Carry on what i did yesterday

Cause of economic growth

• component of AD in the short run
• AS in the long run
• could write with reference to all policies.

Achievement of supply side

• economic growth
• capital investment
• low unemployment
• advance technology manufacture
• living standard
• productivity
• international trade position
• wage

benefit of Budget deficit

• government spending on capital investment that bring potential benefits in the long run
• if increases in public sector such as health, education, it will increase labour productivity and employment.
• A tool of demand management.Maintaining a high level of demand and keep unemployment low.

Cost of inflation

• Menu cost
• shoeleather cost
• inflation cause inflation
• fall in the money value
• fiscal drag
• uncertainty
• inflationary noise
• loss of international competitiveness

Import controls

• tariff
• quotas
• embargoes
• red tape

Homework

The swine flu could be *good* for the economy because everyone is going to run out and buy cold medication and hand sanitizer - do you agree?

Answer(briefly)

No, i do not agree. Swine flu have more harmful effect on the economy.
Government have to increase it spending on the area of prevent swine flu such as provide more information, health centre, collect data, advertisements and so on. This would involve opportunity cost that government would decrease its spending on other area such as education, or it would put downward pressure on budget deficit.
Some area`s activities have to be shut down such as school, factory, shopping mail, the place where people usually are crowed. Since the industries are closed, it would decrease production. Especially on the tourism. People are likely not choose to travel at this period of time, tourist market would be greatly damaged on the top of recession. Some small tourism industries may even went bankrupt if the swine flu is going to be wide spread.There would have great impact on airline companies.
People would feel uncertain, they are less likely to go to shopping mail, pub,gym,restaurants, most importantly, much less consumption on pork although we will not get the virus by consuming pork, but it all matter on the way people think and feel. People feel much safe if they do not eat pork. Therefore, less consumer spending, AD shift to left since there would less trade activities.(diagram...)
However, all the effect are short run.After the flu is over, economy will start to recover.Since the swine flu have not yet be seriously wide spread, the impact would not be so seriouse at the current time.

Summary for Unit 2

I am writing for the topic that i am weak at and the points normally i missed out or dun remember.

Capacity utilisation is the extent to which firms using capital goods.

Factors affect Saving.

• Real disposable income
• Interest rate
• Age structure of the population
• range of financial institutions
• Confidence and expectation.
• Government spending.(Welfare benefit that may discourage saving)

Factors affect Investment

• Interest rate
• capacity utilisation
• Advanced technology
• corporation tax
• the current situation of economy
• price of equipment

Factors of Government spending

• The situation of the economy
• the extent of market failure
• wars

Cost of economic growth

• Pollution(which would have a harmful effect in the long run),congestion
• demand-pull inflation
• People did not get happier as they get richer.
• the profit may not be evenly distributed

Benefits of economic growth

• lower unemployment
• fiscal dividends
• better standard of living, quality of the life
• reduce poverty
• accelerator effect of growth on capital goods
• improve international trade position

Cost of unemployment

• loss income
• loss total output
• increased government spending(opportunity cost)
• fiscal cost
• demotivating(long term out of employment)
• social instability

points that i missed out

Awww>.<...today we did a question related on government intervention to correct market failure, that`s the evaluate question i did yesterday, they are similar and i found out some of the points i missed out.

• Black market which totally avoid taxation.
• The cost of collecting and enforcing the tax could be significant
• Taxes may lead to lower growth and therefore damage the economy
• To be effective, such tax should be applied internationally.
• By raising firm`s costs of production, it could leads to higher unemployment.

i will focus on market imperfection and write another evaluate question later on.

Using regulation to correct market failure.

Regulation is the legal restriction implement by government,such as banning chewing gum in Singapore, restriction on sales of demerit goods such as alcohol, tobacco and etc. There would be market failure as if it left to the market, it will be over consumption and production. People tends not to be aware of the harmful effect or negative externalities.(Diagram of external cost did not take into account) .

By restricting on the sales of demerit goods, people tends not to buy them as much as before if it work in fulls. AS would shift to the left, and AD contract. In the case of alcohol, the accident after over consume alcohol could reduced, less fighting and crimes after people get drunk which provide stability of the society.(could write one more examples)

However, the level of regulation to be set is difficult to measure, the setting level must be equal to the external cost which is extremely hard.If the regulation is too harsh, it would demotivate industries to work which may slowdown the economy. Or the regulation is too low, it would not have the necessary effect to correct market failure.There is black market that does not follow the regulation most of the times. And there are people taking the risks to break the law.The cost of the regulation to be put into action may be significant. Effective regulation need to be international.

Using tradable permits to correct market failure.

Tradable permits is a permit that allow the owner of the factories emit a certain amount of pollution , it could be sold or transfer to another polluter. Tradable permit is specially design for market failure caused by pollution.

Pollution level need to be strictly controlled, as too much pollution is harmful to environment, it would bring down our standard of living, it could cause diseases or even natural disaster.The factories produce without taking into account all the external cost.A tradable permit would achieve a desired environmental outcome with the country`s maximum level of permitted emissions.

However, it is hard to decide the number of permit should issued and the level of pollution the factory is allow to emit.It would be costly to have the permit to work,as it would increase the cost of production, it would damage the economy or lead to cost push inflationary pressure.There are always some people emit pollutant without a permit/ illegally.

Evaluate question 4

Economists have proposed several different policies to solve the problems created by
negative externalities. These include taxation, regulation and the use of pollution
permits.
Discuss how effective any one of these policies may be in correcting the market failure caused by negative externalities.(12 marks)

Negative externalities is the when social cost is more than private cost of particular action .Normally, the consumption of demerit goods is accompanied by negative externalities.Such as the consumption of tobacco, alcohol and so on. It is information failure while the customer did not understand fully the harmful effect which resultd over consumption and production.(diagram)
By using tax,which is to put a higher tax on demerit goods, the supplier tends to produce less as the cost of production is high if the demand of the goods is price elastic. People tends to buy less since the price had gone up, in this case the tax is shared between supplier and consumer.(diagram)The tax would have much effect, if the demand of the goods is price inelastic, where although producer pass all the tax to consumer and they still buy it.
The tax would not be so effective, if there is an increase in wages, so people would have more disposable income and they tend to spend more and some of it will be demerit goods.It is hard to measure how much tax to be put on will be most effective. And supplier could provide misleading information that encourage more consumption.
And there is other negative externalities that caused by emission of CO2 which pollute the environment, in this case, a green tax would better take place, it followed polluter pay principle, an additional tax for extra pollutant.Tax might not be always the best and effective one, it largely depends on the current situation of people, elasticity and government priority

Up to date

I need a up to date post for some reason, so i post it first, and i will carry on writing something about economic later on.

I had finished the yesterday post, and i am going to write some numerical facts about UK`s economy, i think it will be useful for the coming exams.


Lord Davies believes that companies should look east for a route out of the recession.

The sub prime crisis leads to banks collapsing, having serious problems and then moved into global consumer confidence deteriorating and across the world, global demand has fallen.

The UK economy shrank by 1.9% in the first three months of this year.
Manufacturing sector had fallen 6.9% which is particularly hard.

It forecast for 2009 as a whole is now for a 1.5% decline in GDP.

UK`s GDP had down 1.9% in the first quarter of the year.

Unemployment continued to rise,The Labour Force Survey measure suggests the trend rise in unemployment is around 60,000 a month and there is high increase number in claimant count.

Evaluate question 3

What is Current Account Deficit and Government Deficit and do they have any effect on Aggregate Demand and Supply?



Current account deficit means the expenditure on abroad exceed the revenues generated from abroad.It consist of net trade in goods and services, net transfer and net investment.

UK kept having a net trade in goods deficit for few years, this could shows that there are higher demand on imports, which is a leakage to the economy, AD=G+I+C+(X-M), a downward multiplier effect(diagram), it would leads to AD shift inwards.As UK has a strong exchange rate, the price on exports are high , the consumption on exports would tend to be low, the supplier would more likely to turn to domestic market or close down which cause an increase in unemployment and an inward shift of AS.However, it still largely depends on other factors such as whether the demand for the goods are price elastic or income elastic. The current situation of the market and the size of the current account deficit.Net investment which means the UK investors gain profit , interest and dividend on their investment in other countries to UK.The transfer balance is negative as the British government is a net contributor to the EU budget,so there may left less government spending, which would have less welfare benefits to unemployment, AS shift to left.


A current account deficit appear, the government tend to use monetary policy to adjust exchange rate to boost the demand for exports. Provide better information for supplier to improve better quality of the exported goods.Import control to protect domestic market and boost the demand, AD shift to right. Deflation to decrease the consumption on imports.

Government Deficit is budget deficit where government spending exceed tax revenue. For instance, huge government spending into the bank to boost demand. A budget deficit means government have to borrow to finance , the borrowing may through government bond or issue debt for domestic or overseas. No matter how it borrow, there is a interest need to pay. A way to pay that is by having a higher tax, but in this case, a higher tax would damage AD and AS.However, it still depends on what the government spending is used for? and the size of the deficit as well as the situation of the market. If the government spending used to finance extra capital spending that leads to an increase in the stock of national assets or for expand supply side capacity such as education and training, better health care, reduce unemployment, subsidy , it would have positive effect on AS. If the government spending priority is on defense or education, it would have negative effect on AS and AD, as there is a time lag for people to be educate as skillful labour. If the economy is currently have stable economic growth, a small budget deficit will not affect much on AD and AS.Government could cut down interest rate to boost demand to rise revenue from indirect tax to correct budget deficit.