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Title: Hamlet and Revenger's Tragedy Notes
Description: This is a complete collection of notes for any essay on Hamlet by Shakespeare and/or the Revenger's Tragedy by Thomas Middleton. These notes contain quotations, structural formatting and other important aspects needed for any essay.
Description: This is a complete collection of notes for any essay on Hamlet by Shakespeare and/or the Revenger's Tragedy by Thomas Middleton. These notes contain quotations, structural formatting and other important aspects needed for any essay.
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A2 -‐ Economics Notes
Unit 4: The national and international economy
Economic growth and the economic cycle
Important definitions:
Economic growth -‐ an increase in the real output of the whole economy
...
Long run growth Rate -‐ the average rate of economic growth sustained over a period of time
...
25% -‐ 2
...
Normally measured by GDP
Short run economic growth -‐ Fluctuations in GDP in the short run
...
Caused by an increase in productivity i
...
an
increase or improvement in the factors of production
...
Recession -‐ Negative economic growth over two successive quarters
...
Actual growth -‐ an increase in the productive potential of the economy matched by an increase in demand
...
Production possibility boundary (PPB) -‐ Diagram of simplified economy showing the maximum combination of products that can be
produced given the maximum productive efficiency
...
Can be positive or negative
...
AKA the underlying trend rate of growth
...
Hysteresis -‐ The process whereby a variable does not return to its former value when changed
...
This can be due to long-‐
term UE eroding human capital and lack of investment due to poor business confidence and lack of credit leading to capital
destruction or a negative capital formulation rate (i
...
less capital is being formed than is being destroyed) amongst other reasons
...
Kondratiev cycles -‐ long 50 year trade cycles cause by the irregularity of technological change
...
Multiplier effect is initial spending over the marginal propensity to consume
...
Occupational immobility -‐ the difficulties faced by workers wishing to change occupations due to not having the required skills or
qualifications -‐ a cause of structural UE
...
Can include tax breaks and incentives to workers and firms,
legislation to help firms and to ease the set up of business, the freeing up of access to credit for firms, educational directives to
improve human capital, investing in infrastructure to improve efficiency and productivity
...
The economics of happiness -‐ the investigation into exactly what contributes to welfare and attempts to put values on some of
these factors
...
Inventory investment/stock building – investment by firms in stocks of raw materials, semi-‐manufactures and finished goods to
ensure a smooth chain of supply and to deal with fluctuations in demand
...
e
...
1 would mean
that of £10 extra income, the economic agent would spend £9 and save £1
...
The accelerator effect – The theory that the level of investment is related to changes in AD i
...
if AD grows this will have a positive
effect on investor and business confidence that will lead to more investment which in turn leads to increased AD and then the cycle
can repeat
...
Investment – Planned future spending by firms on capital or stocks
...
Labour supply and participation rate
Encouraging people/immigration/more relaxed attitudes towards women and older people/minimum wage/minimum retiring age
all lead to increased labour supply and participation rate
...
Productivity increase leads to AS of economy shifting out
...
Productivity is
increased when one or more of the factors of production is increased in quantity and/or quality
...
• Human capital
Education and training lead to improvement of human capital, increasing skill and flexibility leading to increased
productivity and less structural unemployment
...
Productive potential of economy increases as well as LR growth rate
...
Government policy =
encourage firms to invest in physical capital by lower tax on capital investment, low borrowing costs
...
Promotion of enterprise
Fiscal and Monetary policies will lead to more new companies being formed, more jobs available (start ups are the firms most likely
to expand employment quickest), higher levels of output and a higher level of innovation
...
Pros and cons of using GDP per capita as a measure of standards of living
Pros
Increased GDP per capita means more goods and services can be afforded
Higher GDP per capita means that there is increased tax revenue
Cons
GDP per capita does not include data from the non-‐monetised sector and the black market
GDP per capita does not give any indication of income inequality
Increased GDP per capita does not take into account how the level of income was increased
Alternatives
HDI
GDP per capita, literacy rates and life expectancy
Misery index
Adding the unemployment rate to the rate of inflation
...
More public revenue to spend on public goods and correcting market failures
Higher GDP = higher tax revenue without raising taxes
...
Cons
Rise of consumerism
As countries get richer their inhabitants can consumer more luxury goods
...
SOme people regard this as a bad thing and believe that economic growth should
be sacrificed so people can live better lifestyles
...
Increased relative poverty
There is no guarantee that the gains of economic growth will be distributed evenly and it could lead to a large gap opening up
between the rich and the poor
...
This can lead to social unrest and be
detrimental to welfare
...
However resources are finite in the world and increased
economic growth can lead to finite resources being exhausted to the detriment of the environment i
...
logging in the Amazon, the
tar sands of Alberta and the shale gas deposits in Canada and Alaska
...
Threats to the sustainability of economic growth
Exhaustion of resources
Resources are finite and increasing economic growth requires increasing consumption of resources
...
However microeconomic theory dictates that as the price of the goods go up, this will give people and
firms the incentive to; change their consumption habits to save money, invest in alternative technologies to prolong or replace the
use of fossil fuels or make the exploitation of previously financially unviable deposits viable
...
However the question is whether or not we can do this quick enough and whether or not the break
neck industrialisation of India and China has not done too much to speed up the arrival of peak oil
...
This is likely to har economic growth as;
more crops and other outputs are destroyed due extreme weather, there will be structural UE as certain climates change rendering
some industries uncompetitive of redundant I
...
ski instructors in Scotland and there be increased government spending on flood
defences and the preparation for natural disasters which could be utilised better in a different market
...
Environmental damage
As output increases more resources are used
...
However the Kuznets curve dictates that the more economically developed a country is,
the more it can afford to be environmentally friendly and less dependent on polluting "dirty industries such as manufacturing, so
after a certain point, economic development can actually improve the environment
Reasons for the economic cycle
Automatic stabilisers
Automatic stabilisers are processes that kick in without any policy implementation that smooth the fluctuations of the economic
cycle
...
This leads to real
incomes being eroded and the balance of payments worsening
...
If an economy is falling into recession, government spending will automatically rise as more people start to claim benefits
...
Exogenous demand and supply shocks
Exogenous shocks are occurences that have effect from outside the economy
...
They can be demand shocks which have an effect of demand or a supply shock which has an effect of
aggregate supply
...
For example the
war in oil producing Libya in 2011 led to a reduced supply of oil production as well as hitting investor confidence hard
...
Not only does a hurricane dampen the demand for goods in the area but
will also destroy capital in the surrounding localities and reduce aggregate supply
...
Technological advance occurs exogenously and can vastly improve the economies
level of productive capacity
...
This is because real incomes have risen and assets are a normal good;
i
...
the demand for them rises as income rises
...
As long as investor confidence that the asset prices will keep rising in maintained, the bubble will become a self-‐fulfilling prophesy
as greater demand for the assets lead to increased market prices
...
Rising asset prices can be caused by an upturn and a boom and thanks to the wealth effect; holders of assets feel more
wealthy as a result of their assets rising in value and therefore consume more, as well as the obvious increase in investment, can
help perpetuate a boom
...
This can lead to a “stampede for the exit” and asset prices will tumble
...
Inventory cycles -‐ Firms, as well as investing in capital, invest in stocks of raw materials, semi-‐manufactures and finished goods to
ensure a smooth process of production and to guard against fluctuations in demand
...
If an economy is experiencing a downturn, stocks of unsold goods
build up all along the supply chain, meaning firms have to cut production by more than the original fall in demand to “de-‐stock”
...
Accelerator/multiplier model
The multiplier-‐accelerator model proposes that investment behaves with greater volatility than consumption
...
Since the rate of economic growth is more volatile
than the level of national income, changes in investment are subject to an accelerator effect, magnifying changes in aggregate
demand which in turn affecting consumption
...
The subsequent increase in AD can lead to the accelerator effect repeating itself and the whole cycle perpetuating
...
The process can also work in reverse showing why downturns turn into recessions
...
If households
and optimistic about future growth in the economy and therefore are more confident about their job prospects their MPS is likely to
be lower and this will lead to greater consumption and households being more likely to take out a loan etc
...
In businesses are confident about the demand prospects for goods and services they will be more likely to invest and expand their
operations
...
If firms increase employment then this will lead to greater demand for labour reducing unemployment
and leading to increased real wages which can lead to increased consumption and boosted AD
...
This will reduce consumption and lead to falling AD
...
They will cut back on investment and employment as they try
to reduce costs to maintain the profitability required to survive a recession
...
Exogenous shocks can be very important to affecting investor and consumer confidence as these can effect consumers and
businesses expectations for the future
...
Possibly the most damaging effect of an asset price crash is that it shatters investor, business and consumer confidence and this can
be a determining factor in why an economy can fall into recession
...
Inflation
Important definitions:
Inflation – A sustain increase in the general price level
...
CPI – The consumer price index
...
The information for it comes from the Family Expenditure survey
...
The relative scarcity of finite
goods leads their prices’ to being bid up by potential buyers
...
The quantity theory of money – The theory that increased in the money supply will lead to increases in the price level
...
The Fisher equation – MV = PT where M = the money supply, V = the velocity of circulation, P = the general price level, T = total
transaction in the economy (equivalent to output)
...
of times that the money supply changes hand in a year
...
Indirect taxes – taxes levied on spending on goods and services
...
The cycle can
perpetuate itself leading to higher and higher inflation
...
Monetary transmission mechanism – The process by which a change in the interest rates set by the central bank (the repo rate)
affects AD and by extension effects inflation
...
Limitations of using the CPI as a measure for inflation
Causes of inflation
Demand-‐pull inflation
Demand pull inflation is most likely to occur when there is little or no spare capacity in the economy
...
This is because, due to the lack of slack in the economy, domestic
firms cannot expand supply any further to satisfy the extra demand
...
Cost-‐push inflation
Cost push inflation occurs when businesses are faced with increasing production costs and firms subsequently raise their prices in
order to maintain profit margins
...
This has been especially the case in the light of the rapid industrialisation of the BRIC economies meaning that the global
demand has risen greatly in relation to supply and this has led to high commodity prices
...
• Higher indirect taxes – i
...
an increase in fuel duties or the rate of VAT
...
• Wage price spirals – Rising inflation expectations can induce inflation as well
...
If they bargain for wage increases that are larger than this expected rate of inflation or the
expected rate of inflation is higher than the actual rate of inflation then this will lead to higher costs for firms which may
induce cost push inflation
...
Monetarists believe that in the
Fisher Equation of MV=PT, V and T are constant and therefore the determinant of the price level (or inflation) is the money supply
...
This leads to the classic
example of too much money chasing too few goods and prices of goods get bid up and economy-‐wide inflation occurs
...
This will have economy wide ramifications on the
economy due to about 30% of UK GDP is generated in the export sector
...
This means the balance of payments will worsen and AD will fall
...
If output falls by a greater margin than how much X fell by this could suggest a negative multiplier effect was present and the
reduction of exports has had knock on effects on the rest of the economy and amplified the negative effects of the fall of output
...
Inflation throws into doubt the long-‐
term profitability of firms and the rate of return on investments
...
This will lead to reduced I and reduced AD which has negative effects on the UK economy in the short term and in the long term it
can damage long term growth prospects, lead to increased inflationary pressures as productive capacity is not improved and lead to
the rise in living standards to increase at a slower rate
...
This means that if inflation is high at the moment they will believe that inflation will stay high
...
This leads to increased costs for firms which
in turn could possibly be passed onto the consumer in the form of higher prices i
...
cost push inflation
...
Shoe-‐leather costs
Rising prices will make businesses and consumers less certain about what constitutes a fair price
...
e
...
These costs are dubbed shoe-‐leather costs
...
Effects on distribution of income
Inflation creates winners and losers
...
G iven that
those most likely to be on fixed income are the elderly or those in the bottom quintiles of the income distribution high inflation can
have some very bad side effects in worsening old age poverty and relative poverty
...
Social problems
Milton Friedman famously said "inflation tears at the fabric of society" as high inflation erodes wealth and pay packets leading to
worsening industrial relations and widespread social unrest
...
Remedies of inflation
Monetary transmission mechanism
The Bank of England's Monetary Policy Committee is an independent body from the government who's remit (albeit stipulated by
the government) is target inflation at 2% CPI +/-‐ 1%
...
e
...
The main way the MPC aims to influence the rate of inflation and hit its target is via the monetary transmission mechanism
...
If inflation is high the MPC will likely raise the BR whilst if it is low it will cut interest rates
...
Increased interest rates will increase the opportunity cost of investing and spending as consumers and businesses are forging
possible higher rates on interest if they put the money in a bank account instead
...
Increased interest rates will also increase the cost of borrowing for businesses and consumers
...
The result is that consumption and investment fall due to the
rise in borrowing costs
...
As demand for houses fall this can possibly lead to a negative wealth affect as the contraction in
demand can lead to a fall in price
...
All of these AD movements are also subject to the multiplier and accelerator effect
...
This is because the relatively higher interest rates will attract
hot money inflows which leads to the demand for sterling rising and the exchange rate of the pound to rise relative to other
currencies
...
The extent to this happening is dependent on the economy's marginal propensity to
import and also the extent of the appreciation
...
This means AD falls and the
inflationary pressures in the UK are lessened
...
A rise in the interest rates means the rate of
return on keeping money in a bank account has risen relative to the return on other assets such as securities and bonds
...
If the demand for assets fall then the market value for
them falls
...
Also it can have a dampening effect on "animal spirits" as many
people look to the stock market as an indicator on how the economy is performing
...
Both have the effect of reducing AD in the economy and lessening the inflationary pressures in the economy
...
If the BoE raises the rate of inflation, economic
agents will assume that inflation will fall
...
Businesses will expect a contraction in demand and therefore stop raising prices
...
Unemployment
Important definitions:
Casual unemployment -‐ When workers are made redundant on a short-‐term basis in industries such as tourism, catering and
construction
...
e
...
Structural UE -‐ Unemployment due to a change in the pattern of demand and production
...
This is due to structural changes in the composition of the economy
...
Supply-‐side measures are necessary to reduce structural UE
...
Supply side measures can reduce this
...
e
...
This is comprised of
structural UE and frictional UE
...
If employment is reduced to lower than this level via an injection of AD,
it will lead to inflationary pressures in the long run due to the adaptive expectations of workers
...
Technological UE -‐ A form of structural UE
...
Cyclical UE -‐ AKA demand deficient UE
...
This means less resources need to be utilised to meet demand and therefore redundancies occur and UE rises
...
Classical or real-‐wage unemployment -‐ When real wages are kept at a such a level that the demand for labour is at a disequilibrium
with supply for labour i
...
artificially high or artificially low
...
e D for labour < S for labour)
...
(D for labour > S for labour) This could be due to trade union power or government legislation preventing them from taking those
jobs i
...
women and front line battle battalions in the army
...
The Replacement Ratio -‐ The ratio between what an economic agent receives as an Unemployment benefits and what wages he
could receive being employed i
...
if it is 1
...
Normally worked out as UE benefits divided by wages
...
This can exacerbate a structural UE problem
...
The Phillips Curve -‐ An empirical economic model that shows a trade-‐off between inflation and unemployment
...
It is made up of
voluntary, frictional and structural UE
...
Causes of UE
Structural UE
Structural UE occurs when there is long-‐run decline in demand for labour relative to supply
...
A change in the structure of the economy will
lead to old jobs becoming redundant and new jobs opening up in different industries or sectors
...
When there is a mismatch of skills and available jobs it is
occupational immobility of labour i
...
workers cannot move from the declining sector to the growing one as their skills are not
compatible
...
This is when workers cannot move to where the new jobs
are and therefore lie unemployed due to this
...
This leads to falling house prices
...
This means that people in the new area, with their depressed house prices, cannot sell up and move somewhere else where there
are jobs as the selling price of their current house will not cover the new one
...
This can especially be seen in the north of England, traditionally where the primary and secondary sectors of the economy where
based, as deindustrialisation has led to high levels of unemployment whilst the new jobs in the service sectors have opened up in
the south east
...
Cyclical UE
Cyclical UE or demand deficient UE arises during the recession or downturn stage in the economy and is due to a lack in AD
...
Falling AD leads to less demand for goods
and services and therefore firms have to cut back on output and employment of factors of production
...
Voluntary and involuntary UE
Voluntary UE occurs when a worker chooses not to accept work at existing wage rate i
...
those that are frictionally unemployed
...
If the amount of income accrued UE'd (thanks to
benefits and grants) is close to, equal or greater than the income gained from working (salary minus taxes and welfare forgone by
working) then this serves as a disincentive to work as someone could gain more or nearly as much welfare from not working as they
could from working
...
Therefore
structural and cyclical UE are types of involuntary UE
...
This
results in a twofold effect
...
The result is there is a surplus of supply over demand and this results in involuntary real-‐wage UE
...
It also represents an opportunity cost in
the form of potential output as the economy is operating with a negative output gap and forgoing extra welfare deriving goods and
services
...
UE'd workers have less money to spend and therefore will lead to
fall in consumer spending
...
This means real
incomes will fall and consumption will fall as well
...
These factors are very
susceptible to negative multiplier and decelerator effects
...
Whilst workers lie unemployed the
average cost (cost divided by total output) of training them stays constant rather than falling as their output stays the same whilst
their training costs stay fixed
...
Also as workers lie unemployed their human capital gets eroded as their skills do not get updated and practised and their
motivation falls
...
This process,
whereby UE does not return to its previous equilibrium (short term cyclical UE led to long term structural UE) is dubbed the
hysteresis effect and if it occurs it can damage an economy's long run growth prospects which can lead to a slow in the rise of living
standards
...
This is because there is less of a tax take as peoples incomes fall
...
This is
coupled with a rise in welfare spending as more people will claim UE benefits
...
Areas and regions that are suffering from high structural UE will also suffer from
widening inequality gaps between them and the rest of the country and this can lead to social unrest and other welfare detrimental
occurrences
...
Thus UE may lead to a wide range of negative externalites
...
A sufficient level of UE may be useful for firms to control wage bargaining
...
Workers
may even have to accept wage cuts to remain competitive with those that are willing to work for less due to the lack of employment
...
UE can also help control inflationary pressures
...
Also if there is some "slack" in the economy this means that if firms want to raise output due to better growth prospects,
they can do so without igniting too much demand pull inflation as there is excess capacity in the economy
...
This is dependent on the marginal propensity to import and given that the UK's MPI is relatively high and that our economy no
longer produces all the goods that consumers want the improvement on the Balance of Payments may be negligible
...
Increased UE, and falling
consumption, means that the level of output has fallen and therefore resources are being used at a slower rate
...
The relationship between UE and inflation
The expectation augmented Phillips Curve
The Phillips curve is an empirical economic model that shows a trade off between inflation and UE
...
e
...
This can be explained simply
...
This means that demand pull inflation is likely meaning there will be high inflation when UE is low
...
This leads to increased costs for firms whom (depending on the PED of the goods they sell) may pass these costs onto
consumers in the form of higher prices; cost push inflation
...
However in the 1970s this relationship broke down when the high inflation co-‐existed side by side with high UE; a concept called
stagflation
...
Monetarist economist Milton Friedman accepted that in the SR the Phillips Curve relationship existed but in the LR he argued that
there was no trade off between UE and inflation i
...
in the LR the PC was vertical
...
tried to reduce UE using
fiscal or monetary stimulus, UE would initially fall but in the LR it would tend back to the previous natural rate of UE or the NAIRU
(the non-‐accelerating inflation rate of unemployment) but with a higher rate of inflation
...
To correct this he developed his "adaptive
expectation" hypothesis to incorporate into the Phillips Curve model to create the expectations augmented Phillips Curve
...
e
...
This is the main
explanation that reducing UE under the NAIRU will lead to ever accelerating rates of inflation
...
tries to reduce UE using monetary or fiscal methods initially inflation will rise and UE will fall
...
(For workers to supply more
labour a rise is real wages is necessary)
...
e
...
are rising faster than
labour costs
...
However now inflation expectations are raised due to the initial gov
...
This means cost push inflation of the expectations will feed
through in prices as firms pass on the higher labour costs to consumers and so the wage price spiral begins as workers strive to
protect real incomes and firms strive to protect profit margins
...
tries to push UE down past the NAIRU it will ultimately have no effect on employment levels in the long run but at the cost of ever
increasing inflation
...
The effect of this would to be to shift the LRPC to the left (or inwards) so therefore a lower rate of UE is
compatible with no inflation in the economy
...
If it is demand deficient then the economy needs re-‐inflating so growth
and output rise and more resources are employed
...
Demand-‐side
The government, if faced with demand deficient/cyclical UE, could try to re-‐inflate demand so that there was greater demand for
goods and services in the economy and by extension (because labour is in derived demand for goods and services) drive up demand
for labour leading to lower UE
...
e
...
Decreased taxation on firms may lead firms to increase employment and lead UE to fall
...
The government could also "loosen" monetary policy by cutting interest rates and imploring banks to extend credit
...
Governments may also enact a regional policy to target areas on the country where UE is above the national average
...
This can also have a regional multiplier effect as firms in the locality of the enterprise zone benefit
and create more employment of their own as increased real incomes in the area due to the employment provided by the enterprise
zone leads to greater demand for goods and services which the local economy benefits from and in turn demands more labour
...
Improved educational and training schemes will reduce the amount of occupational immobility of labour as improved transferable
basic skills such as literacy, numeracy and technological dexterity will improve the flexibility of labour and increase workers' abilities
to work in different sectors
...
Geographical immobility of labour could be corrected by affordable housing schemes to ensure that workers are able to move to
the areas where the jobs are
...
Frictional UE can be reduced by improving the process of the job search i
...
a national database instead of a regional one
...
Voluntary UE can be reduced by reforms to the tax and benefit system
...
To encourage people to retrain they could be given tax credits or be taxed a lower marginal rate if
they enrol on a retraining course
...
should undertake the process of removing labour market imperfections in
the economy such as trade union power
...
If
removed the real wage will fall to an equilibrium rate where the labour market clears and no involuntary UE is present
...
Therefore if the economy is
already at the NRU and the government wants to reduce UE further, it must follow the path of supply side reform otherwise UE will
always tend to the NAIRU
...
Fiscal policy and supply side policy
Important definitions:
Fiscal policy – The manipulation of public spending, taxation and borrowing to achieve the government's macroeconomic objectives
...
Product market measures – Supply side policies designed to improve investment, efficiency and competition
...
Indirect taxation – Taxes on spending such as VAT, excise duties and customs fees
...
Regressive tax system – Where the proportion of a person's income paid in tax falls in income increases
...
Horizontal equity -‐ When people or firms with the same income and financial circumstances pay the same amount in tax
Vertical equity -‐ When the amount that people and firms pay is based on their ability to pay
...
spending to improve the productive capacity of the economy
Current expenditure -‐ Gov
...
Transfer payments -‐ Gov
...
e
...
spending and revenue
Budget deficit -‐ When gov
...
revenues
Budget surplus – When gov
...
spending
Structural deficit -‐ A budget deficit resulting from fundamental changes in the structure of the economy
...
Automatic stabilisers -‐ Features of government spending and taxation that minimise the fluctuations of the economic cycle
...
compared to the cost of collection
...
This is a large part of the argument for progressive taxation is based
upon i
...
rich people are in a better position to pay a greater proportion of their income in tax so they should
...
Taxes should also be
difficult to evade
...
Flexible
The structure and rates of taxation must be capable of easy alteration in response to changing economic conditions
...
In comparison direct taxation has no "relative" effect as a tax directly on income merely shifts the demand curve for
goods in proportionally
...
Because the price of the good is lower than the true cost of the good the good is over-‐consumer
and therefore a demerit good; this leads to a loss of social welfare as resources are not being allocated efficiently
...
Incentive effects
Indirect taxes have less of an impact upon individual work versus leisure choices as economic agents have the aspect of choice in
their decision to pay as they could just forgo the good that has the indirect tax levied on it
...
Direct taxes on the other hand are very inflexible and can only be changed once a year when the Budget
is announced
...
A
big example of this is with petrol duties
...
Therefore the tax is regressive
...
The government attempts to get around this
problem by exempting many necessity goods such as food, books and children's' clothing from VAT
...
Also indirect taxation may alter workers expectations for inflation and therefore
they may bargain for higher wages to maintain the purchasing power of their pay packets
...
May lead to an increase in tax avoidance
High levels of indirect taxation create incentives to avoid them
...
Lack of an "announcement effect"
Because indirect taxes can be changed more readily economic agents may not be entirely sure exactly how much they are ought to
pay
...
Pros and cons of a budget deficit
Dependent on whether or not the deficit is a cyclical one or a structural one and what the money is being spent on
...
If factors of production are left unemployed for too long their capital (be it human or physical) will start to erode and the
productive potential of the economy will deteriorate
...
If AD is injected into the economy by the government this can avoid wide spread UE and factors of production
will stay employed so the hysteresis effect does not take place
...
This concept; that government spending pays for itself is called the fiscal d ividend
...
bonds to
finance the debt
...
This represents not only a leakage from the circular
flow of income which will depress AD but an opportunity cost as the government is forgoing spending government revenues on
welfare deriving goods and services such a schools, hospitals and roads to finance the national debt
...
If investors start to lose confidence in the govs
...
have to offer greater rates of interest to entice investors to
buy the bonds
...
Increased
borrowing costs mean there is an even greater leakage from the circular flow of income and OC on paying interest
...
solvency grows yields rise and rise and a government can quickly become insolvent and must
default on its debt
...
Deep recessions and price deflation are usual consequences
...
The lack of confidence in Greek gov
...
This spread of investor panic is called a
"contagion"
...
Fiscal crowding out
Another consequence of higher government spending is that it may "crowd out" private sector investment
...
This will diminish the amount of private sector investment in the economy
...
Also common consensus says that private sector investment is more effective and efficient than government investment due to the
discipline of the profit incentive
...
Limitations of fiscal policy
Although it still brings benefits, fiscal policy nowadays is seen as a less precise demand management tool than monetary policy
...
This led to very
destabilising boom bust cycles which were detrimental to everyone
...
Fiscal policy has numerous drawbacks:
Public choice theory
The choice of suitable fiscal policy is very susceptible to being distorted for non-‐economic means
...
For example increased
benefits and reduced taxation is likely to win popularity for the party in power but it is at the detriment of the gov
...
This is a drawback for the use of fiscal policy as the wrong policy may be chosen in order to keep the politicians in office, not to
achieve the MEPOS
...
This can make the use of fiscal policy to
influence the economy limited as policy makers may chose the right policy at the time but events between them implementing and
the effects of the policy being felt may have made their policy choice redundant and possibly detrimental to the macroeconomic
performance of the country
...
If the economy is in need of a tax cut and an
increase in benefits the government may not be able to do this as it may not have the revenues or it can't borrow any more without
causing a reaction on the bond markets and threatening investor confidence
...
Information failure
The government may make a mistake in identifying the economic problem which means the policy prescribed may be unsuitable for
solving it and may actually make the problem worse
...
Supply-‐side policies
Labour market measures
Lower rates of income tax
Supply side economists such as Andrew Laffer believe that lower rates of income tax leads to a greater incentive to work which not
only improves the productive capacity of the economy as the labour supply increases but can also lead to a greater tax take for the
government
...
Reducing benefits
Similarly it is argued that unemployment benefits reduce the incentive to work and by removing them and reducing the
replacement ratio (i
...
you are better off working than you are unemployed in terms of benefits and income) governments can
improve the supply of labour and achieve supply side growth
...
Education and training
By increasing the labour force's human capital by implementing educational and training directives it will improve the productivity
of labour (output per worker per hour) in the UK
...
This leads to many beneficial effects on the UK's
macroeconomic performance
...
This increases costs for the UK firms, leading not only to cost push inflationary pressures but also decreases
UK goods' competitiveness with foreign competitors possibly leading to a worsening of the BoP
...
Also importantly a lot less hours were lost to industrial action and therefore productivity of the
nation rose
...
Product market measures
Fostering an environment of enterprise
Measures to encourage enterprise and capital spending, such as the set up of enterprise zones with lower levels of tax and red tape,
reduce corporation tax, loans for start up businesses and small enterprises and maintaining macroeconomic stability to help
confidence, are all key s-‐side product market policies which aim to improve the productive capacity of the economy
...
Not only do they say this leads to less of a drain on government resources but it will lead to a
more efficient and productive allocation of resources which will lead to welfare gains and inefficiency is eliminated thanks to
competition and the profit incentive
...
This can lead to industries growing rapidly and becoming
internationally competitive i
...
the financial sector in the UK exploded after the "Big Bang" in the 1980s when Thatcher's gov
...
However is all innovation a good thing for e
...
are the CDOs and other financial
innovations that caused the financial crisis of 2008 which we are still feeling the effects of good for social welfare and utility?
Limitations of supply-‐side policy
Time lags
The effects of supply side policy have extremely long time lags between them being implemented and the effects being felt
...
Public choice theory
As with fiscal policy, supply side policy is extremely susceptible to being distorted for political means
...
Government revenues
Again as with fiscal policy, s-‐side policy is dependent on the resources that the government has to hand
...
Information failure
As with everything in real life the government does not have perfect information, and this can result in the wrong policy being
chosen as the government may have been misreported the extent of the problem or the ability of the s-‐side policy to deal with the
problem
...
does not foresee a way in which their policy
effects the pattern of behaviour of economic agents
...
failure if utility is actually loss due
to the implementation of the policy
...
Monetary policy
Important definitions:
Monetary policy – The manipulation of the money supply and interest rates to achieve the government's macroeconomic objectives
Money supply – The total value of all the coins and notes in circulation of the economy
...
Narrow money – Notes, coins and balances available for normal financial transactions
...
Broad money – Money held in banks and building societies that is not immediately accessible
...
e
...
M4 money supply is constituted by broad money
...
Liquidity trap – The liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking
system by a central bank fail to lower interest rates and hence to stimulate economic growth
...
It can also be applied to the limitation of how low interest rates can go i
...
they cannot nominally fall below zero
...
Monetary transmission mechanism – The process by which a change in the interest rates set by the central bank (the repo rate)
affects AD and by extension effects inflation
...
Determinants of the demand for money
Income
The higher the level of income, the greater the demand for money in order to facilitate spending
...
The higher the rate of interest the higher the
opportunity cost of holding money as people are forgoing the possible gains of interest for the ability to spend or hold their money
...
Firstly using quantitative measures such as changing the reserve asset ratios of retail banks
...
If the BoE raises the RAR this means
the banks have less money to lend and the money supply falls
...
Other quantitative controls include limiting the amount banks are allowed to lend, or at what rate can they expand their total
deposits each year
...
e
...
Open market operations
Open market operations are the use of buying or selling government bonds to either increase of decrease the money supply
...
bonds which if bought will pass money into the BoE's vaults in return for
the bonds and this will reduce the MS as money stored in the BoE's vaults do not count as part of the money supply
...
This is the repurchase of
government bonds which are being held by the private sector to pass funds onto their balance sheets so the money supply is
increased
...
Influencing the demand for money
Limitations of monetary policy
The liquidity trap
The liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a
central bank fail to lower interest rates and hence to stimulate economic growth
...
It can also be applied to the limitations of how low interest rates can go i
...
they cannot nominally fall below zero
...
Time lags
The monetary transmission mechanism is subject to lengthy time lags with the full effects of a rate change to take up to 2 years to
manifest themselves
...
Problems with forecasting inflation
Inflation is notoriously tricky to try and forecast
...
This would be a case of information failure and the wrong decision
could have detrimental impacts on the economy's macroeconomic performance
...
The MPC tries to get around this problem by using complex econometric models
and producing "fan charts" of probabilities where inflation will be
...
Determinants of globalisation
Technological advance
Communication technology advances such as the internet, phones, video conferencing and email has rendered the necessity for the
production process to occur in one country let alone one factory
...
It also allows consumers greater choice and comparison between products meaning global
competition has increased massively
...
Advent of free trade and the WTO
Thanks to the advent of free-‐market capitalism in ex-‐USSR satellite states, the Chinese embracing their own brand of capitalism and
the work of the WTO, the level of free trade has steadily been increasing over the past few decades
...
Pros and cons of globalisation
Pros
Economies of scale and specialisation
Increased globalisation leads to trade creation and subsequently increased markets which firms can sell to
...
This can lead to reduced
prices for consumers as resources are being allocated more efficiently
...
Also Ricardo's theory of comparative advantage states that if a country specialises and trades it surplus it can obtain a higher level of
output than it could be attempting to be self-‐sufficient
...
Increased competition
Increased global interconnectedness, especially now with the advent of online shopping and comparison websites, means that firms
are now open to a lot more international competition
...
It will also force firms to be productively and allocatively
efficient, otherwise they will start running at a loss, so welfare is gained as well due to resources being utilised efficiently
...
Increased international competition can also lead to a previously inefficient domestic industry to become efficient otherwise if it
doesn’t make an effort to cut costs it will lose its market share and go out of business
...
This investment will improve human capital via teaching of business
techniques and physical capital as many firms invest in the host country's infrastructure i
...
roads, schools, hospitals etc
...
Cons
Possible loss of domestic employment
International competition may render some domestic industries uncompetitive and this could lead to structural UE
...
Also
labour can be slow to retrain or may be forced to stay UE because of geographical immobility of labour, which leads to long term
structural UE, which due to hysteresis effect can become permanent as workers human capital gets eroded in the time they spend
UE and may lose confidence and drop out of the work force
...
Exploitation of undeveloped economies
Some people argue that globalisation has led to less economically developed countries being exploited by MNCs because their
workers are not offered a fair wage and forced to work in in-‐humane conditions i
...
Nike and Adidas and the controversy over the
south-‐east Asian sweatshops
...
This happens because the host
nation is dependent on the MNC for employment so they wouldn't reprimand in case they left
...
MNCs may also expect tax breaks and other incentives, such as laxer environmental laws, to encourage them to set
up there
...
All of these things lead to welfare loss in the host nation
especially for it's population
...
point)
Increased globalisation perhaps encourages an economy to be overly dependent on one industry
...
We have seen this in the UK
with our dependence on the City and its financial services
...
Furthermore greater economic global integration means that exogenous supply and demand shocks, like the one in 2008 and the
recent sovereign debt crisis in Europe, spread far quicker and deeper into the economy adversely effecting out economic
performance
...
This leads to a greater level of
output which means it is more likely for a firm to achieve their MES and utilise economies of scale
...
However this may lead to a couple of firms dominating the market
and abusing their market power, however most countries have competition policy authorities to guard against this threat
...
This mean that increased fair trade can mean all countries can specialise in
their comparative advantages and global output will rise
...
This means there is greater pressure on firms to compete on prices and
costs which can lead to welfare gains for the consumers as prices may fall
...
Firms may also seek a USP (unique selling point) to differentiate their good on the international market, so this increased global
competition may encourage more non-‐price competition and innovation which can lead to dynamic gains for consumers as well
...
Consumer welfare gains
Increased international comp
...
Also competition may lead to increased innovation as firms invest more into R & D to try and develop some product
differentiation to grab market share
...
This has benefits for consumers, governments and firms alike as inflation and
prices will be stable
...
Cons
Possible loss of domestic employment
Increased international competition due to free trade may render some domestic industries uncompetitive and this could lead to
structural UE as domestic output falls
...
Also
labour can be slow to retrain or may be forced to stay UE because of geographical immobility of labour, which leads to long term
structural UE, which due to hysteresis effect can become permanent as workers human capital gets eroded in the time they spend
UE and may lose confidence and drop out of the work force
...
Gains of free trade are not guaranteed to be evenly distributed
Free trade creates winners and losers
...
This in turn can have adverse effects on UE as well as possibly having a negative
multiplier effect on the surrounding locality if that economy was dependent on the industry
...
As the pits were rendered economically unviable by cheap Australian coal, whole
towns became UE as all the businesses were dependent on the mines directly or indirectly
...
Tendency towards and unbalanced economy
Increased free trade perhaps encourages an economy to be overly dependent on one industry
...
We have seen this in the UK
with our dependence on the City and its financial services
...
Furthermore greater economic global integration means that exogenous supply and demand shocks, like the one in 2008 and the
recent sovereign debt crisis in Europe, spread far quicker and deeper into the economy adversely effecting out economic
performance
...
may choose to "shelter" certain industries until they grow big enough to compete internationally
...
The only way for a firm to compete is to grow big enough so it may achieve its MES so it can
compete price-‐wise
...
This is
especially the case for the car industry which has a very high MES due to the expensive machinery and factories that are necessary
...
Strategic industry argument
A government may choose to protect an industry if they believe it was strategically important i
...
munitions manufacturers, power
supply etc
...
Protection of domestic employment
A government may decide that the costs of the ensuing structural UE that could occur if they allowed foreign competition would be
too high so they decide to protect the said industry
...
e
...
This could lead to a build up of brand loyalty and
also a fall in employment as domestic firms would not be able to compete with the subsidised imports
...
The imposition of the tariff will raise prices which will
lead to a loss of consumer welfare
...
This as well leads to a loss of welfare
...
This means they will continue to
carry on being inefficient
...
Some would argue it would be better to open up the industry to competition so either firms are forced to
become efficient or if not, firms go bankrupt and free up FoPs to be allocated elsewhere
...
will retaliate and put a tariff on UK goods
...
WTO reprimand
The WTO does not allow tariffs between its members and may reprimand the UK for imposing a tariff
...
The balance of payments
Important definitions:
The balance of payments -‐ The balance of all ingoing and outgoing transactions that the UK has with other countries
...
e
...
It also represents some
types of net government transfers) and the financial account (which measures the balance of long and short-‐term financial capital
flows , such as hot money and FDI flows, into the UK)
...
Can be caused by short term cyclical pressures causing currency to overvalue and economy to run out of
capacity or the structural long term issues of international un-‐competitiveness in terms of productivity and quality of its exports
...
Surplus -‐ When X > M
...
This can lead to boosted AD and consequently
inflation
...
Ways to deal with a BoP deficit:
1) It self-‐corrects
If deficit is cyclical and caused by a boom, then the deficit will be eliminated when economy goes into downturn or recession as AD
falls resulting in M falling as well
...
marginal propensity to import
...
This is dependent on the
UK utilising a floating exchange rate system, which at the moment, it does
...
may opt to depress AD by enacting contractionary fiscal and monetary policy (higher interest rates, lower benefit payments,
higher int
...
This means AD falls as consumption falls
...
However depressing AD is not likely to be a very politically
popular policy, it is also contradictory to the other MEPOs of growth and UE
...
The higher interest rates may also
negatively effect investment and therefore the rate of capital formation which will adversely effect the country's long term
economic growth
...
may opt to try and influence consumers to swap their purchases from imports to exports
...
must
make domestic goods more price competitive compared to the foreign imports
...
a) Tariffs, quotas and subsidies
The gov
...
This reduces demand for imports and
increases the consumption of domestically produced products which improves the balance of payments
...
Also by implementing a subsidy, it achieves the same effect as domestic products are made more competitive as supply
shifts out due to the lower production costs
...
Protectionism also leads to loss of consumer welfare as prices are raised (in the case of tariffs) and less
choice of goods are available as foreign imports fall
...
Tariffs,
especially to an economy that is as reliant on imports as the UK, will also increase cost push inflationary pressures, which means
that the inflation MEPO is not being fulfilled
...
b) Depreciation and devaluation
The gov
...
If the value of the pound falls, then M are relatively more expensive
whilst foreigners find our X relatively cheap
...
The gov
...
However the
improvement on the BoP is dependent on the PED of X and M
...
In the short run, if the PED of X and M are less than one (which is likely given the UK's
dependence on imports of manufactured goods and foodstuffs), the BoP could worsen as the market takes time to respond to the
change in exchange rates
...
(J curve diagram) However after the market responds (usually about 18 months) and consumers change their spending
patterns, the BoP should appreciate
...
4) Supply-‐side polices (final eval
...
However if a persistent disequilibrium exists, this implies there
is a fundamental structural weakness in the economy which is causing its domestically produced goods to be uncompetitive; both in
the domestic market and the international market
...
This
will increase the productivity of the nation's resources and hopefully make them more competitive; be it in price or quality
...
A fixed exchange rate -‐ when a gov
...
This
means that BoP deficits are less likely to happen for if UK exports become to expensive the demand for UK exports fall, so too does
the demand for UK pounds, which means the value of the pound falls and then UK exports become more price competitive
...
will let the exchange rate fall so there will be more risk, therefore less incentive,
in speculating on sterling
...
Disadvantages
Does not guarantee a neutral BoP
UK exports could be structurally uncompetitive which would lead to a persistent disequilibrium in the BoP which any fall in the value
of pound still could not fix
...
Also it leads to greater "shoe leather"
costs internationally as MNCs have to "shop around" to see which currency gets them the most value for money in regards to their
investments
...
Possibly detrimental to inflation
In an economy that is so dependent on imports such as the UK's, fluctuation in the exchange rate can have massive effects of the
price level in the economy
...
Lack of capital controls may lead to destabilising capital flows
A floating exchange rate system means that all capital controls on the country's currency are removed
...
However hot money flows are extremely large and if there is a large scale inflow or outflow, caused
by rises or falls in the int
...
Factors affecting the exchange rate:
Relative interest rates
Increased interest rates will lead to hot money (a pool of investors' financial capital that flows around the world seeking the highest
rate of return i
...
the highest interest rates) inflows into the economy
...
Inflation
Inflation in the UK renders UK X more expensive whilst foreign imports are cheaper
...
This will mean D for foreign currency rises whilst D for sterling falls
...
This will lead to foreign currencies being more expensive and sterling being cheaper
...
This is because the foreign firm that wants to build a factory in the
UK must first buy pounds to pay for the plant i
...
pounds are in derived demand with factory materials
...
Trade and current account deficits
If the economy is running a trade deficit, this means importing firms have to sell pounds to buy the foreign imports
...
This will lead sterling to appreciate
...
However the mere action of doing so will increase supply so if enough investor believe this and
speculate then it will become a self-‐fulfilling prophesy
...
This
could lead to increased trade and greater output
...
Possible reduction of fluctuations of the trade cycle
Post WW2 to the 1970s the major world currencies were pegged to the dollar which in turn was pegged to the price of gold
...
Disadvantages
Increased chance of speculative attack
Due to differential growth rates between countries, as well as international competitiveness of their firms, there could market
pressure for the exchange rate to fall
...
This means the investors can buy back the currency at the lower prices and pocket the
difference as a profit
...
However there is only so much they can do and if the speculative pressures are too much they will be
forced to give in, this has been the case many times and it implies that the capital flows are bigger than any foreign exchange
reserves a central bank may have
...
However if a fixed exchange rate is in place, the economy cannot adjust and may start running a permanent deficit or surplus which
may have detrimental effects on the economy
...
It may mean a constant BoP deficit
which would represent a leakage from the circular flow of income which would depress AD and hamper long term economic growth
prospects
...
may find it necessary to run deflationary fiscal and monetary policies
such as high interest rates and high taxes
...
The European Union
Important definitions:
Single market -‐ removal of obstacles, such as customs checking to allow the free movement of goods, services, capital and labour
through the area
...
Trade creation -‐ an increase in international trade as a consequence of the removal of protectionist policies
...
Combated with the use of "rules of origin" within intra-‐free area trade
...
(Trade creation diagram) However the imposition of the CET may lead to trade diversion which
is economically inefficient as the lowest cost producer, i
...
the one with the comparative advantage, is not being traded with as
much which leads to a waste in resources and a loss of consumer welfare
...
Also given the free movement of labour and capital, efficiency and productivity is likely to be raised as factors of production
will be able to move more freely to wherever they are best utilised
...
However there is a drawback that some firms can achieve market
dominance, especially in industries where there are high MES, and the abuse their monopoly power to the detriment of competition
and consumer welfare
...
This means there is greater pressure on firms to compete on prices and costs which c an
lead to welfare gains for the consumers as prices may fall
...
Firms may also seek a USP (unique selling point) to differentiate their good on the international market, so this increased global
competition may encourage more non-‐price competition and innovation which can lead to dynamic gains for consumers as well
...
This will lead to boosted consumer welfare as well as a downside pressure to cost-‐push inflation
...
This is likely to have adverse effect on growth and UE, unless the slack is taken up by
exports which is unlikely if they were uncompetitive in their own domestic market
...
EU single market is still incomplete and flawed
The legislation in certain sectors is incomplete and these industries have not been opened up to the single market yet, such as
power, intellectual property and services
...
e
...
They cannot be
transported and have to be consumed in the locality they are sold
...
Promotion of national champions
Some countries still promote national champions and in certain industries, especially in natural monopolies, it is hard to see how
these firms will be challenged
...
Countries may promote national
champions on a prestige basis, because they are strategically important politically and economically or because they want to protect
domestic employment
...
We measure
macroeconomic performance via the economy's ability to fulfil the MEPOs
...
Pros
Reduced exchange rate uncertainty
Increased certainty about exchange rate could possibly lead to trade creation as greater price transparency and the lack of
transaction costs encourage intra-‐EMU trade
...
This increase in certainty is likely to lead to trade creation
...
Increased intra-‐EMU competition
Increased intra-‐EMU trade is likely to lead to increased competition in domestic markets which are likely to lead to welfare gains for
consumers as prices fall, firms become more efficient and the possibility of dynamic gains as firms innovate and compete in non-‐
price ways to claim market share
...
For FDI from countries not in the EMU, it is likely that it
would increase FDI as that means that plant could benefit from being within the Euro area and not have the risk of £/Euro currency
variations rendering the output of the factory uncompetitive
...
This means the Eurozone can enjoy lower interest rates than it usually would if it wasn’t in
a monetary union
...
Cons
Loss of independent monetary policy
The biggest impact is the loss of independent monetary policy as a the ECB in Frankfurt controls it
...
At
the present the BoE controls our MP, and tailors it specifically to the UK's economic situation
...
This means the ECB is
likely to pick a monetary policy that suits the UK as much as the BoE would have
...
The UK has more trade outside the EU
than Eurozone countries so therefore currency fluctuations with the dollar and the yen will probably have more effect on the UK
than it would France or Spain
...
Therefore interest rate changes are more likely to have a much greater effect on the UK than say Germany who has a
higher percentage of fixed rate mortgages or the rest of the Eurozone that have a higher proportion of their population renting
...
e
...
This makes them very susceptible to demand side shocks and find it hard to adjust to lower
levels of output
...
But because of the majority of the
Eurozone suffers this weakness, the ECB would likely choose a reflationary policy to try ward off the deflationary effects that high
UE has on an economy even if the UK was not suffering from UE
...
Too deflationary
Some economists and politicians argue that the ECB tries too hard to prove its anti-‐inflationary credentials (which are important to
keep inflation expectations low) and this damages growth and employment prospects by keeping interest rates higher than they
should
...
Even
then they are limited by the EGS pact, however the credibility of this pact after the Eurozone sovereign debt crisis may be
questionable, which limits gov
...
However even then there are limitations to fiscal and supply side policies
...
Also imperfect information as well as the political system that economic policies have to
passed through may lead to a distortion of the facts and the wrong policy may be chose which would lead to a government failure
...
spending there is also the possibility of crowding out of private investment as increased gov
...
Pros and cons of EU enlargement
The UK usually sees the enlargement of the Eurozone as a good thing
...
Pros
Trade creation
The augmentation of the single market will lead to trade creation as there will be the removals of protectionist policies as these new
countries enter the single market
...
This leads to a more
efficient allocation of resources
...
Increased market for UK goods
Increased market for UK goods means output can rise which could lead to a an improvement on the balance of payments
...
Increased intra-‐union competition
The enlargement of the EU will mean the UK will face more intra-‐union competition which means only the most efficient UK firms
will survive, others will collapse
...
Cons
Possibility of increased UE and social dumping
Increased EU competition may mean some firms close as they cannot compete which will lead to a fall in UK GDP and employment
which can have knock on consequences
...
However new entrants firms will struggle to compete in the industries that the UK has its
comparative advantages in; financial services and high tech manufacturing, as these sectors require experience, high levels of capital
and expertise to set up and therefore are not easily imitated
...
The balance of transfers (final eval
...
This represents a leakage from the circular flow of income and can have adverse
effects on AD and long term growth
...
Title: Hamlet and Revenger's Tragedy Notes
Description: This is a complete collection of notes for any essay on Hamlet by Shakespeare and/or the Revenger's Tragedy by Thomas Middleton. These notes contain quotations, structural formatting and other important aspects needed for any essay.
Description: This is a complete collection of notes for any essay on Hamlet by Shakespeare and/or the Revenger's Tragedy by Thomas Middleton. These notes contain quotations, structural formatting and other important aspects needed for any essay.