© Economics Online 2012Economics Online 20121. © Economics Online 2012Economics Online 20122.

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 2.5 5 10 20 5 7.5 3.75 2.5 15 1.0 26

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 20 10 20 40 50 30 10 50 + 10 - 10 - 5 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 20 10 20 40 50 30 10 50 + 10 - 20 - 10 29

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

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

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

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 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 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

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 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

The J Curve Time Balance of Payments (-) (+) 200820092011 DeficitDeficit SurplusSurplus 109

© 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

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 The Lorenz curve The Lorenz Curve A Lorenz curve shows the % of income earned by a given % of the population. 100 90 80 70 60 50 40 30 20 10 Cumulative Income (%) Cumulative Population (%) Line of perfectly equal distribution Lorenz Curve for Country X 10 20 30 40 50 60 70 80 90 100 % of Pop % of Y for perfect distribution % of Y in Country X 20 2 40 10 60 25 80 45 100 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. 100 90 80 70 60 50 40 30 20 10 Cumulative Income (%) Cumulative Population (%) Line of perfectly equal distribution Lorenz Curve for Country X 10 20 40 60 80 100 % of Pop % of Y in Country X % of Y in Country Y 2021 40105 602515 804530 100 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 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

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

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

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

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 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 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 Fiscal deficits and the National Debt £Billions2008200920102011 Government spending 500550600650 Revenues480520560600 Borrowing20304050 National Debt 205090140 Hypothetical example to illustrate how the National Debt is calculated. 248

© 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

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

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

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 20121. © Economics Online 2012Economics Online 20122.

Similar presentations

Presentation on theme: "© Economics Online 2012Economics Online 20121. © Economics Online 2012Economics Online 20122."— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

© Economics Online 2012Economics Online 20121. © Economics Online 2012Economics Online 20122.

Similar presentations

Presentation on theme: "© Economics Online 2012Economics Online 20121. © Economics Online 2012Economics Online 20122."— Presentation transcript:

Similar presentations

About project

Feedback