaluation of stage theory 127

© Economics Online 2012Economics Online 2012 Structural change models Agriculture Industry Agriculture Industry Labour 128

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Evaluation of the Lewis model 130

© Economics Online 2012Economics Online 2012 Industry Clark-Fishers structural change model Agriculture Industry Agriculture Industry Labour Industry Agriculture Services Labour 131

© Economics Online 2012Economics Online 2012 Dependency theory 132

© Economics Online 2012Economics Online 2012 Dependency theory 133

© Economics Online 2012Economics Online 2012 Neo-classical theory 134

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 New growth theory 136

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Inefficiencies 139

© Economics Online 2012Economics Online 2012 Imbalances 140

© Economics Online 2012Economics Online 2012 Population constraints 141

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Poverty and inequality 143

© Economics Online 2012Economics Online 2012 Measuring inequality 144

© Economics Online 2012Economics Online 2012 The Lorenz curve The Lorenz Curve A Lorenz curve shows the % of income earned by a given % of the population Cumulative Income (%) Cumulative Population (%) Line of perfectly equal distribution Lorenz Curve for Country X % of Pop % of Y for perfect distribution % of Y in Country X The Gini co-efficient is calculated by comparing the area from the curve to the 45 0 line and the area from the axis to the 45 0 line. The closer to 1, the greater the inequality

© Economics Online 2012Economics Online 2012 Comparing countries The further the Lorenz Curve from the 45 degree line, the less equal (wider) the distribution of income Cumulative Income (%) Cumulative Population (%) Line of perfectly equal distribution Lorenz Curve for Country X % of Pop % of Y in Country X % of Y in Country Y Lorenz Curve for Country Y Changes in the Lorenz curve (and Gini co-efficient) can be used to assess the effectiveness of policies designed to reduce poverty and narrow the distribution of income.

© Economics Online 2012Economics Online 2012 Poverty

© Economics Online 2012Economics Online 2012 Estimated absolute poverty 23% 25% 62% 28% 35% Source – United Nations 148

© Economics Online 2012Economics Online 2012 Inequality and development Kuznets Curve Inequality increases in the early stages of development Development Inequality 149

© Economics Online 2012Economics Online 2012 Lack of financial capital 150

© Economics Online 2012Economics Online 2012 Poor governance 151

© Economics Online 2012Economics Online 2012 Missing markets 152

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Lack of education 154

© Economics Online 2012Economics Online 2012 Over-exploitation of environmental capital 155

© Economics Online 2012Economics Online 2012 Barriers to trade 156

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Developing agriculture and primary products 158

© Economics Online 2012Economics Online 2012 Low elasticity 159

© Economics Online 2012Economics Online 2012 Falling terms of trade - The Prebisch-Singer hypothesis Index of export prices Index of import prices X

© Economics Online 2012Economics Online 2012 Falling incomes Q Price D P Q S P1 Q1 Q1 0 AA BB Revenue 161

© Economics Online 2012Economics Online 2012 Unstable prices Q Price D P Q S P1 Q1 0 S1S2 Q2 P2 S3 Q3 Long Run Supply 162

© Economics Online 2012Economics Online 2012 Protectionism 163

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Promoting industrialisation Agriculture Industry Agriculture Industry Labour 165

© Economics Online 2012Economics Online 2012 Inward looking policies 166

© Economics Online 2012Economics Online 2012 The benefits of inward looking policies 167

© Economics Online 2012Economics Online 2012 Outward looking policies – embracing globalisation 168

© Economics Online 2012Economics Online 2012 The benefits of outward looking policies 169

© Economics Online 2012Economics Online 2012 The promotion of tourism 170

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Official Development Aid (ODA) 173

© Economics Online 2012Economics Online 2012 Official Development Aid (ODA) 174

© Economics Online 2012Economics Online 2012 Government assistance 175

© Economics Online 2012Economics Online 2012 Non-Governmental Organisations (NGOs) 176

© Economics Online 2012Economics Online 2012 The IMF 177

© Economics Online 2012Economics Online 2012 The World Bank 178

© Economics Online 2012Economics Online 2012 Assessment of the World Bank 179

© Economics Online 2012Economics Online 2012 Assessment of the IMF 180

© Economics Online 2012Economics Online 2012 United nations millennium goals 181

© Economics Online 2012Economics Online 2012 Excessive debt 182

© Economics Online 2012Economics Online 2012 Excessive debt 183

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Debt forgiveness 185

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Macro-economic policy 188

© Economics Online 2012Economics Online 2012 Macro-economic policy 189

© Economics Online 2012Economics Online 2012 Macro-economic policy objectives 190

© Economics Online 2012Economics Online 2012 The trade cycle Time Change in real national income DEMAND SIDE POLICY Monetary policy Fiscal policy Exchange rate policy Regulates aggregate demand to stabilise the trade cycle DEMAND SIDE POLICY Monetary policy Fiscal policy Exchange rate policy Regulates aggregate demand to stabilise the trade cycle SUPPLY SIDE POLICY Incentives Welfare to work Education and skills Promotes long term growth SUPPLY SIDE POLICY Incentives Welfare to work Education and skills Promotes long term growth 191

© Economics Online 2012Economics Online 2012 Policy Building Blocks DEMAND SIDE POLICY MONETARY FISCALFISCAL Taxation Government spending Interest rates Money supply Productivity & efficiency Productivity & efficiency Stabilise after shocks Manage the trade cycle Exchange rates SUPPLY- SIDE POLICY Privatisation & competition De-regulation Labour market reform Incentives Education and skills POLICY OBJECTIVES Stable prices Stable growth Sustainable growth Full employment Balance of payments Sustainable public finances Supply side Monetary Fiscal Equity 192

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Global shocks 195

© Economics Online 2012Economics Online 2012 Types of shock 196

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Unstable prices 199

© Economics Online 2012Economics Online 2012 The problem of inflation 200

© Economics Online 2012Economics Online 2012 Why is inflation a problem? 201

© Economics Online 2012Economics Online 2012 Why is inflation a problem? 202

Price Level National Output (Y) © Economics Online 2012Economics Online 2012 The causes of price instability - demand pull inflation Yf LRAS AD YY1 P P1 SRAS As the economy approaches full employment excessive AD pulls up prices As the economy approaches full employment excessive AD pulls up prices 203

© Economics Online 2012Economics Online 2012 Changes in the savings rate 204

Price Level National Output (Y) © Economics Online 2012Economics Online 2012 Yf LRAS AD YY1 P P1 SRAS Cost push inflation SRAS 205

© Economics Online 2012Economics Online 2012 Exchange rates and cost push inflation 206

© Economics Online 2012Economics Online 2012 Why is deflation a problem? 207

© Economics Online 2012Economics Online 2012 Why is deflation a problem? 208

Price Level National Income (Y) © Economics Online 2012Economics Online 2012 Causes of deflation LRAS AD YY1 P P1 SRAS Y2 Deflation tends to occur when the economys capacity (indicated by the AS curve) grows at a faster rate than AD. 209

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012Unemployment 211

© Economics Online 2012Economics Online 2012 UK unemployment 212

© Economics Online 2012Economics Online 2012 Types of unemployment 213

© Economics Online 2012Economics Online 2012 Types of unemployment 214

© Economics Online 2012Economics Online 2012 Structural unemployment and mobility 215

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012NAIRU 217

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 New Keynesian theory of persistent unemployment 219

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 The importance and role of money 221

© Economics Online 2012Economics Online 2012 The importance and role of money 222

© Economics Online 2012Economics Online 2012 Measures of the money supply 223

Interest rates Q © Economics Online 2012Economics Online 2012 The demand for money Speculative demand Transactions Demand Precautionary demand Liquidity Preference (total demand) A certain amount of money is required for transactions. This is not affected by interest rates, so is vertical and perfectly inelastic with respect to interest rates The precautionary demand is also unrelated to interest rates Financial assets are an alternative to holding money – the speculative demand is inversely related to interest rates 224

Interest rates Q © Economics Online 2012Economics Online 2012 Money markets and interest rates Money Supply (M) Liquidity Preference (L) 5% M 225

Interest rates Q © Economics Online 2012Economics Online 2012 Changing interest rates Money Supply Liquidity Preference 5% M 6% M1 226

© Economics Online 2012Economics Online 2012Monetarism 227

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Money and inflation - The Fisher equation 229

© Economics Online 2012Economics Online 2012 Modern monetary policy 230

© Economics Online 2012Economics Online 2012 Modern monetary policy 231

© Economics Online 2012Economics Online 2012 Monetary policy 232

© Economics Online 2012Economics Online 2012 How do interest rates work? 233

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Import prices FALL Domestic demand TIGHTENS Import prices - cost inflation Domestic demand inflation Summary of the monetary transmission mechanism Market interest rates Asset prices Expectations Exchange rates Official interest rate Total inflation RISE FALL WORSEN APPRECIATE Inflationary PRESSURE EASED 235

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012

© Economics Online 2012Economics Online 2012 Monetary Policy in Europe 242

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 The public sector - government expenditure 244

© Economics Online 2012Economics Online 2012 Fiscal policy 245

© Economics Online 2012Economics Online 2012 Government Spending The main areas of UK government spending in 2010, which totalled £681bn, were: 1. Social protection 2. National Health 3. Education 4. Public Order 5. Defence 246

© Economics Online 2012Economics Online 2012 Central and Local government borrowing 247

© Economics Online 2012Economics Online 2012 Fiscal deficits and the National Debt £Billions Government spending Revenues Borrowing National Debt Hypothetical example to illustrate how the National Debt is calculated. 248

© Economics Online 2012Economics Online 2012 Is a rising national debt a problem? European stability pact limit 3 249

© Economics Online 2012Economics Online 2012 Central and local government spending 250

© Economics Online 2012Economics Online 2012 Evaluation of discretionary public spending 251

© Economics Online 2012Economics Online 2012 Evaluation of government spending 252

© Economics Online 2012Economics Online 2012 Crowding out theory 253

© Economics Online 2012Economics Online 2012 The public sector – revenue and taxation 254

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Tax revenue sources 256

© Economics Online 2012Economics Online 2012 Automatic Stabilisation 257

© Economics Online 2012Economics Online 2012 Automatic stabilisation – fiscal boost 258

© Economics Online 2012Economics Online 2012 The effects of fiscal drag and fiscal boost Progressive taxes reduce the rate of growth in the economy Progressive taxes and benefits stop the economy contracting too quickly Without stabilisers Without stabilisers With stabilisers With stabilisers 259

© Economics Online 2012Economics Online 2012 Discretionary changes to tax rates 260

© Economics Online 2012Economics Online 2012 Evaluation of taxation – the advantages 261

© Economics Online 2012Economics Online 2012 Taxes and Equity 262

© Economics Online 2012Economics Online 2012 Evaluation of taxation – the disadvantages 263

Tax Revenue Tax Rate © Economics Online 2012Economics Online 2012 The disincentive effect of direct taxes 0 100% Laffer Curve Disincentive effect 264

© Economics Online 2012Economics Online 2012 Income and substitution effects 265

© Economics Online 2012Economics Online

Inflation (%) Unemployment (%) © Economics Online

Inflation (%) Unemployment (%) © Economics Online 2011 The Phillips Curve U P P1 U1 268

Inflation (%) Unemployment (%) © Economics Online 2011 The Phillips Curve U P P1 U1 269

Inflation (%) Unemployment (%) © Economics Online 2011 The Phillips Curve U P P1 U1 However, by the end of the 1970s the stable and inverse relationship began to break down. As policy makers exploited the relationship, it began to break down. 270

Inflation (%) Unemployment (%) © Economics Online 2011 The breakdown of the Phillips Curve Short Run Phillips Curves Long Run Phillips Curve NRU The Natural Rate of Unemployment 271

Inflation (%) Unemployment (%) © Economics Online 2011 What happened? The New Classical View Short Run Phillips Curves Long Run Phillips Curve NRU The Natural Rate of Unemployment A BC U1 P P1 D E P2 272

Price Level National Output (Y) © Economics Online 2011 Using AD/AS to show the Phillips Curve Effect LRAS AD1 YY1 P P1 SRAS1 AD P2 SRAS 273

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Supply-side policy 275

© Economics Online 2012Economics Online 2012 Supply-side policy 276

© Economics Online 2012Economics Online

Price Level National Income (Y) © Economics Online 2012Economics Online 2012 The effects of supply-side policy LRAS AD Y P P1 LRAS1 The shift to the right in the LRAS curve creates the possibility of a lower price level and more output and jobs in the longer term Y1 Actual equilibrium in the short run is determined by the position of SRAS in relation to AD SRAS 278

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online 2012 Conflicts of objectives 280

© Economics Online 2012Economics Online 2012 Conflicts of objectives 281

© Economics Online 2012Economics Online

© Economics Online 2012Economics Online